Putnam
Diversified
Income
Trust II
ANNUAL REPORT
March 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Many analysts argue that bond funds are a good place to ride out
the turmoil, and to take advantage of higher interest rates."
-- "Quarterly Mutual Funds Review,"
The Wall Street Journal, April 4, 1997
* "During the six periods in the past decade when U.S. government
bonds lost more than 2%, junk bonds beat government bonds every time,
while international bonds went five for six. A portfolio that included
a fund representing each bond type would've outperformed government
bonds in each instance. Those who can't be bothered with picking several
types of bond funds might consider a multisector bond fund . . . the
best choice for one-stop diversification."
-- Morningstar Investor, April 1997
CONTENTS
4 Report from Putnam Management
10 Fund performance summary
15 Portfolio holdings
33 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[COPYRIGHT] Karsh, Ottawa
Dear Shareholder:
Global diversification, astute currency strategies, and careful security
selection all contributed to Putnam Diversified Income Trust II's positive
performance during the fiscal year ended March 31, 1997. Supervision of such a
diverse, multinational portfolio requires a depth and breadth of expertise
your fund's management team is superbly equipped to provide.
I am pleased to announce the addition of Kenneth J. Taubes and Gail A.
Attridge to that team. Ken, who will oversee the fund's taxable investment
grade sector, has been managing funds at Putnam for nearly six years. Before
joining Putnam, he was employed by United States Trust Company of Boston, Home
Owners Savings Bank, and Bank of New England, N.A. He has 15 years of
investment experience. Gail came to Putnam in 1993 from Keystone Custodian
Funds, prior to which she was employed by County NatWest Securities Asia and
Data Resources/McGraw-Hill. She has 12 years of investment experience. She
will manage the fund's emerging markets securities.
In the following report, your fund's managers discuss overall results for the
fiscal year and then review prospects for the year ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
May 21, 1997
Report from the Fund Managers
Jennifer E. Leichter, lead manager
Kenneth J. Taubes
Michael Martino
D. William Kohli
Gail A. Attridge
Putnam Diversified Income Trust II completed its first full fiscal year with
positive results, producing respectable gains at net asset value for all share
classes for the 12 months ended March 31,1997. Each of the fund's three
sectors, or sleeves -- U.S. government, U.S. high yield, and foreign
government -- contributed to overall performance, although each experienced
its share of downward pressure late in the period as interest rates rose in
the United States and uncertainty crept into most fixed-income markets around
the globe.
Throughout much of fiscal 1997, our bond selections and sector allocations
centered more on maximizing yield potential than aggressively managing
duration. However, as risk premiums -- the level of return or yield one hopes
to receive for assuming higher risk -- came down around the globe and
expectations of rising interest rates became a reality, we began to unwind our
focus on yield-enhancing instruments in favor of more stable and defensive
positions. Active management of the fund's U.S. dollar exposure also played a
key role. Full performance details can be found on pages 10 and 11 of this
report.
* MORTGAGE-BACKED SECURITIES PLAY LEAD ROLE IN TAXABLE INVESTMENT GRADE SECTOR
Since the outset of the fiscal year, mortgage-backed securities have dominated
your fund's taxable investment grade sleeve. Their income advantages and price
appreciation possibilities have made them particularly attractive. Through
January, our main concentration had been discount-coupon mortgages -- those
with coupons below current market rate -- and current-coupon mortgages, whose
coupons reflect the current market rate.
Following Federal Reserve Board Chairman Alan Greenspan's Congressional
testimony, however, the favorable investment environment for U.S. fixed-income
securities began showing signs of a dramatic turnaround. Anticipating market
turbulence, we swapped out of discount- and current-coupon mortgage-backed
securities in favor of more defensively oriented premium-coupon mortgages.
Since these securities have coupons higher than the current market rate, they
are less likely to fluctuate in price when interest rates are rising.
(Conversely, in a falling rate environment, they tend not to appreciate as
much as discount- or current-coupon securities.) We also purchased
longer-structured mortgage instruments that were trading cheaply. This move
proved timely, helping to mitigate the negative impact of the Fed's increase
in short-term interest rates in late March.
We also kept the fund's Treasury exposure relatively low for much of the
period, although the 10-year note and 30-year bond positions that we did hold
allowed the fund to participate fully in the market's rally during the fall.
Most recently we have elected to "barbell" the portfolio's Treasury exposure,
clustering assets in short-term cash-based instruments and 30-year bonds to
further defend the sleeve against a flattening yield curve and selling the
10-year notes.
Please note that this portion of the portfolio was formerly known as the U.S.
government securities sector. Within this sector, the fund has always had the
flexibility to invest in investment-grade bonds as well as U.S. government
securities, and we believe the new name is a more accurate reflection of its
strategy.
[GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR]
TOP THREE HOLDINGS PER SECTOR*
HIGH-YIELD BONDS
Viacom International, Inc., 8%, 2006
Cencall Communications Corp., zero %, 2004
Coinmach Corp., 11.75%, 2005
FOREIGN BONDS
Federal Republic of Germany, 4.75%, 2001
United Kingdom Treasury bonds, 7%, 2002
Federal Republic of Germany, 5.25%, 2001
U.S. GOVERNMENT OBLIGATIONS
Government National Mortgage Association, 7.5%, 2022-2027
Federal National Mortgage Association, 7.5%, 2026-2027
Federal Home Loan Mortgage Corp., TBA, 8.5%, 2027
Footnote reads:
*Based on net assets as of 3/31/97. Portfolio holdings will vary over time.
* HIGH-YIELD MARKET STAYS STRONG THROUGH FEBRUARY, SELLS OFF IN MARCH
Your fund benefited from its heavy weighting in corporate high-yield
securities throughout the first 11 months of fiscal 1997, since high-yield
bond returns were fueled by favorable supply/demand characteristics, strong
corporate profitability, moderate economic growth, and record-breaking stock
market activity. Merger and acquisition activity was also robust in several
sectors, including telecommunications, cable, and utilities, with many
high-yield issuers purchased by financially stronger companies, resulting in
credit quality upgrades.
Many of the fund's holdings in telecommunications, television and radio
broadcasting, and cable enjoyed impressive runs on the heels of the
deregulation legislation passed in February of 1996. Competitive local
exchange carriers (CLECs) and competitive access providers (CAPs) were among
the best-performing issues, with Teleport Communications and Brooks Fiber
Properties turning in outstanding results. These companies issue high-yield
debt to help finance fiber-optic networks to attract corporate customers and
compete with larger telephone service providers. While these holdings, along
with others discussed in this report, were viewed favorably as of March 31,
1997, all portfolio holdings are subject to review and adjustment in
accordance with the fund's investment strategy and may vary in the future.
As the fund's fiscal year ended, the tide turned for high-yield bonds. They
followed the downward pattern of U.S. Treasury and equity securities, with
prices declining and yields rising across the board. Among the hardest hit
were bonds in capital-intensive industries, such as telecommunications and
telephone services, in which the fund has considerable exposure. Despite the
recent downturn, we remain optimistic about the performance potential of bonds
in these economically defensive, growth-oriented industries and continue to
emphasize them. The underlying credit fundamentals of many holdings are
attractive and those companies, in general, are making concerted efforts to
improve cash flow.
[GRAPHIC OMITTED: horizontal bar chart TOP FIVE COUNTRY ALLOCATIONS]
TOP FIVE COUNTRY ALLOCATIONS*
(international sector)
Germany 7.9%
United Kingdom 5.9%
France 4.2%
Canada 2.2%
Mexico 1.2%
Footnote reads:
*Based on net assets as of 3/31/97. Holdings will vary over time.
In addition to the sectors mentioned above, renewed growth in the aerospace
industry, high demand for cellular phones in developing nations, the
attractive yields offered by casino operators, consolidation, and an increase
in telephone/cable television duopolies in the United Kingdom make these
industries particularly attractive as we enter fiscal 1998. All are
represented in the portfolio.
* FLEXIBILITY PROVES REWARDING IN INTERNATIONAL ARENA
The primary investment locale for your fund's international sleeve has been
Europe. During the first half of the fiscal year, we targeted bonds in the
peripheral markets of Europe -- Spain, Italy, and Sweden -- that offered
higher yields than the markets of core Europe. To gain acceptance into the
European Monetary Union (EMU), these countries have made concerted efforts to
get their fiscal houses in good order, driving down inflation and bond yields.
As a result, the fund's Swedish, Italian, and Spanish bond holdings
appreciated in value. As their prices reached our target levels, we
re-positioned the resulting gains into Canada and the United Kingdom. We also
increased positions in core European markets, specifically those of France and
Germany, which had begun to rally in response to growing optimism about
monetary union.
Recently, however, economic growth in the core markets was slowed by unusually
inclement weather, temporarily masking the improving economic outlook for the
region. The slower pace of growth has made it appear less likely that Germany
would be able to meet the budget deficit requirements for EMU participation,
prompting a reversal of EMU-inspired rallies across Continental currency,
stock, and bond markets. The higher-yielding country markets have declined
more dramatically than the core markets, and by shifting out of these markets
at midyear, we avoided these losses.
The anticipation and eventual impact of higher U.S. interest rates were felt
in most bond markets around the world. The lone exception was Japan, where
investors were focused on the potential positives of a new consumption tax,
proposed deregulation measures, and renewed pressure on the banking sector.
While we believe our avoidance of this market during its decline was
beneficial for the fund, it also meant that the fund did not benefit from the
market's unexpected confidence toward the end of the period.
The fund's emerging markets holdings and currency strategies favoring the U.S.
dollar contributed significantly to the sleeve's returns, providing
exceptional gains in January and early February. The fund's exposure to
emerging markets was increased to its allowable maximum during the second half
of the fiscal year, enabling it to profit substantially from positions in
Mexico, Argentina, Russia, and South Africa. As the fiscal year came to a
close, we had begun scaling back the portfolio's emerging debt positions in
response to declining risk premiums and reduced global liquidity in the wake
of the Fed's actions.
*1998 BOND MARKET MANTRA: "PROCEED WITH CAUTION"
As we enter fiscal 1998, unsettled market conditions may well persist in the
months ahead. Concern about rising wage-inflation pressure in the United
States may prompt the Fed to raise rates again, causing further market
volatility at home and abroad. Growing uncertainty surrounding the timetable
for the start of EMU also poses certain challenges across European markets,
while the uncertainty surrounding Japan's banking industry leaves our view of
that market unchanged.
Against this backdrop, we will work to maintain a defensive posture in each of
the fund's three sectors. We expect core European markets to remain our
international focus, since they stand to benefit from improving economic
conditions. However, corrections in the higher-yielding European markets have
caused valuations to come down a bit from their lofty levels. As a result, we
have cautiously begun to re-enter those markets as opportunities arise. We've
reduced the fund's high-yield allocation while looking to add higher-quality
credits selectively, specifically Ba-rated issues. Our focus on growth
industries that are economically defensive remains intact.
We plan to continue emphasizing defensively oriented mortgage-backed
securities in the U.S. government sleeve as we enter the new fiscal year.
Finally we have trimmed the fund's U.S. dollar positions somewhat, believing
the dollar's outstanding rally in January has reduced the potential for
further gains over the near term.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 3/31/97, 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
Performance should always be considered in light of a fund's investment
strategy. Putnam Diversified Income Trust II is designed for investors
seeking high current income consistent with capital preservation through
U.S. government, high-yield, and international fixed-income securities.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares changed
over time, assuming you held the shares through the entire period and
reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 3/31/97
Class A Class B Class M
(inception date) (2/26/96) (2/26/96) (2/26/96)
NAV POP NAV CDSC NAV POP
- ---------------------------------------------------------------------------
1 year 7.36% 2.24% 6.56% 1.58% 7.09% 3.63%
- ---------------------------------------------------------------------------
Life of fund 6.33 1.32 5.44 1.52 6.04 2.54
Annual average 5.74 1.20 4.94 1.38 5.48 2.31
- ---------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/97
Salomon Bros.
Lehman Bros. Non-U.S. First Boston Consumer
Aggregate World Govt. High Yield Price
Bond Index Bond Index Index Index
- ---------------------------------------------------------------------------
1 year 4.91% 1.23% 11.66% 2.76%
- ---------------------------------------------------------------------------
Life of fund 4.18 1.09 11.36 3.29
Annual average 3.85 1.01 10.43 2.99
- ---------------------------------------------------------------------------
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 a 4.75% maximum sales charge of 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.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 2/26/96
$9,525 Fund's class A shares at POP $10,132
$10,000 Lehman Bros. Aggregate Bond Index $10,418
$10,000 Consumer Price Index $10,329
(plot points for MONTHLY total return since inception mountain chart)
Lehman Bros.
Fund at Aggregate
Date/year POP Bond Index CPI
2/29/96 9,525 10,000 10,000
3/31 9,449 9,930 10,052
4/30 9,463 9,874 10,091
5/31 9,489 9,855 10,110
6/30 9,551 9,987 10,116
7/31 9,619 10,014 10,136
8/31 9,867 9,997 10,155
9/30 9,961 10,171 10,187
10/31 10,139 10,396 10,220
11/30 10,131 10,574 10,239
12/31 10,231 10,476 10,239
1/31/97 10,296 10,508 10,272
2/28 10,069 10,535 10,304
3/31 10,132 10,418 10,329
Footnote reads:
Past performance is no assurance of future results. A $10,000
investment in the fund's class B shares at inception on 2/26/96
would have been valued at $10,544 on 3/31/97 ($10,152 with a
redemption at the end of the period). A $10,000 investment in
the fund's class M shares at inception on 2/26/96 would have
been valued at $10,604 at net asset value on 3/31/97 $10,254
at public offering price.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 3/31/97
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.625834 $0.561562 $0.604372
- ------------------------------------------------------------------------------
Capital gains
- ------------------------------------------------------------------------------
Long-term -- -- --
- ------------------------------------------------------------------------------
Short-term 0.018000 0.018000 0.018000
- ------------------------------------------------------------------------------
Total $0.643834 $0.579562 $0.622372
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
3/31/96 $8.38 $8.80 $8.38 $8.38 $8.66
- ------------------------------------------------------------------------------
3/31/97 8.34 8.76 8.34 8.34 8.62
- ------------------------------------------------------------------------------
Current return
(end of period)
- ------------------------------------------------------------------------------
Current dividend
rate1 7.39% 7.03% 6.62% 7.13% 6.90%
- ------------------------------------------------------------------------------
Current 30-day SEC
yield2 7.42 7.08 6.71 7.20 6.96
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales and a higher 12b-1 fee than
class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 4.75% sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Aggregate Bond Index* is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage of
the original investment. Indexes are rebalanced monthly by market
capitalization.
Salomon Brothers Non-U.S. World Government Bond Index* is a market
capitalization-weighted benchmark that tracks the performance of the
government bond markets tracked by the Salomon Brothers World Government
Bond Index, excluding the United States.
First Boston High Yield Index* is an unmanaged index of lower-rated,
higher-yielding U.S. corporate bonds. It includes over 180 issues with an
average maturity range of 7 to 10 years.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Report of independent accountants
For the fiscal year ended March 31, 1997
To the Trustees and Shareholders of
Putnam Diversified Income Trust II
We have audited the accompanying statement of assets and liabilities of Putnam
Diversified Income Trust II, including the portfolio of investments owned, as
of March 31, 1997, and the related statement of operations for the year then
ended and the statements of changes in net assets and the financial highlights
for the year then ended and the period February 26, 1996 (commencement of
operations) to March 31, 1996. These financial statements and financial
highlights are the responsibility of the fund's management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of March 31, 1997, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Putnam Diversified Income Trust II as of March 31, 1997, the results of its
operations for the year then ended and the changes in its net assets and the
financial highlights for the year then ended and the period February 26, 1996
(commencement of operations) to March 31, 1996, therein, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
May 19, 1997
<TABLE>
<CAPTION>
Portfolio of investments owned
March 31, 1997
CORPORATE BONDS AND NOTES (46.4%) *
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Advertising (0.2%)
- ------------------------------------------------------------------------------------------------------------
$ 25,000 Adams Outdoor Advertising sr. notes 10 3/4s, 2006 $ 26,375
80,000 Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 79,600
100,000 Universal Outdoor, Inc. sr. sub. notes 9 3/4s, 2006 99,000
--------------
204,975
Aerospace and Defense (1.1%)
- ------------------------------------------------------------------------------------------------------------
450,000 Alliant Techsystems, Inc. sr. sub. notes 11 3/4s, 2003 481,500
50,000 Howmet Corp. sr. sub. notes 10s, 2003 53,250
80,000 Lockheed Martin Corp. company guaranty 7 1/4s, 2006 78,783
400,000 Sequa Corp. sr. sub. notes 9 3/8s, 2003 396,000
70,000 Tracor, Inc. 144A sr. sub. notes 8 1/2s, 2007 67,200
--------------
1,076,733
Agriculture (0.8%)
- ------------------------------------------------------------------------------------------------------------
250,000 AGCO Corp. 144A sr. sub. notes 8 1/2s, 2006 248,750
450,000 PMI Holdings Corp. sub. disc. deb. stepped-coupon
Ser. B, zero % (11 1/2s, 9/1/00), 2005 ++ 328,500
250,000 Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 [2 DBL. DAGGERS] 262,500
--------------
839,750
Apparel (0.5%)
- ------------------------------------------------------------------------------------------------------------
60,000 Anvil Knitwear Inc. 144A sr. notes 10 7/8s, 2007 58,200
30,000 GFSI, Inc. 144A sr. sub. notes 9 5/8s, 2007 29,250
325,000 Guess Jeans, Inc. sr. sub. notes 91/2s, 2003 325,000
65,000 William Carter Co. 144A sr. sub. notes 12s, 2008 65,650
--------------
478,100
Automotive (0.1%)
- ------------------------------------------------------------------------------------------------------------
80,000 DRA Inc. 144a notes 11 1/2S, 2004 [2 DBL. DAGGERS] 80,800
Automotive Parts (1.2%)
- ------------------------------------------------------------------------------------------------------------
260,000 A.P.S. Inc. company guaranty 11 7/8s, 2006 261,300
299,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 328,900
70,000 CSK Auto, Inc. 144A sr. sub. notes 11s, 2006 70,700
250,000 Harvard Industries Inc. sr. notes 11 1/8s, 2005 128,750
80,000 Key Plastics Corp. 144A sr. sub. notes 10 1/4s, 2007 79,400
90,000 Lear Corp. sub. notes 9 1/2s, 2006 93,600
215,000 Safelite Glass Corp. 144A sr. sub. notes 9 7/8s, 2006 215,000
25,000 Titan Wheel International, Inc. sr. sub. notes 8 3/4s, 2007 24,625
--------------
1,202,275
Banks (1.1%)
- ------------------------------------------------------------------------------------------------------------
40,000 Advanta National Bank sr. notes 7.02s, 2001 38,608
60,000 BankAmerica Corp. sub. notes 7 1/8s, 2009 57,646
50,000 Banponce Financial Corp. med. term notes 6 3/4s, 2001 49,046
170,000 Chevy Chase Savings Bank, Inc. sub. deb. 9 1/4s, 2005 166,600
250,000 First Nationwide Holdings 144A sr. sub. notes
10 5/8s, 2003 265,000
25,000 First Nationwide Holdings sr. sub. notes 9 1/8s, 2003 25,000
60,000 First Union Corp. sub. notes 7s, 2006 57,647
95,000 Merita Bank Ltd. sub. notes 6 1/2s, 2006 (Finland) 88,082
110,000 NationsBank Corp. sub. notes 7.8s, 2016 109,304
60,000 Provident Capital Trust 144A bonds 8.6s, 2026 58,260
40,000 Riggs Capital Trust 144A bonds 8 5/8s, 2026 39,608
60,000 Sovereign Capital Trust 144A company guaranty 9s, 2027 58,500
35,000 Sparbanken Sverige AB (Swedbank) 144A sub. 7 1/2s,
2006 (Sweden) 34,396
50,000 State Development Bank of China notes 7 3/8s, 2007
(China) 48,849
50,000 Webster Capital Trust I 144A bonds 9.36s, 2027 50,348
--------------
1,146,894
Basic Industrial Products (0.3%)
- ------------------------------------------------------------------------------------------------------------
35,000 Astor Corp. 144A sr. sub. notes 10 1/2s, 2006 37,275
275,000 Clark-Schwebel sr. notes 10 1/2s, 2006 288,750
--------------
326,025
Beverages (0.1%)
- ------------------------------------------------------------------------------------------------------------
95,000 Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 95,475
Broadcasting (2.1%)
- ------------------------------------------------------------------------------------------------------------
250,000 American Radio Systems Corp. company guaranty 9s,
2006 241,250
215,000 Capstar Broadcasting 144A sr. disc. notes stepped-
coupon zero % (12 3/4s, 2/1/02), 2009 ++ 113,950
235,000 Chancellor Broadcasting Corp. sr. sub. notes 9 3/8s, 2004 230,300
175,000 Commodore Media, Inc. sr. sub. notes stepped-coupon
7 1/2s, (13 1/4s, 5/1/98), 2003 ++ 187,250
250,000 Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 235,000
40,000 Jacor Communications, Inc. company guaranty 9 3/4s,
2006 40,000
250,000 Jacor Communications, Inc. sr. sub. notes 10 1/8s, 2006 253,750
50,000 Pegasus Media & Communications notes Ser. B, 12 1/2s,
2005 54,000
200,000 Petracom Holdings, Inc. notes stepped-coupon zero %
(17 1/2s, 8/1/98), 2003 ++ 192,000
235,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 245,575
80,000 Spanish Broadcasting Systems 144A sr. notes 11s, 2004 79,600
250,000 Turner Broadcasting Systems, Inc. sr. notes 8 3/8s, 2013 249,513
35,000 TV Azteca Sa De Cv 144A sr. notes 10 1/2s, 2007
(Mexico) 34,102
--------------
2,156,290
Building and Construction (0.8%)
- ------------------------------------------------------------------------------------------------------------
75,000 Atrium Companies Inc. 144A sr. sub. notes 10 1/2s, 2006 74,250
40,000 Continental Homes Holding Corp. sr. notes 10s, 2006 41,400
210,000 Inter-City Products sr. notes 9 3/4s, 2000 215,250
400,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 440,000
35,000 Webb (Del E.) Corp. sr. sub. notes 9 3/4s, 2008 35,000
--------------
805,900
Building Products (1.3%)
- ------------------------------------------------------------------------------------------------------------
25,000 Building Materials Corp. sr. notes Ser. B, 8 5/8s, 2006 25,000
145,000 Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 162,763
370,000 Presley Cos. sr. notes 12 1/2s, 2001 359,825
225,000 Schuller International Corp. sr. notes 10 7/8s, 2004 244,125
150,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 150,750
300,000 Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 321,000
100,000 Waxman Industries Inc. sr. notes stepped-coupon
Ser. B, zero % (12 3/4s, 6/1/99), 2004 ++ 84,000
--------------
1,347,463
Buses (0.4%)
- ------------------------------------------------------------------------------------------------------------
95,000 Atlantic Express, Inc. 144A company guaranty 10 3/4s,
2004 96,663
415,000 Consorcio/MCII Holdings sec. notes stepped-coupon
zero % (12s, 11/15/98), 2002 ++ 355,863
--------------
452,526
Business Services (0.1%)
- ------------------------------------------------------------------------------------------------------------
5,000 Bell & Howell Operating Co. bonds 9 1/4s, 2000 5,000
10,000 Corporate Express, Inc. sr. sub. notes Ser. B,
9 1/8s, 2004 9,650
60,000 Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006
(United Kingdom) 60,750
35,000 Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 37,800
--------------
113,200
Cable Television (3.3%)
- ------------------------------------------------------------------------------------------------------------
600,000 Adelphia Communications Corp. 144A sr. notes 9 7/8s,
2007 543,000
110,000 American Telecasting, Inc. sr. disc. notes stepped-coupon
zero % (14 1/2s, 8/15/00), 2005 ++ 33,000
55,000 American Telecasting, Inc. sr. disc. notes stepped-coupon
zero % (14 1/2s, 6/15/99), 2004 ++ 18,700
250,000 Century Communications Corp. sr. notes 8 7/8s, 2007 237,500
200,000 Charter Communications International, Inc. disc. notes
stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 ++ 121,000
550,000 Comcast Corp. sr. sub. notes 9 3/8s, 2005 550,000
200,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) ++ 130,000
90,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (13 1/2s, 9/30/99), 2004
(United Kingdom) ++ 70,650
300,000 Diamond Cable Communication Co. sr. disc. notes
stepped-coupon zero % (11 3/4s, 12/15/00), 2005
(United Kingdom) ++ 192,000
210,000 Diamond Cable Communications Co. 144A sr. disc.
notes stepped-coupon zero % (10 3/4s, 2/15/02),
2007 (United Kingdom) ++ 113,400
50,000 Heartland Wireless Communications, Inc. 144A sr. notes
Ser. D, 13s, 2003 20,875
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 434,000
110,000 Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 100,100
100,000 Marcus Cable Co. (L.P.) sr. deb. 11 7/8s, 2005 104,000
10,000 Marcus Cable Co. (L.P.) sr. disc. notes stepped-coupon
zero % (14 1/4s, 6/15/00), 2005 ++ 6,900
10,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-
coupon zero % (13 1/2s, 8/1/99), 2004 ++ 7,950
185,000 Telewest Communications PLC deb. stepped-coupon
zero % (11s, 10/1/00), 2007 (United Kingdom) ++ 120,250
250,000 Tevecap S.A. 144A sr. notes 12 5/8s, 2004 (Brazil) 257,500
40,000 TV Filme, Inc. 144A sr. notes 12 7/8s, 2004 (Brazil) 40,823
150,000 UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 5/15/01), 2006 (Australia) ++ 78,000
80,000 Wireless One, Inc. sr. notes 13s, 2003 52,000
--------------
3,311,648
Cellular Communications (2.1%)
- ------------------------------------------------------------------------------------------------------------
40,000 Airtouch Communications, Inc. notes 7 1/8s, 2001 39,906
150,000 Call-Net Enterprises sr. disc. notes stepped-coupon
zero % (13 1/4s, 12/1/99), 2004 ++ 124,875
1,020,000 Cencall Communications Corp. sr. disc. notes stepped-
coupon zero % (10 1/8s, 1/15/99), 2004 ++ 703,800
200,000 Millicom International Cellular S.A. sr. disc. notes stepped-
coupon zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) ++ 130,000
805,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (9 3/4s, 2/15/99), 2004 ++ 547,400
150,000 NEXTEL Communications, Inc. sr. disc. notes stepped-
coupon zero % (11 1/2s, 9/1/98), 2003 ++ 117,000
200,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 166,000
350,000 Pricellular Wireless Corp. sr. notes 10 3/4s, 2004 354,375
--------------
2,183,356
Chemicals (1.2%)
- ------------------------------------------------------------------------------------------------------------
200,000 Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 196,000
30,000 Freedom Chemicals, Inc. sr. sub. notes 10 5/8s, 2006 31,200
500,000 ISP Holdings, Inc. 144A sr. notes 9 3/4s, 2002 520,000
75,000 Millennium America Inc. company guaranty 7 5/8s, 2026 69,567
30,000 Sociedad Quimica Y Minera de Chile S.A. 144A bonds
7.7s, 2006 (Chile) 29,963
295,000 Sterling Chemicals Holdings sr. disc. notes stepped-
coupon zero % (13 1/2s, 8/15/01), 2008 ++ 181,425
200,000 Union Carbide Global Enterprises sr. sub.
Ser. B, 12s, 2005 227,500
--------------
1,255,655
Computer Equipment (0.3%)
- ------------------------------------------------------------------------------------------------------------
250,000 Computervision Corp. sr. sub. notes 11 3/8s, 1999 259,375
Computer Services (0.2%)
- ------------------------------------------------------------------------------------------------------------
200,000 Unisys Corp. sr. notes 11 3/4s, 2004 209,000
Consumer Durable Goods (0.5%)
- ------------------------------------------------------------------------------------------------------------
115,000 Icon Fitness Corp. 144A sr. disc. notes stepped-coupon
zero % (14s, 11/15/01), 2006 ++ 62,100
525,000 International Semi-Tech. Corp. sr. secd. disc. notes
stepped-coupon zero % (11 1/2s, 8/15/00), 2003
(Canada) ++ 267,750
200,000 Remington Products Co. sr. sub. notes Ser. B, 11s, 2006 166,000
--------------
495,850
Consumer Products (0.3%)
- ------------------------------------------------------------------------------------------------------------
250,000 IHF Holdings, Inc. sr. disc. notes Ser. B, stepped-coupon
zero % (15s, 11/16/99), 2004 ++ 207,500
110,000 Interact Systems, Inc. 144A sr. notes stepped-coupon
zero % (14s, 8/1/99), 2003 ++ 59,400
--------------
266,900
Consumer Services (0.7%)
- ------------------------------------------------------------------------------------------------------------
140,000 Affinity Group Holdings 144A sr. notes 11s, 2007 139,300
500,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 552,500
--------------
691,800
Containers (0.2%)
- ------------------------------------------------------------------------------------------------------------
100,000 Innova S De R.L. 144A sr. notes 12 7/8s, 2007 (Mexico) 99,375
30,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 32,625
35,000 Printpack, Inc. sr. notes Ser. B, 9 7/8s, 2004 35,525
35,000 Radnor Holdings Corp. 144A sr. notes 10s, 2003 35,525
--------------
203,050
Cosmetics (0.3%)
- ------------------------------------------------------------------------------------------------------------
550,000 Revlon Worldwide Corp. 144A sr. disc. notes zero %, 2001 341,000
Electric Utilities (2.7%)
- ------------------------------------------------------------------------------------------------------------
145,000 AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 152,975
250,000 Calpine Corp. sr. notes 10 1/2s, 2006 270,000
450,000 Cleveland Electric Illuminating Co. 1st mtge. Ser. E, 9s, 2023 454,613
25,000 Commonwealth Edison Co. notes 7 3/8s, 2004 24,447
25,000 Commonwealth Edison Co. 1st mtge. 7s, 2005 24,099
85,000 Connecticut Light & Power Co. 1st mtge.
Ser. A, 7 7/8s, 2001 85,060
100,000 El Paso Electric Co. 1st mtge. Ser. E, 9.4s, 2011 107,198
75,000 El Paso Electric Co. 1st mtge. Ser. B, 7 3/4s, 2001 74,758
60,000 Enersis S.A. ADR notes 7.4s, 2016 (Chile) 56,097
60,000 Enersis S.A. ADR notes 6.6s, 2026 (Chile) 57,269
25,000 Hidroelectric Pierda Aguila 144A bonds 10 5/8s, 2001
(Argentina) 26,094
35,000 Illinova Corp. sr. notes 7 1/8s, 2004 34,001
45,000 Jersey Central Power & Light Co. 1st mtge. med. term
note 6.85s, 2006 42,571
350,000 Long Island Lighting Co. deb. 9s, 2022 374,486
165,000 Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 187,415
10,000 Niagara Mohawk Power Corp. med. term notes 9.99s,
2004 10,000
250,000 Niagara Mohawk Power Corp. 1st mtge. 5 7/8s, 2002 226,698
499,698 Northeast Utilities System notes Ser. A, 8.58s, 2006 471,696
25,000 Ohio Edison Co. 1st mtge. 8 1/4s, 2002 25,690
--------------
2,705,167
Electronics (0.2%)
- ------------------------------------------------------------------------------------------------------------
45,000 Celestica International Ltd. 144A sr. sub. notes
10 1/2s, 2006 (India) 47,250
51,564 Cirent Semiconductor sr. sub. notes 10.22s, 2002 51,500
51,776 Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 51,712
90,000 Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 93,375
--------------
243,837
Energy-Related (0.1%)
- ------------------------------------------------------------------------------------------------------------
50,000 Arizona Public Service Co. sr. notes 6 3/4s, 2006 47,420
100,000 Calpine Corp. sr. notes 9 1/4s, 2004 102,250
--------------
149,670
Entertainment (0.7%)
- ------------------------------------------------------------------------------------------------------------
120,000 News America Holdings, Inc. deb. 7 3/4s, 2045 107,638
250,000 Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 275,000
115,000 Six Flags Corp. sr. sub. notes stepped-coupon zero %
(12 1/4s, 6/15/98), 2005 ++ 111,550
30,000 Time Warner Entertainment Co. deb. 7 1/4s, 2008 28,497
40,000 Time Warner Entertainment Co. notes 8 7/8s, 2012 42,376
5,000 Time Warner, Inc. deb. 9.15s, 2023 5,270
125,000 Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 141,250
--------------
711,581
Environmental Control (0.2%)
- ------------------------------------------------------------------------------------------------------------
80,000 Allied Waste Industries, Inc. 144A sr. sub. notes
10 1/4s, 2006 81,600
90,000 WMX Technologies Inc. notes 7.1s, 2026 89,615
--------------
171,215
Finance (0.2%)
- ------------------------------------------------------------------------------------------------------------
140,000 Ford Motor Credit Corp. sr. notes 7s, 2001 139,166
100,000 Webster Financial Corp. sr. notes 8 3/4s, 2000 99,938
--------------
239,104
Financial Services (1.1%)
- ------------------------------------------------------------------------------------------------------------
150,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 147,000
50,000 AIM Management Group sr. secd. notes 9s, 2003 52,750
40,000 Allstate Financing II company guaranty 7.83s, 2045 37,401
35,000 Colonial Capital Trust I 144A company guaranty
8.92s, 2027 34,355
135,000 Contifinancial Corp. sr. notes 8 3/8s, 2003 136,350
110,000 Dollar Financial Group Inc. 144A sr. notes 10 7/8s, 2006 111,650
35,000 First Financial Caribbean Corp. sr. notes 7.84s, 2006 34,152
140,000 Imperial Credit Industries, Inc. 144A sr. notes 9 7/8s, 2007 137,200
135,000 Lehman Bros Holdings, Inc. med. term notes 6.4s, 1999 132,914
55,000 Ocwen Federal Bank FSB sub. deb. 12s, 2005 60,775
35,000 Ocwen Financial Corp. notes 11 7/8s, 2003 37,800
40,000 Outsourcing Solutions Inc. 144A sr. sub. notes 11s, 2006 41,800
25,000 Primark Corp. sr. notes 8 3/4s, 2000 25,219
55,000 Salomon, Inc. sr. notes 7s, 1999 55,108
60,000 Southern Investments Service Co. sr. notes 6.8s, 2006
(United Kingdom) 56,938
50,000 Travelers Capital Trust II bonds 7 3/4s, 2036 46,521
--------------
1,147,933
Food (0.2%)
- ------------------------------------------------------------------------------------------------------------
200,000 Doane Products Co. sr. notes 10 5/8s, 2006 207,000
25,000 MBW Foods, Inc. 144A sr. sub. notes 9 7/8s, 2007 24,313
--------------
231,313
Food Chains (0.5%)
- ------------------------------------------------------------------------------------------------------------
55,000 Quality Food Centers, Inc. 144A sr. sub. notes 8.7s, 2007 53,075
200,000 Ralphs Grocery Co. sr. notes 10.45s, 2004 207,000
9,000 Southland Corp. 1st priority sr. sub. deb. 5s, 2003 7,425
150,000 Southland Corp. deb. Ser. A, 4 1/2s, 2004 114,000
25,000 Stater Brothers sr. notes 11s, 2001 27,250
45,000 Supermercados Norte 144A bonds 10 7/8s, 2004
(Argentina) 43,763
--------------
452,513
Gaming (2.8%)
- ------------------------------------------------------------------------------------------------------------
250,000 Alliance Gaming Corp. sr. notes 12 7/8s, 2003 272,500
450,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 393,750
185,000 Casino America, Inc. sr. notes 12 1/2s, 2003 177,600
50,000 Casino Magic Corp. 144A 1st mtge. 13s, 2003 48,375
50,000 Casino Magic Finance Corp. 1st mtge. 11 1/2s, 2001 42,250
260,000 Coast Hotels & Casinos, Inc. company guaranty
Ser. B, 13s, 2002 292,500
370,000 Colorado Gaming & Entertainment Co. sr. notes
12s, 2003 [2 DBL. DAGGERS] 366,300
100,000 Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 98,250
75,000 Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 81,000
350,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 348,250
150,000 Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 144,000
51,000 Louisiana Casino Cruises Corp. 1st mtge.
11 1/2s, 1998 51,510
250,000 Mohegan Tribal Gaming Auth. Rev. Bonds Ser. B,
13 1/2s, 2002 328,750
250,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 175,000
50,000 Showboat Marina Casino 1st mtge. Ser. B, 13 1/2s, 2003 56,250
--------------
2,876,285
Health Care (0.7%)
- ------------------------------------------------------------------------------------------------------------
30,000 Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 29,850
110,000 IMED Corp. sr. sub. notes 9 3/4s, 2006 113,300
80,000 Manor Care, Inc. sr. notes 7 1/2s, 2006 79,561
385,000 Paracelsus Healthcare Corp. sr. sub. notes 10s, 2006 361,900
100,000 Quorum Health Group, Inc. sr. sub. notes 8 3/4s, 2005 101,000
--------------
685,611
Hospital Management and Medical Services (0.3%)
- ------------------------------------------------------------------------------------------------------------
75,000 Tenet Healthcare Corp. sr. notes 8 5/8s, 2003 75,750
70,000 Tenet Healthcare Corp. sr. notes 8s, 2005 68,075
100,000 Tenet Healthcare Corp. sr. sub. notes 10 1/8s, 2005 107,000
65,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 63,375
--------------
314,200
Insurance (0.7%)
- ------------------------------------------------------------------------------------------------------------
95,000 Aegon NV sub. notes 8s, 2006 (Netherlands) 97,861
45,000 Conseco Inc. sr. notes 10 1/2s, 2004 51,682
100,000 Phoenix Home Life Mutual Insurance Co. 144A notes
6.95s, 2006 94,734
125,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 126,250
300,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 309,000
75,000 Sampoerna International Finance Co. 144A company
guaranty 8 3/8s, 2006 (Indonesia) 74,812
--------------
754,339
Lodging (0.3%)
- ------------------------------------------------------------------------------------------------------------
300,000 Host Marriott Corp. sr. notes Ser. B, 9 1/2s, 2005 304,500
Media (1.0%)
- ------------------------------------------------------------------------------------------------------------
75,000 RBS Participacoes S.A. 144A company guaranty
11s, 2007 (Brazil) 74,535
1,000,000 Viacom International, Inc. sub. deb. 8s, 2006 930,000
--------------
1,004,535
Medical Supplies and Devices (0.4%)
- ------------------------------------------------------------------------------------------------------------
175,000 Dade International, Inc. sr. sub. notes Ser. B, 11 1/8s,
2006 198,625
160,000 Wright Medical Technology, Inc. sr. secd. notes Ser. B,
10 3/4s, 2000 161,600
--------------
360,225
Metals and Mining (0.6%)
- ------------------------------------------------------------------------------------------------------------
50,000 Acindar Industria Argentina de Aceros S.A. bonds
11 1/4s, 2004 (Argentina) 50,250
80,000 Continental Global Group 144A sr. notes Ser. A, 11s,
2007 79,600
55,000 Echo Bay Mines jr. sub. deb. 11s, 2027 (Canada) 55,550
50,000 Maxxam Group Holdings Inc. sr. notes Ser. B, 12s, 2003 50,000
150,000 NL Industries, Inc. sr. notes 11 3/4s, 2003 157,500
195,000 Renco Metals, Inc. sr. notes 11 1/2s, 2003 202,800
30,000 Royal Oak Mines, Inc. company guaranty Ser. B, 11s,
2006 (Canada) 30,300
--------------
626,000
Motion Picture Distribution (0.5%)
- ------------------------------------------------------------------------------------------------------------
250,000 Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 271,250
130,000 AMC Entertainment, Inc. 144A sr. sub. notes 9 1/2s,
2009 126,425
95,000 Cinemark USA, Inc. notes 9 5/8s, 2008 95,000
--------------
492,675
Natural Gas (--%)
- ------------------------------------------------------------------------------------------------------------
45,000 El Paso Natural Gas Co. deb. 7 1/2s, 2026 42,929
Networking (0.1%)
- ------------------------------------------------------------------------------------------------------------
200,000 CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/00), 2005 ++ 127,000
Office Equipment (0.3%)
- ------------------------------------------------------------------------------------------------------------
40,000 Boise Cascade Corp. deb. 7.35s, 2016 36,430
250,000 United Stationer Supply, Inc. sr. sub. notes 12 3/4s,
2005 277,500
--------------
313,930
Oil and Gas (2.2%)
- ------------------------------------------------------------------------------------------------------------
55,000 Abraxas Petroleum Corp. 144A sr. notes
Ser. B, 11 1/2s, 2004 57,338
350,000 Benton Oil & Gas Co. sr. notes 11 5/8s, 2003 391,125
35,000 CIA Naviera Perez Companc S.A. 144A bonds 9s,
2004 (Argentina) 34,650
15,000 Citgo Petroleum Corp. sr. notes 7 7/8s, 2006 14,778
20,000 Cliffs Drilling Co. company guaranty Ser. B, 10 1/4s,
2003 20,600
35,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 35,700
50,000 Gulf Canada Resources, Ltd. sr. notes 8.35s, 2006
(Canada) 51,875
50,000 Kelley Oil & Gas Corp. sr. sub. notes Ser. B, 10 3/8s,
2006 51,500
50,000 Lasmo (USA) Inc. company guaranty 7 1/2s, 2006 49,627
250,000 Maxus Energy Corp. med. term notes 10.83s, 2004 266,875
15,000 Maxus Energy Corp. notes 9 3/8s, 2003 15,300
60,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 2006 63,300
55,000 Petro Geo-Services AS ADR notes 7 1/2s, 2007
(Norway) 53,897
115,000 Petroliam Nasional Berhad 144A notes 7 5/8s, 2026
(Malaysia) 111,651
15,000 Texas Petrochemical Corp. sr. sub. notes 11 1/8s, 2006 15,825
75,000 Transamerican Refining Corp. 144A 15s, 1998 75,000
50,000 Transamerican Refining Corp. 1st mtge. variable rate
Ser. 2, 16 1/2s, (16s, 8/15/98), 2002 ++ 54,000
400,000 Transamerican Refining Corp. 1st mtge. variable rate
stepped-coupon Ser. 1, zero % (18 1/2s, 2/15/98),
2002 ++ 366,000
295,000 TransTexas Gas Corp. sr. disc. notes stepped-coupon
zero % (13 1/4s, 12/16/01), 2003 ++ 185,850
255,000 TransTexas Gas Corp. sr. secd. notes 11 1/2s, 2002 279,225
--------------
2,194,116
Paging (1.1%)
- ------------------------------------------------------------------------------------------------------------
485,000 Arch Communications Group sr. disc. notes stepped-
coupon zero % (10 7/8s, 3/15/01), 2008 ++ 208,550
500,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 470,000
325,000 Paging Network, Inc. sr. sub. notes 10s, 2008 292,500
200,000 Pronet, Inc. sr. sub. notes 11 7/8s, 2005 186,000
--------------
1,157,050
Paper and Forest Products (1.8%)
- ------------------------------------------------------------------------------------------------------------
250,000 Buckeye Cellulose Corp. sr. sub. notes 9 1/4s, 2008 253,750
100,000 Domtar, Inc. deb. 9 1/2s, 2016 (Canada) 102,000
300,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 307,500
200,000 Gaylord Container Corp. sr. sub. disc. deb. 12 3/4s, 2005 218,000
250,000 Rainy River Forest Products sr. notes 10 3/4s, 2001
(Canada) 272,500
225,000 Repap New Brunswick sr. notes 10 5/8s, 2005
(Canada) 225,000
400,000 Riverwood International Corp. company guaranteed
10 7/8s, 2008 328,000
100,000 Stone Container Corp. sr. notes 11 7/8s, 2016 98,000
--------------
1,804,750
Publishing (0.7%)
- ------------------------------------------------------------------------------------------------------------
200,000 Affinity Group sr. sub. notes 11 1/2s, 2003 210,000
285,000 American Media Operation, Inc. sr. sub. notes
11 5/8s, 2004 307,800
50,000 Hollinger International Publishing, Inc. company
guaranty 9 1/4s, 2007 48,000
50,000 Hollinger International Publishing, Inc. company
guaranty 8 5/8s, 2005 48,375
35,000 News America Holdings, Inc. deb. 7.7s, 2025 31,887
30,000 Sun Media Corp. 144A sr. sub. notes 9 1/2s, 2007
(Canada) 28,500
--------------
674,562
Real Estate (0.3%)
- ------------------------------------------------------------------------------------------------------------
120,000 Prime Hospitality Corp. 144A sr. sub. notes 9 3/4s, 2007 118,800
80,000 Rodamco N.V. notes 7.3s, 2005 (Netherlands) (R) 78,728
125,000 Tanger Properities Ltd. Partnership guaranteed. notes
8 3/4s, 2001 (R) 126,758
--------------
324,286
Restaurants (0.1%)
- ------------------------------------------------------------------------------------------------------------
30,000 AmeriKing. Inc. sr. notes 10 3/4s, 2006 30,300
100,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 104,000
--------------
134,300
Retail (1.9%)
- ------------------------------------------------------------------------------------------------------------
100,000 Brylane (L.P.) sr. sub. notes 10s, 2003 105,000
200,000 Federated Department Stores, Inc. sr. notes 8 1/2s, 2003 206,570
25,000 Federated Department Stores, Inc. sr. notes 8 1/8s, 2002 25,436
265,000 Guitar Center Management Co. sr. notes 11s, 2006 283,550
200,000 K mart Corp. deb. 8 3/8s, 2022 177,500
50,000 K mart Corp. deb. 7 3/4s, 2012 43,750
250,000 K mart Corp. med. term notes 7.86s, 2002 238,018
25,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 26,750
250,000 Mothers Work, Inc. sr. notes 12 5/8s, 2005 260,000
175,000 Phar-Mor, Inc. sr. notes 11.72s, 2002 183,750
50,000 Rite Aid Corp. notes 6.7s, 2001 48,865
105,000 Specialty Retailers, Inc. sr. sub. notes 11s, 2003 111,563
150,000 Waban, Inc. sr. sub. notes 11s, 2004 167,250
--------------
1,878,002
Satellite Services (0.2%)
- ------------------------------------------------------------------------------------------------------------
160,000 Net Sat Servicos Ltd. sr. notes 12 3/4s, 2004 (Brazil) 165,600
80,000 TCI Satellite Entertainment 144A sr. sub. notes
10 7/8s, 2007 69,600
--------------
235,200
Semiconductors (0.1%)
- ------------------------------------------------------------------------------------------------------------
80,000 Fairchild Semiconductor Corp. 144A sr. sub. notes
10 1/8s, 2007 79,600
Shipping (0.3%)
- ------------------------------------------------------------------------------------------------------------
40,000 Newport News Shipbuilding sr. notes 8 5/8s, 2006 40,300
35,000 Newport News Shipbuilding sr. sub. notes
9 1/4s, 2006 35,613
250,000 Transport Maritima Mexicana S.A. de CV sr. notes 10s,
2006 (Mexico) 245,000
--------------
320,913
Specialty Consumer Products (0.1%)
- ------------------------------------------------------------------------------------------------------------
130,000 Sassco Fashions Ltd. 144A notes 12 3/4s, 1999 131,300
Steel (0.3%)
- ------------------------------------------------------------------------------------------------------------
75,000 AK Steel Corp. sr. notes 9 1/8s, 2006 73,875
200,000 Ispat Mexicana, S.A. deb. 10 3/8s, 2001 (Mexico) 200,500
--------------
274,375
Telecommunications (2.9%)
- ------------------------------------------------------------------------------------------------------------
100,000 Dobson Communications Corp. 144A sr. notes
11 3/4s, 2007 100,250
110,000 Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 122,925
400,000 Hyperion Telecommunication Corp. sr. disc. notes
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003 ++ 218,000
250,000 ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 ++ 167,500
300,000 Intermedia Communication of Florida sr. disc. notes
stepped-coupon zero % (12 1/2s, 5/15/01), 2006 ++ 190,500
25,000 Intermedia Communication of Florida sr. notes
Ser. B, 13 1/2s, 2005 28,188
200,000 International Cabletel, Inc. 144A sr. notes 10s, 2007 190,000
375,000 International Cabletel, Inc. sr. notes stepped-coupon
Ser. B, zero % (11 1/2s, 2/01/01), 2006 ++ 232,500
170,000 McLeod, Inc. 144A sr. disc. notes stepped-coupon zero %
(10 1/2s, 3/1/02), 2007 ++ 93,500
300,000 Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 240,000
250,000 Nextlink Communications, Inc. sr. notes 12 1/2s, 2006 253,750
50,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 43,500
300,000 Orbcomm Global Capital Corp. sr. notes Ser. B, 14s, 2004 297,000
5,000 Pricellular Wireless Corp. sr. disc. notes stepped-coupon
zero % (12 1/4s, 10/1/98), 2003 ++ 4,450
250,000 Rogers Cantel, Inc. deb. 9 3/8s, 2008 (Canada) 252,500
625,000 Teleport Communications Group Inc. sr. disc. notes
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 ++ 418,750
100,000 Winstar Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 ++ 59,000
80,000 Winstar Equipment Corp. 144A company guaranty
12 1/2s, 2004 78,200
--------------
2,990,513
Telephone Services (1.1%)
- ------------------------------------------------------------------------------------------------------------
350,000 American Communication Services, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 ++ 192,500
145,000 Brooks Fiber Properties, Inc. sr. disc. notes stepped-
coupon zero % (11 7/8s, 11/01/01), 2006 ++ 86,275
275,000 Brooks Fiber Properties, Inc. sr. disc. notes stepped-
coupon zero % (10 7/8s, 3/1/01), 2006 ++ 170,500
60,000 Compania Telecom Chile notes 7 5/8s, 2006 (Chile) 60,004
140,000 Globo Communicacoes 144A company guaranty
10 1/2s, 2006 141,400
382,000 GST Telecommunications,Inc. company guaranty stepped-
coupon zero % (13 7/8s, 15/15/00), 2005 ++ 240,660
260,000 IntelCom Group, Inc. company guaranty stepped-coupon
zero % (12 1/2s, 5/1/01), 2006 ++ 161,200
95,000 US West Capital Funding, Inc. company guaranty
6.95s, 2037 92,705
--------------
1,145,244
Textiles (0.4%)
- ------------------------------------------------------------------------------------------------------------
50,000 Dominion Textile USA Inc. gtd. sr. notes 9 1/4s, 2006 50,000
40,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 39,750
5,000 Polysindo Inernational Eka company guaranty 13s,
2001 (Indonesia) 5,600
150,000 Polysindo International Finance company guaranty
11 3/8s, 2006 (Indonesia) 160,875
105,000 Tultex Corp. sr. notes 10 5/8s, 2005 114,188
--------------
370,413
Tobacco (0.1%)
- ------------------------------------------------------------------------------------------------------------
25,000 Philip Morris Cos., Inc. deb. 7 3/4s, 2027 23,687
80,000 Philip Morris Cos., Inc. notes 7 1/2s, 2002 80,399
30,000 RJR Nabisco, Inc. notes 8 3/4s, 2005 29,623
--------------
133,709
Wireless Communications (--%)
- ------------------------------------------------------------------------------------------------------------
30,000 International Wireless Communications, Inc. sr. disc.
notes zero %, 2001 16,800
--------------
Total Corporate Bonds and Notes (cost $47,709,652) $ 47,363,735
FOREIGN GOVERNMENT BONDS AND NOTES (19.7%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
AUD 970,000 Australia (Government of) notes 8 3/4s, 2001 $ 796,883
CAD 390,000 Canada (Government of) 8s, 2023 304,551
DKK 2,650,000 Denmark (Government of) 8s, 2001 459,367
DKK 2,240,000 Denmark (Government of) bonds 8s, 2006 383,017
FRF 9,865,000 France (Government of) 5 1/2s 1,803,806
FRF 7,324,000 France Treasury bill 7s, 2000 1,409,260
FRF 6,000,000 France Treasury bill 4 1/2s, 1998 1,076,896
DEM 2,700,000 Germany (Federal Republic of) 8s, 2002 1,818,795
DEM 350,000 Germany (Federal Republic of) bonds 7 3/8s,
2005 230,653
DEM 1,090,000 Germany (Federal Republic of) bonds 6 1/4s,
2006 668,568
DEM 3,330,000 Germany (Federal Republic of) bonds
Ser. 118, 5 1/4s, 2001 2,036,545
DEM 5,225,000 Germany (Federal Republic of) 4 3/4s, 2001 3,120,659
USD 55,000 Morocco (Government of) FRN Ser. A, 6.375s,
2009 47,025
USD 80,000 Quebec (Province of) deb. Ser. NN, 7 1/8s,
2024 72,394
USD 620,000 Bank of Foreign Economic Affairs of Russia
(Vnesheconombank) principal loan FRN,
2020 +##+++ 347,975
ZAR 310,000 South Africa (Republic of) bonds Ser. 153, 13s,
2010 60,892
GBP 1,670,000 United Kingdom Treasury bonds 7s, 2002 2,696,869
GBP 600,000 United Kingdom Treasury bonds 6s, 1999 963,395
GBP 1,095,000 United Kingdom Treasury bonds 7 1/2s, 2006 1,777,842
--------------
Total Foreign Government Bonds and Notes
(cost $20,817,977) $ 20,075,392
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (17.0%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Pass-Through Certificates (14.1%)
- ------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
$1,870,000 8 1/2s, TBA, April 16, 2027 $ 1,916,152
554,400 8 1/2s, January 1, 2027 568,083
190,102 7s, February 15, 2027 158,258
Federal National Mortgage Association Pass-Through
Certificates
727,058 8s, with due dates from June 1, 2026 to
October 1, 2026 729,785
4,030,646 7 1/2s, with due dates from July 1, 2026 to
February 1, 2027 3,955,076
105,034 7s, January 1, 2027 100,406
Government National Mortgage Association
Pass-Through Certificates
1,792,341 8s, with due dates from January 15, 2026 to
February 15, 2027 1,799,619
4,118,312 7 1/2s, with due dates from October 15, 2022 to
February 15, 2027 4,045,141
1,208,266 7s, with due dates from March 15, 2026 to
June 15, 2026 1,152,386
--------------
14,424,906
U.S. Treasury Obligations (2.9%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
720,000 8 1/8s, August 15, 2019 789,977
1,980,000 6 1/2s, November 15, 2026 1,822,828
U.S. Treasury Notes
40,000 6 7/8s, May 15, 2006 39,775
310,000 5 5/8s, November 30, 1998 306,416
--------------
2,958,996
--------------
Total U.S. Government and Agency Obligations
(cost $17,760,797) $ 17,383,902
UNITS (1.0%) *
NUMBER OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------
75 Advanced Radio Telecommunications units 14s, 2007 $ 81,750
20 Anvil Holdings Inc. 144a pfd. units 13s 03/15/09 [2 DBL. DAGGERS] 19,400
90 Colt Telecommunications Group PLC units stepped-
coupon zero % (12s, 12/15/01), 2006
(United Kingdom) ++ 56,925
35 Diva Systems Corp. 144A units stepped-coupon zero %
(13s, 5/15/01), 2006 ++ 20,606
85 Esat Holdings Ltd. 144A units stepped-coupon zero %
(12 1/2s, 2/1/02), 2007 ++ 47,600
130 Fitzgerald Gaming Co. units 13s, 2002 89,700
120 Globalstar L.P. Capital units 11 3/8s, 2004 117,000
65 Ionica PLC stepped-coupon zero % (15s, 05/01/07),
2007 ++ 28,925
160 Mccaw International, Ltd. 144a units stepped-coupon
zero % (13s, 04/15/07), 2007 ++ 80,000
2,345 Nextlink Communications 144A pfd. units 14s, 2009 [2 DBL. DAGGERS] 103,180
95 Real Time Data 144A units stepped-coupon zero %
(13 1/2s, 8/15/01), 2006 ++ 50,350
180 RSL Communications, Ltd. 144A units 12 1/4s, 2006 184,500
100 Spanish Broadcasting Systems units 14 1/4s, 2005 98,000
155 Wireless One Inc. units stepped-coupon zero %
(13 1/2s, 8/1/01), 2006 ++ 46,500
--------------
Total Units (cost $1,112,466) $ 1,024,436
PREFERRED STOCKS (2.7%) *
NUMBER OF SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
300 American Radio Systems Corp. 144A $11.375 pfd. [2 DBL. DAGGERS] $ 29,400
2,000 AmeriKing, Inc. $3.25 pfd. [2 DBL. DAGGERS] 53,000
5,000 Cablevision Systems Ser. M, $11.125 dep. shs. pfd. 446,250
1,000 California Federal Bank Ser. B, $11.50 pfd. 112,000
4,000 California Federal Bank Ser. A, $2.28 pfd. 97,500
1,000 California Federal Bank Ser. B, $10.625 exch. pfd. 109,500
900 Chancellor Radio Broadcasting 144A $12.00 pfd. 87,750
2,575 Chevy Chase Capital Corp. Ser. A, $5.19 pfd. 121,025
1,750 Diva Systems Corp. Ser. C, $ 6.00 pfd. 14,438
2,787 El Paso Electric Co. $11.40 pfd. [2 DBL. DAGGERS] 309,357
110 Fresenius Medical Care AG Ser. D, $9.00 pfd.
(Germany) 107,800
250 ICG Holdings, Inc. 14.25% pfd. (Canada) 275,000
25 Intermedia Communications, Inc. 144A 13.50% pfd. [2 DBL. DAGGERS] 236,250
100 International CableTel, Inc. 144A 13.00% pfd. [2 DBL. DAGGERS] 95,000
1,800 SFX Broadcasting, Inc. Ser. E, $12.625 pfd. [2 DBL. DAGGERS] 174,600
422 Time Warner Inc. Ser. M, 10.25% pfd. [2 DBL. DAGGERS] 451,039
--------------
Total Preferred Stocks (cost $2,742,917) $ 2,719,909
BRADY BONDS (2.3%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$1,162,060 Argentina (Republic of) deb. 6.75s, 2005 $ 1,038,591
75,000 Bulgaria (Government of) deb. Ser. IAB, 6.5625s, 2011 42,469
734,614 Brazil (Republic of) FRB 8s, 2014 +++ 546,369
101,173 Ecuador (Government of) PDI, 3 1/4s, 2015 57,416
705,000 United Mexican States deb. Ser. B, 6 1/4s, 2019 497,025
238,095 Venezuela (Government of) deb. Ser. B, 6 3/4s, 2007 209,524
--------------
Total Brady Bonds (cost $2,445,738) $ 2,391,394
CONVERTIBLE BONDS AND NOTES (0.9%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$200,000 Argosy Gaming cv. sub. notes 12s, 2001 $ 124,000
105,000 Chiquita Brands cv. sr. notes 9 5/8s, 2004 106,575
250,000 Exide Corp. 144A cv. sr. sub. notes 2.9s, 2005 141,563
4,000 GST Telecommunications, Inc. cv. sr. disc. notes stepped-
coupon zero % (13 7/8s, 15/15/00), 2005 ++ 2,800
160,000 Integrated Device Technology, Inc. cv. sub. notes 5 1/2s,
2002 129,200
140,000 National Semiconductor Corp. cv. deb. 6 1/2s, 2002 140,875
103,000 Pricellular Wireless Corp. 144A cv. sub. notes stepped-
coupon zero % (10 3/4s, 8/15/00), 2004 ++ 87,678
60,000 VLSI Technology, Inc. cv. sub. notes 8 1/4s, 2005 56,625
150,000 Winstar Communications. Inc. 144A cv sr. disc. notes
zero %, (14s, 10/15/00), 2005 93,000
--------------
Total Convertible Bonds and Notes (cost $874,994) $ 882,316
ASSET-BACKED SECURITIES (0.2%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 70,000 Associates Manufactured Housing Ser. 96-1, Class A3,
7s, 2027 $ 70,263
50,000 Capita Equipment Receivables Trust Ser. 96-1,
Class A4, 6.28s, 2000 49,266
70,000 Contimortgage Home Equity Loan Trust Ser. 97-1,
Class M2, 7.67s, 2025 69,300
65,000 Sears Credit Account Master Trust Ser. 96-4, Class A,
6.45s, 2006 63,740
--------------
Total Asset-Backed Securities (cost $254,548) $ 252,569
COLLATERALIZED MORTGAGE OBLIGATIONS (0.3%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$ 115,000 Federal National Mortgage Association Ser.97-25 Z,
7s, 2027 $ 96,492
126,462 Federal National Mortgage Association Ser. 97-5Z,
7s, 2027 105,338
139,390 Rural Housing Trust Ser. 87-1, Class D, 6.33s,
April 1, 2026 135,341
--------------
Total Collateralized Mortgage Obligations (cost $345,339) $ 337,171
WARRANTS (--%) * + EXPIRATION
PRINCIPAL AMOUNT DATE VALUE
- ------------------------------------------------------------------------------------------------------------
400 Hyperion Telecommunications 144A 4/15/01 $ 12,000
110 Interact Systems Inc. 3/1/00 28
25 Intermedia Communications 144A 6/11/00 500
45 Sterling Chemicals Holdings 8/15/08 1,575
15,000 Transamerican Refining 2/15/02 30,000
--------------
Total Warrants (cost $52,570) $ 44,103
COMMON STOCKS (--%) * +
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
50 AmeriKing, Inc. $ 2,500
900 Terex Corp. Rights expiration date 5/15/02 4,500
--------------
Total Common Stocks (cost $5,251) $ 7,000
PURCHASED OPTIONS OUTSTANDING (--%) *
CONTRACT
AMOUNT EXPIRATION DATE VALUE
- ------------------------------------------------------------------------------------------------------------
USD 3,700,000 U.S. Dollars in exchange for
Deutschemarks (Call) May 97/1.692 DEM $ 29,970
USD 1,200,000 U.S. Dollars in exchange for
Japanese Yen (Call) Apr. 97/125.0 JPY 6,120
--------------
Total Options Purchased Outstanding (cost $ 38,490) $ 36,090
SHORT-TERM INVESTMENTS (10.2%) * (cost $10,432,854)
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
10,431,000 Interest in $803,250,000 joint repurchase agreement
dated March 31, 1997, with UBS Securities due
April 1, 1997, with respect to various U.S. Treasury
obligations -- maturity value of $10,432,854 for
an effective yield of 6.40% $ 10,432,854
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $104,593,593) *** $ 102,950,871
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $102,031,289.
*** The aggregate identified cost on a tax basis is $104,599,212, resulting in gross unrealized appreciation
and depreciation of $1,023,796 and $2,672,137, respectively, or net unrealized depreciation of $1,648,341.
+ 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.
+++ A portion of the income will be received in additional securities.
[DOUBLE DAGGER] Income may be received in cash or additional securities at the discretion of the issuer.
## When-issued securities (Note 1). The coupon rate will be LIBOR plus 13/16.
(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
March 31, 1997, which are subject to change based on the terms of the security.
Diversification by Country (Unaudited)
Distribution of investments by country of issue at March 31, 1997:
(as percentage of Market Value)
Argentina 1.2%
Brazil 1.1
Canada 2.2
France 4.2
Germany 7.8
Mexico 1.2
United Kingdom 5.8
United States 72.8
Other 3.7
------
100.0%
<CAPTION>
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at March 31, 1997
(aggregate face value $15,673,486)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $ 874,732 $ 874,824 6/18/97 $ (92)
British Pounds 335,656 334,935 6/18/97 721
Canadian Dollars 1,537,864 1,564,330 6/18/97 (26,466)
Deutschemarks 5,474,974 5,423,473 6/18/97 51,501
French Francs 460,355 457,392 6/18/97 2,963
Italian Lira 2,123,753 2,087,688 6/18/97 36,065
Japanese Yen 2,768,722 2,795,614 6/18/97 (26,892)
Spanish Peseta 1,237,367 1,232,700 6/18/97 4,667
Swedish Krona 22,840 22,591 6/18/97 249
Swiss Francs 879,107 879,939 6/18/97 (832)
- ----------------------------------------------------------------------------------------
$ 41,884
- ----------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at March 31, 1997
(aggregate face value $12,817,741)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
British Pounds $ 4,415,052 $ 4,318,370 6/18/97 $ (96,682)
Danish Krone 120,205 119,701 6/18/97 (504)
Deutschemarks 4,043,788 4,007,843 6/18/97 (35,945)
French Francs 1,853,551 1,851,555 6/18/97 (1,996)
Japanese Yen 1,154,319 1,169,083 6/18/97 14,764
Swedish Krona 485,757 478,656 6/18/97 (7,101)
Swiss Francs 873,781 872,533 6/18/97 (1,248)
- ----------------------------------------------------------------------------------------
$ (128,712)
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
March 31, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $104,593,593) (Note 1) 102,950,871
- ---------------------------------------------------------------------------------------------------
Cash 299
- ---------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 1,742,852
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,192,914
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 518,307
- ---------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 113,920
- ---------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 39,323
- ---------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 45,654
- ---------------------------------------------------------------------------------------------------
Total assets 106,604,140
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 163,221
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 3,212,621
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 394,197
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 230,405
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 26,993
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 316
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,251
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 76,776
- ---------------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 46,575
- ---------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 200,748
- ---------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 141,469
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 78,279
- ---------------------------------------------------------------------------------------------------
Total liabilities 4,572,851
- ---------------------------------------------------------------------------------------------------
Net assets 102,031,289
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) 103,209,518
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 38,301
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 516,692
- ---------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (1,733,222)
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $102,031,289
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($39,177,864 divided by 4,695,854 shares) $8.34
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.34)* $8.76
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($57,051,763 divided by 6,842,885 shares)** $8.34
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($5,801,662 divided by 695,674 shares) $8.34
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.34)* $8.62
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the
offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent deferred
sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended March 31, 1997
<S> <C>
Investment income:
- --------------------------------------------------------------------------------------------------
Interest (net of foreign tax of $5,527) $ 5,260,992
- --------------------------------------------------------------------------------------------------
Dividends 106,921
- --------------------------------------------------------------------------------------------------
Total investment income 5,367,913
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 424,705
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 185,771
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 8,392
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 4,793
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 55,646
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 348,936
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 17,386
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 706
- --------------------------------------------------------------------------------------------------
Reports to shareholders 54,732
- --------------------------------------------------------------------------------------------------
Registration fees 26,443
- --------------------------------------------------------------------------------------------------
Auditing 45,307
- --------------------------------------------------------------------------------------------------
Legal 12,303
- --------------------------------------------------------------------------------------------------
Postage 10,899
- --------------------------------------------------------------------------------------------------
Other 4,109
- --------------------------------------------------------------------------------------------------
Fees waived by Manager (Note 2) (174,482)
- --------------------------------------------------------------------------------------------------
Total expenses 1,025,646
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (65,367)
- --------------------------------------------------------------------------------------------------
Net expenses 960,279
- --------------------------------------------------------------------------------------------------
Net investment income 4,407,634
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 663,194
- --------------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 650
- --------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (41,003)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (87,163)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (1,620,154)
- --------------------------------------------------------------------------------------------------
Net loss on investments (1,084,476)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 3,323,158
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
For the period
February 26, 1996
(commencement
Year ended of operations)
March 31 to March 31
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 4,407,634 $ 20,908
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments
and foreign currency transactions 622,841 (3,208)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (1,707,317) (25,905)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 3,323,158 (8,205)
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
- ----------------------------------------------------------------------------------------------------------------------
Class A (1,689,156) (7,673)
- ----------------------------------------------------------------------------------------------------------------------
Class B (2,371,438) (8,092)
- ----------------------------------------------------------------------------------------------------------------------
Class M (253,993) (1,000)
- ----------------------------------------------------------------------------------------------------------------------
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) 93,866,742 9,251,502
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 92,702,757 9,226,532
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 9,328,532 102,000
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $38,301 and $4,666, respectively) 102,031,289 9,328,532
- ----------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------
For the period
Per-share Year ended Feb. 26, 1996+
operating performance March 31 to March 31
- ---------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $8.38 $8.50
- ---------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------
Net investment income (d) .63 .04 (c)
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.02) (.13)
- ---------------------------------------------------------------------------------------------------
Total from
investment operations .61 (.09)
- ---------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------
From net
investment income (.63) (.03)
- ---------------------------------------------------------------------------------------------------
From net realized gain
on investments (.02) --
- ---------------------------------------------------------------------------------------------------
Total distributions (.65) (.03)
- ---------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.34 $8.38
- ---------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.36 (1.41)*
- ---------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $39,178 $3,799
- ---------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(d) 1.25 .13 *
- ---------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(d) 7.74 .50 *
- ---------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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 and $0.02 per share class for 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
- -------------------------------------------------------------------------------------------------------
For the period
Per-share Year ended Feb. 26, 1996+
operating performance March 31 to March 31
- -------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $8.38 $8.50
- -------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------
Net investment income (d) .57 .03 (c)
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.03) (.12)
- -------------------------------------------------------------------------------------------------------
Total from
investment operations .54 (.09)
- -------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------
From net
investment income (.56) (.03)
- -------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.02) --
- -------------------------------------------------------------------------------------------------------
Total distributions (.58) (.03)
- -------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.34 $8.38
- -------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 6.56 (1.41)*
- -------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $57,052 $5,048
- -------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(d) 2.00 .20 *
- -------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(d) 6.99 .44 *
- -------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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 and $0.02 per share class for 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
- -----------------------------------------------------------------------------------------------------
For the period
Per-share Year ended Feb. 26, 1996+
operating performance March 31 to March 31
- -----------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $8.38 $8.50
- -----------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------
Net investment income (d) .61 .04 (c)
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.03) (.13)
- -----------------------------------------------------------------------------------------------------
Total from
investment operations .58 (.09)
- -----------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------
From net
investment income (.60) (.03)
- -----------------------------------------------------------------------------------------------------
From net realized gain
on investments (.02) --
- -----------------------------------------------------------------------------------------------------
Total distributions (.62) (.03)
- -----------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.34 $8.38
- -----------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.09 (1.41)*
- -----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $5,802 $482
- -----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(d) 1.50 .14 *
- -----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(d) 7.48 .50 *
- -----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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 and $0.02 per share class for 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
March 31, 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 effective yield
method.
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 fluctuations are included with the net
realized and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net exchange gains or losses
on closed forward currency contracts, disposition of foreign currencies and
the difference between the amount of investment income and foreign withholding
taxes recorded on the fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net unrealized 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 forward currency exchange rates
supplied by a quotation service. The market value of the contract will
fluctuate with changes in currency exchange rates. The contract is "marked to
market" daily and the change in market value is recorded as an unrealized gain
or loss. When the contract is closed, the fund records a realized gain or loss
equal to the difference between the value of the contract at the time it was
opened and the value at the time it was closed. The fund could be exposed to
risk if the value of the currency changes unfavorably, if the counterparties
to the contracts are unable to meet the terms of their contracts or if the
fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
H) TBA purchase commitments The fund may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a future
date beyond customary settlement time. Although the unit price has been
established, the principal value has not been finalized. However, the amount
of the commitments will not fluctuate more than 1.0% from the principal
amount. The fund holds, and maintains until settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the fund may enter into offsetting contracts for the forward sale of
other securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the underlying
securities, according to the procedures described under "Security valuation"
above.
Although the fund will generally enter into TBA purchase commitments with the
intention of acquiring securities for their portfolio or for delivery pursuant
to options contracts it has entered into, the fund may dispose of a commitment
prior to settlement if Putnam Management deems it appropriate to do so.
I) Federal taxes It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986. Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation on securities held nor for excise tax
on income and capital gains.
J) 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. These differences include treatment of market
discount, paydown gains and losses on mortgage-backed securities, amortization
of bond premium, organization expenses, interest on payment-in-kind
securities, currency gains and losses on foreign bonds and realized and
unrealized gains and losses on forward foreign currency contracts.
Reclassifications are made to the fund's capital accounts to reflect income
and gains available for distribution (or available capital loss carryovers)
under income tax regulations. For the year ended March 31, 1997, the fund
reclassified $59,412 to decrease undistributed net investment income and
$10,741 to decrease paid-in-capital, with an increase to accumulated net
realized gain on investments of $70,153. The calculation of net investment
income per share in the financial highlights table excludes these adjustments.
K) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities and
Exchange Commission and with various states and the initial public offering of
its shares were $46,575. These expenses are being amortized on projected net
asset levels over a five-year period. The fund will reimburse Putnam
Management for the payment of these expenses.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 0.70% of the first $500 million of
average net assets, 0.60% of the next $500 million, 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 year ended March 31, 1997, fund expenses were reduced by $65,367 under
expense offset arrangements with PFTC and brokerage service arrangements.
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 $630 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 "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 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 have approved payment by the fund at an annual rate of 0.25%, 1.00%
and 0.50% of the average net assets attributable to class A, class B and class
M shares respectively.
For the year ended March 31, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $86,350 and $5,447 from the sale of
class A and class M shares, respectively and $55,923 in contingent deferred
sales charges from redemptions of class B shares. A deferred sales charge of
up to 1% is assessed on certain redemptions of class A shares. For the year
ended March 31, 1997, Putnam Mutual Funds Corp., acting as underwriter
received $88 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended March 31, 1997, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $122,405,273 and $54,328,191, respectively. Purchases and sales of
U.S. government obligations aggregated $57,681,570 and $42,250,662,
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 year $-- $--
- ------------------------------------------------------------
Options opened 200,000 650
- ------------------------------------------------------------
Options expired (200,000) (650)
- ------------------------------------------------------------
Written options
outstanding at
end of year $-- $--
- ------------------------------------------------------------
Note 4
Capital shares
At March 31, 1997, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares
were as follows:
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
- ------------------------------------------------------------
For the period
February 26, 1996
(commencement of
operations) to
March 31, 1996
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 461,199 $3,876,904
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 611 5,124
- ------------------------------------------------------------
461,810 3,882,028
Shares
repurchased (20,271) (170,759)
- ------------------------------------------------------------
Net increase 441,539 $3,711,269
- ------------------------------------------------------------
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
- ------------------------------------------------------------
For the period
February 26, 1996
(commencement of
operations) to
March 31, 1996
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 618,364 $5,194,019
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 597 5,001
- ------------------------------------------------------------
618,961 5,199,020
Shares
repurchased (16,843) (141,112)
- ------------------------------------------------------------
Net increase 602,118 $5,057,908
- ------------------------------------------------------------
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
- ------------------------------------------------------------
For the period
February 26, 1996
(commencement of
operations) to
March 31, 1996
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 59,906 $502,851
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 51 424
- ------------------------------------------------------------
59,957 503,275
Shares
repurchased (2,500) (20,950)
- ------------------------------------------------------------
Net increase 57,457 $482,325
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 2.07% of the distributions from net investment
income as qualifying for the dividends received deduction for corporations.
The Form 1099 you receive in January 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. 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
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 principal amount invested.
[PUTNAM LOGO OMITTED]
The Putnam Funds
One Post Office Square
Boston, Massachusetts
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
32911-896/2BQ/2BR/2BC 5/97
