PROSPECTUS
JULY 30, 1997
PUTNAM DIVERSIFIED INCOME TRUST II
CLASS A, B AND M SHARES
INVESTMENT STRATEGY: INCOME
This prospectus explains concisely what you should know before
investing in Putnam Diversified Income Trust II (the "fund").
Please read it carefully and keep it for future reference. You
can find more detailed information in the July 30, 1997
statement of additional information (the "SAI"), as amended from
time to time. For a free copy of the SAI or other information,
call Putnam Investor Services at 1-800-225-1581. The SAI has
been filed with the Securities and Exchange Commission (the
"Commission") and is incorporated into this prospectus by
reference. The Commission maintains a Web site
(http://www.sec.gov) that contains the SAI, material incorporated
by reference into this prospectus and the SAI, and other
information regarding registrants that file electronically with
the Commission.
THE FUND INVESTS PRIMARILY IN LOWER-RATED BONDS, COMMONLY KNOWN
AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT TO A
GREATER RISK OF LOSS OF PRINCIPAL AND NONPAYMENT OF INTEREST.
INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE FUND.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
BOSTON * LONDON * TOKYO
<PAGE>
ABOUT THE FUND
EXPENSES SUMMARY
.................................................................
This section describes the sales charges, management fees, and
annual operating expenses that apply to various classes
of the fund's shares. Use it to help you estimate the impact of
transaction costs on your investment over time.
FINANCIAL HIGHLIGHTS
..........................................................
.......Study this table to see, among other things, how the fund
performed each year for the past 10 years or since it began
investment operations if it has been in operation for less than
10 years.
OBJECTIVE
..........................................................
.......Read this section to make sure the fund's objective is
consistent with your own.
HOW THE FUND PURSUES ITS OBJECTIVE
.................................................................
This section explains in detail how the fund seeks its investment
objective.
RISK FACTORS. All investments entail some risk. Read this
section to make sure you understand the risks that
are associated with an investment in the fund.
HOW PERFORMANCE IS SHOWN
.................................................................
This section describes and defines the measures used to assess
fund performance. All data are based on past
investment results and do not predict future performance.
HOW THE FUND IS MANAGED
.................................................................
Consult this section for information about the fund's management,
allocation of its expenses, and how purchases and sales
of securities are made .
ORGANIZATION AND HISTORY
.................................................................
In this section, you will learn when the fund was introduced, how
it is organized, how it may offer shares, and who its Trustees
are.
ABOUT YOUR INVESTMENT
ALTERNATIVE SALES ARRANGEMENTS
.................................................................
Read this section for descriptions of the classes of shares this
prospectus offers and for points you should consider when making
your choice.
HOW TO BUY SHARES
.................................................................
This section describes the ways you may purchase shares and tells
you the minimum amounts required to open various types of
accounts. It explains how sales charges are determined and how
you may become eligible for reduced sales charges on each class
of shares.
DISTRIBUTION PLANS
.................................................................
This section tells you what distribution fees are charged against
each class of shares.
HOW TO SELL SHARES
.................................................................
In this section you can learn how to sell fund shares ,
either directly to the fund or through an investment dealer.
HOW TO EXCHANGE SHARES
.................................................................
Find out in this section how you may exchange fund shares
for shares of other Putnam funds. The section also explains how
exchanges can be made without sales charges and the conditions
under which sales charges may be required.
HOW THE FUND VALUES ITS SHARES
.................................................................
This section explains how the fund determines the value of its
shares.
HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION
..........................................................
.......This section describes the various options you have in
choosing how to receive fund dividends . It also discusses
the tax status of the payments and counsels you
to seek specific advice about your own situation.
ABOUT PUTNAM INVESTMENTS, INC.
.................................................................
Read this section to learn more about the companies that provide
marketing, investment management, and shareholder account
services to Putnam funds and their shareholders.
APPENDIX
Securities ratings
<PAGE>
ABOUT THE FUND
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing.
The following table summarizes your maximum transaction costs
from investing in the fund and expenses based on
the most recent fiscal year. The examples show the
cumulative expenses attributable to a hypothetical $1,000
investment over specified periods.
CLASS A CLASS B CLASS M
SHARES SHARES SHARES
SHAREHOLDER TRANSACTION
EXPENSES
Maximum sales charge
imposed on purchases
(as a percentage of
offering price) 4.75% NONE* 3.25%*
Deferred sales charge 5.0% in the first
(as a percentage year, declining
of the lower of to 1.0% in the
original purchase sixth year, and
price or redemption eliminated
proceeds) NONE** thereafter NONE
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Total fund
Management 12b-1 Other operating
fees+ fees expenses expenses+
- ---------- ----- -------------------
Class A 0.41% 0.25% 0.59%1.25%
Class B 0.41% 1.00% 0.59%2.00%
Class M 0.41% 0.50% 0.59%1.50%
+ after expense limitation
The table is provided to help you understand the expenses of
investing and your share of fund operating
expenses . The expenses shown in the table do not reflect
the application of credits that reduce fund expenses.
The management fees and total fund operating expenses shown in
the table reflect an expense limitation currently in effect. In
the absence of an expense limitation, management fees and
total fund operating expenses would have been 0.70%
and 1.54%, respectively, for class A shares; 0.70%
and 2.29%, respectively, for class B shares; and
0.70 % and 1.79%, respectively, for class M shares.
EXAMPLES
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return and, except as indicated, redemption at
the end of each period:
1 3 5 10
year years years years
CLASS A $60 $85 $113 $191
CLASS B $70 $93 $128 $213 ***
CLASS B (NO REDEMPTION) $20 $63 $108 $213 ***
CLASS M $47 $78 $112 $206
The examples do not represent past or future expense levels.
Actual expenses may be greater or less than those shown. Federal
regulations require the examples to assume a 5% annual return,
but actual annual return varies.
* The higher 12b-1 fees borne by class B and class M shares
may cause long-term shareholders to pay more than the
economic equivalent of the maximum permitted front-end
sales charge on class A shares.
** A deferred sales charge of up to 1.00% is assessed on
certain redemptions of class A shares that were purchased
without an initial sales charge. See "How to buy shares -
Class A shares."
*** Reflects conversion of class B shares to class A shares
(which pay lower ongoing expenses) approximately eight
years after purchase. See "Alternative sales
arrangements."
FINANCIAL HIGHLIGHTS
The following table presents per share financial information for
class A, B and M shares. This information has been audited and
reported on by the independent accountants. The "Report
of independent accountants" and financial statements included in
the fund's annual report to shareholders for the 1997
fiscal year are incorporated by reference into this
prospectus. The fund's annual report, which contains additional
unaudited performance information, is available without charge
upon request.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<PAGE>
CLASS A
For the period
February 26, 1996
Per-share Year ended to May
31
operating performance March 31, 1997
1996
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
<PAGE>
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.
(c) Per share net investment income has been determined on the
basis of the weighted average number of shares outstanding
during the period.
(d) Reflects an expense limitation during the period. As a
result of such limitation, expenses for each class of
shares reflect a reduction of approximately $0.01 and $0.02
per share for the year ended March 31, 1997 and the period
February 26, 1996 (commencement of operations) to March 31,
1996 respectively.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS B
For the period
February 26, 1996
Per-share Year ended to May
31
operating performance March 31, 1997
1996
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
<PAGE>
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.
(c) Per share net investment income has been determined on the
basis of the weighted average number of shares outstanding
during the period.
(d) Reflects an expense limitation during the period. As a
result of such limitation, expenses for each class of shares
reflect a reduction of approximately $0.01 and $0.02 per
share for the year ended March 31, 1997 and the period
February 26, 1996 (commencement of operations) to March 31,
1996 respectively.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS M
For the period
February 26, 1996
Per-share Year ended to May
31
operating performance March 31, 1997
1996
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
<PAGE>
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) 1.05 .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.
(c) Per share net investment income has been determined on the
basis of the weighted average number of shares outstanding
during the period.
(d) Reflects an expense limitation during the period. As a
result of such limitation, expenses for each class of shares
reflect a reduction of approximately $0.01 and $0.02 per
share for the year ended March 31, 1997 and the period
February 26, 1996 (commencement of operations) to March 31,
1996 respectively.
<PAGE>
OBJECTIVE
Putnam Diversified Income Trust II seeks high current income
consistent with preservation of capital. The fund is not
intended to be a complete investment program, and there is no
assurance it will achieve its objective.
HOW THE FUND PURSUES ITS OBJECTIVE
BASIC INVESTMENT STRATEGY
Under normal market conditions, the fund will invest at least 65%
of its total assets in debt securities of domestic or foreign
issuers, including government and corporate obligations. Putnam
Investment Management, Inc., the fund's investment manager
("Putnam Management"), expects that the fund will invest in debt
securities having longer maturities (10 years or more), but the
fund may invest in debt securities having a broad range of
maturities.
The fund also may invest in preferred stocks, common
stocks and other equity securities, as well as in cash or money
market instruments.
The fund may invest up to 60% of its total assets in securities
rated below BBB or Baa by each nationally recognized
securities rating agency, such as Standard & Poor's ("S&P")
or Moody's Investors Service, Inc. ("Moody's"),
rating such securities and in unrated securities
determined by Putnam Management to be of comparable
quality. Securities rated below BBB and Baa (and
comparable unrated securities) are commonly known as
"junk bonds." The fund will not invest more than 15% of its
total assets in securities rated below CCC or Caa by each
of the agencies rating such securities (and in unrated securities
determined by Putnam Management to be of comparable quality),
which may include securities in the lowest rating category of
each rating agency. Such securities may be in default and are
generally regarded by the rating agencies as having extremely
poor prospects of ever attaining any real investment standing.
The foregoing investment limitations will be measured at the time
of purchase and, to the extent that a security is assigned a
different rating by one or more of the various rating agencies,
Putnam Management will use the highest rating assigned by any
agency. The rating services' descriptions of securities in the
lower- rated categories, including the speculative
characteristics of such securities, are included in the
appendix to this prospectus.
In pursuing the fund's investment objective of high current
income consistent with preservation of capital, the fund will
seek to manage the volatility of the portfolio through extensive
credit analysis and diversification among lower- and higher-rated
securities, and domestic and foreign corporate and governmental
obligations.
ALTERNATIVE INVESTMENT STRATEGIES
At times Putnam Management may judge that conditions in
the securities markets make pursuing the fund's basic investment
strategy inconsistent with the best interests of its shareholders.
At such times, Putnam Management may temporarily use alternative
strategies primarily designed to reduce fluctuations in
the value of fund assets.
In implementing these defensive strategies, the fund may increase
the portion of its assets invested in money market instruments and
in U.S. government or agency obligations, or invest in any other
securities which Putnam Management considers consistent with such
defensive strategies.
It is impossible to predict when, or for how long, these
alternative strategies will be used.
RISK FACTORS
THE VALUES OF FIXED-INCOME SECURITIES FLUCTUATE
IN RESPONSE TO CHANGES IN INTEREST RATES. A decrease in interest
rates will generally result in an increase in the value of fund
assets. Conversely, during periods of rising interest rates, the
value of fund assets will generally decline. The magnitude of
these fluctuations generally is greater for securities with
longer maturities. However, the yields on such securities are
also generally higher. In addition, the values of fixed-income
securities are affected by changes in general economic and
business conditions affecting the specific industries of their
issuers.
Changes by recognized rating services in their ratings of a
fixed-income security and changes in the ability of an issuer to
make payments of interest and principal may also affect
the value of these investments. Changes in the value of
portfolio securities generally will not affect income derived
from these securities, but will affect the fund's net asset
value.
INVESTORS SHOULD CAREFULLY CONSIDER THEIR ABILITY TO ASSUME THE
RISKS OF OWNING SHARES OF A MUTUAL FUND THAT INVESTS IN LOWER-
RATED SECURITIES BEFORE MAKING AN INVESTMENT.
The lower ratings of certain securities held by the fund reflect
a greater possibility that adverse changes in the financial
condition of the issuer, or in general economic conditions, or an
unanticipated rise in interest rates may impair the ability of
the issuer to make payments of interest and principal.
The inability (or perceived inability) of issuers to make timely
payments of interest and principal would likely make the values
of securities held by the fund more volatile and could limit the
fund's ability to sell its securities at prices approximating the
values placed on such securities. In the absence of a liquid
trading market for its portfolio securities, the fund at times
may be unable to establish the fair value of such securities.
The rating assigned to a security by a rating agency does not
reflect an assessment of the volatility of the security's market
value or of the liquidity of an investment in the security.
The table below shows the percentages of fund assets invested
during fiscal 1997 in securities assigned to the various
rating categories by S&P, or, if unrated by S&P, assigned to
comparable rating categories by another rating agency,
and in unrated securities determined by Putnam Management to be
of comparable quality .
UNRATED SECURITIES
RATED SECURITIES, OF COMPARABLE QUALITY,
AS PERCENTAGE OF AS PERCENTAGE OF
RATING NET ASSETS NET ASSETS
"AAA" 30.87% 0.07%
"AA" 4.21% 0.01%
"A" 0.94% 0.12%
"BBB" 2.36% 0.16%
"BB" 12.73% 0.50%
"B" 30.85% 5.15%
"CCC" 2.94% 0.16%
"CC" 0.11% 0.17%
______ ______
Totals 85.01% 6.34%
====== =====
Putnam Management seeks to minimize the risks of investing in
lower-rated securities through careful investment analysis. When
the fund invests in securities in the lower rating categories,
the achievement of the fund's goals is more dependent on Putnam
Management's ability than would be the case if the fund were
investing in securities in the higher rating categories.
The fund will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase.
However, Putnam Management will monitor the investment to
determine whether continued investment in the security will
assist in meeting the fund's investment objective.
At times, a substantial portion of fund assets may be invested in
securities as to which the fund, by itself or together with other
funds and accounts managed by Putnam Management and its
affiliates, holds all or a major portion. Under adverse market
or economic conditions or in the event of adverse changes in the
financial condition of the issuer, it may be more
difficult to sell these securities when Putnam Management
believes it advisable to do so . The fund also may be able
to sell the securities only at prices lower than if they were
more widely held. Under these circumstances, it also may
be more difficult to determine the fair value of such securities
for purposes of computing the fund's net asset value.
In order to enforce its rights in the event of a default of these
securities, the fund may be required to participate in various
legal proceedings or take possession of and manage assets
securing the issuer's obligations on the securities. This could
increase fund operating expenses and adversely affect the
fund's net asset value.
Certain securities held by the fund may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were
to redeem securities held by the fund during a time of declining
interest rates, the fund may not be able to reinvest the proceeds
in securities providing the same investment return as the
securities redeemed.
The fund at times may invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a
significant discount from their principal amount and pay interest
only at maturity rather than at intervals during the life of the
security. Payment-in-kind bonds allow the issuer, at its option,
to make current interest payments on the bonds either in cash or
in additional bonds. Both zero-coupon bonds and payment-
in-kind bonds allow an issuer to avoid the need to generate cash
to meet current interest payments. Accordingly, such bonds may
involve greater credit risks than bonds paying interest in cash
currently. The values of zero-coupon bonds and payment-in-kind
bonds are also subject to greater fluctuation in response to
changes in market interest rates than bonds that pay interest in
cash currently.
Even though such bonds do not pay current interest in cash, the
fund nonetheless is required to accrue interest income on these
investments and to distribute the interest income on a
current basis. Thus, the fund could be required at times to
liquidate other investments in order to satisfy its distribution
requirements.
Certain investment grade securities in which the fund may invest
share some of the risk factors discussed above with respect to
lower-rated securities.
FOR ADDITIONAL INFORMATION REGARDING THE RISKS ASSOCIATED
WITH INVESTING IN SECURITIES IN THE LOWER RATING CATEGORIES, SEE
THE SAI.
INVESTMENTS IN PREMIUM SECURITIES
At times, the fund may invest in securities bearing coupon rates
higher than prevailing market rates. Such "premium" securities
are typically purchased at prices greater than the principal
amounts payable on maturity.
The fund does not amortize the premium paid for these securities
in calculating its net investment income. As a result, the
purchase of premium securities provides a higher level of
investment income distributable to shareholders on a current
basis than if the fund purchased securities bearing current
market rates of interest. Because the value of premium
securities tends to approach the principal amount as they
approach maturity (or call price in the case of securities
approaching their first call date), the purchase of such
securities may increase the risk of capital loss if such
securities are held to maturity (or first call date).
During a period of declining interest rates, many of the fund's
portfolio investments will likely bear coupon rates that are
higher than the current market rates, regardless of whether the
securities were originally purchased at a premium. These
securities would generally carry premium market values that would
be reflected in the net asset value of fund shares. As a result,
an investor who purchases fund shares during such periods would
initially receive higher taxable monthly distributions (derived
from the higher coupon rates payable on the fund's investments)
than might be available from alternative investments bearing
current market interest rates, but the investor may face an
increased risk of capital loss as these higher coupon securities
approach maturity (or first call date). In evaluating the
potential performance of an investment in the fund, investors may
find it useful to compare the fund's current dividend rate with
its "yield," which is computed on a yield-to-maturity basis in
accordance with SEC regulations and which reflects amortization
of market premiums. See "How performance is shown."
PORTFOLIO TURNOVER
The length of time the fund has held a particular security is not
generally a consideration in investment decisions. A change in
the securities held by the fund is known as "portfolio turnover."
As a result of the fund's investment policies, under certain
market conditions its portfolio turnover rate may be higher than
that of other mutual funds.
Portfolio turnover generally involves some expense, including
brokerage commissions or dealer markups and other transaction
costs on the sale of securities and reinvestment in other
securities. These transactions may result in realization of
taxable capital gains. Portfolio turnover rates are shown in the
section "Financial highlights."
FOREIGN INVESTMENTS
The fund may invest in securities of foreign issuers that
are not actively traded in U.S. markets. These foreign
investments involve certain special risks described below.
Foreign securities are normally denominated and traded in foreign
currencies . As a result, the value of the fund's foreign
investments and the value of its shares may be affected favorably
or unfavorably by changes in currency exchange rates
relative to the U.S. dollar. The fund may engage in a variety of
foreign currency exchange transactions in connection with its
foreign investments, including transactions involving futures
contracts, forward contracts and options.
Investments in foreign securities may subject the fund to other
risks as well. For example, there may be less information
publicly available about a foreign issuer than about a
U.S. issuer, and foreign issuers are not
generally subject to accounting, auditing and financial
reporting standards and practices comparable to those in
the United States. The securities of some foreign
issuers are less liquid and at times more volatile than
securities of comparable U.S. issuers. Foreign brokerage
commissions and other fees are also generally higher than
in the United States. Foreign settlement procedures and trade
regulations may involve certain risks (such as delay in payment
or delivery of securities or in the recovery of the
fund's assets held abroad) and expenses not present in the
settlement of investments in U.S. markets.
In addition, the fund's investments in foreign securities
may be subject to the risk of nationalization or expropriation of
assets, imposition of currency exchange controls or restrictions
on the repatriation of foreign currency, confiscatory taxation,
political or financial instability and diplomatic developments
which could affect the value of the fund's investments in
certain foreign countries. Dividends or interest on, or proceeds
from the sale of, foreign securities may be subject to foreign
withholding taxes, and special U.S. tax considerations may apply.
Legal remedies available to investors in certain foreign
countries may be more limited than those available with respect
to investments in the United States or in other foreign
countries. The laws of some foreign countries may limit
the
fund's ability to invest in securities of certain issuers
organized under the laws of those foreign countries.
The risks described above are typically increased in
connection with investments in less developed and developing
nations, which are sometimes referred to as "emerging markets."
For example, political and economic structures in these countries
may be in their infancy and developing rapidly, causing
instability. High rates of inflation or currency devaluations
may adversely affect the economies and securities markets of such
countries. Investments in emerging markets may be considered
speculative.
The fund expects that its investments in foreign
securities generally will not exceed 30% of its total assets,
although the fund's investments in foreign securities may exceed
this amount from time to time. Certain of the foregoing risks
may also apply to some extent to securities of U.S. issuers that
are denominated in foreign currencies or that are traded in
foreign markets, or to securities of U.S. issuers having
significant foreign operations.
For more information about foreign securities and the risks
associated with investment in such securities, see the SAI.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
The fund may invest without limit in mortgage-backed securities,
including collateralized mortgage obligations ("CMOs") and
certain stripped mortgage-backed securities. CMOs and other
mortgage-backed securities represent participations in,
or are secured by, mortgage loans and include:
- - Certain securities issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities;
- - Securities issued by private issuers that represent an
interest in or are secured by mortgage-backed securities
issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities; and
- - Securities issued by private issuers that represent an
interest in or are secured by mortgage loans or mortgage-
backed securities without a government guarantee but usually
having some form of private credit enhancement.
Stripped mortgage-backed securities are usually structured with
two classes that receive different portions of the interest and
principal distributions on a pool of mortgage loans. The fund
may invest in both the interest-only or "IO" class and the
principal-only or "PO" class.
The fund may also invest in asset-backed securities. Asset-
backed securities are structured like mortgage-backed securities,
but instead of mortgage loans or interests in mortgage loans, the
underlying assets may include such items as motor vehicle
installment sales or installment loan contracts, leases of
various types of real and personal property, and receivables from
credit card agreements. The ability of an issuer of asset-backed
securities to enforce its security interest in the underlying
assets may be limited.
PREPAYMENT RISK. Mortgage-backed and asset-backed securities
have yield and maturity characteristics corresponding to the
underlying assets. Unlike traditional debt securities, which may
pay a fixed rate of interest until maturity when the entire
principal amount comes due, payments on certain mortgage-backed
and asset-backed securities include both interest and a partial
payment of principal. Besides the scheduled repayment of
principal, payments of principal may result from the voluntary
prepayment, refinancing, or foreclosure of the underlying
mortgage loans or other assets.
Mortgage-backed and asset-backed securities are less effective
than other types of securities as a means of "locking in"
attractive long-term interest rates. One reason is the need to
reinvest prepayments of principal; another is the possibility of
significant unscheduled prepayments resulting from declines in
interest rates. These prepayments would have to be reinvested at
lower rates. As a result, these securities may have less
potential for capital appreciation during periods of declining
interest rates than other securities of comparable maturities,
although they may have a similar risk of decline in market value
during periods of rising interest rates. Prepayments may also
significantly shorten the effective maturities of these
securities, especially during periods of declining interest
rates. Conversely, during periods of rising interest rates, a
reduction in prepayments may increase the effective maturities of
these securities, subjecting them to a greater risk of decline in
market value in response to rising interest rates than
traditional debt securities, and, therefore, potentially
increasing the volatility of the fund.
Prepayments may cause losses on securities purchased at a
premium. At times, some of the mortgage-backed and asset-backed
securities in which the fund may invest will have higher than
market interest rates and therefore will be purchased at a
premium above their par value. Unscheduled prepayments, which
are made at par, will cause the fund to experience a loss equal
to any unamortized premium.
CMOS. CMOs are issued with a number of classes or series
that have different maturities and that may represent interests
in some or all of the interest or principal on the underlying
collateral. Payment of interest or principal on some classes or
series of CMOs may be subject to contingencies or some classes or
series may bear some or all of the risk of default on the
underlying mortgages. CMOs of different classes or series are
generally retired in sequence as the underlying mortgage loans in
the mortgage pool are repaid. If enough mortgages are repaid
ahead of schedule, the classes or series of a CMO with the
earliest maturities generally will be retired prior to their
maturities. Thus, the early retirement of particular classes or
series of a CMO would have the same effect as the
prepayment of mortgages underlying other mortgage-backed
securities. Conversely, slower than anticipated prepayments can
extend the effective maturities of CMOs, subjecting them to a
greater risk of decline in market value in response to rising
interest rates than traditional debt securities, and, therefore,
potentially increasing the volatility of the fund.
STRIPPED MORTGAGE-BACKED SECURITIES. The yield to
maturity on an IO or PO class of stripped mortgage-backed
securities is extremely sensitive not only to changes in
prevailing interest rates but also to the rate of principal
payments (including prepayments) on the underlying assets. A
rapid rate of principal prepayments may have a measurably adverse
effect on the fund's yield-to-maturity to the extent it invests
in IOs. If the assets underlying the IOs experience
greater than anticipated prepayments of principal, the fund may
fail to recoup fully its initial investment in these securities.
Conversely, POs tend to increase in value if prepayments are
greater than anticipated and decline if prepayments are slower
than anticipated.
In either event, the secondary market for stripped mortgage-
backed securities may be more volatile and less liquid than that
for other mortgage-backed securities, potentially limiting the
fund's ability to buy or sell those securities at any particular
time.
FUTURES AND OPTIONS
THE FUND MAY BUY AND SELL FUTURES CONTRACTS ON SECURITIES
INDEXES, U.S. GOVERNMENT SECURITIES, FOREIGN FIXED-INCOME
SECURITIES AND ON FOREIGN CURRENCIES. A futures contract is a
contract to buy or sell units of a particular securities index or
a certain amount of a particular security or foreign currency at
an agreed price on a specified future date. Depending on the
change in value of the index, security or currency when
the fund enters into and terminates a futures contract, the fund
realizes a gain or loss. The fund may purchase and sell options
on futures contracts or on securities indexes directly, in
addition to or as an alternative to purchasing and selling
futures contracts or to earn additional income. The fund may
purchase and sell futures contracts and options for hedging
purposes and for nonhedging purposes, such as to adjust the
fund's exposure to
the relevant securities markets or as a substitute for direct
investment.
THE USE OF FUTURES AND RELATED OPTIONS INVOLVES CERTAIN SPECIAL
RISKS. FUTURES AND OPTIONS TRANSACTIONS INVOLVE COSTS AND MAY
RESULT IN LOSSES.
The successful use of futures and related options will usually
depend on Putnam Management's ability to forecast interest rate
and market movements correctly. The use of futures and options
strategies also involves the risk of imperfect correlation
between movements in the prices of futures and options and
movements in the prices of the underlying securities index,
securities or currencies or, in the case of hedging transactions,
in the values of the securities or currencies that are the
subject of a hedge. The successful use of futures and options
also depends on the availability of a liquid secondary market to
enable the fund to close its positions on a timely basis. There
can be no assurance that such a market will exist at a particular
time. The fund's ability to terminate option positions
established in the over-the-counter market may be more limited
than for exchange-traded options and may also involve the risk
that securities dealers participating in such transactions would
fail to meet their obligations to the fund. The use of futures
or options on futures for purposes other than hedging may be
regarded as speculative.
Because the markets for futures and options on foreign fixed-
income securities and foreign currencies are relatively new and
still developing and are subject to certain regulatory
constraints, the fund's ability to engage in such transactions
may be limited. Certain provisions of the Internal Revenue Code
and certain regulatory requirements may limit the use of
futures and options transactions.
A MORE DETAILED DESCRIPTION OF FUTURES AND OPTIONS
TRANSACTIONS, INCLUDING THE RISKS ASSOCIATED WITH THEM, IS
INCLUDED IN THE SAI.
OTHER INVESTMENT PRACTICES
THE FUND MAY ALSO ENGAGE IN THE FOLLOWING INVESTMENT PRACTICES,
EACH OF WHICH INVOLVES CERTAIN SPECIAL RISKS. THE SAI CONTAINS
MORE DETAILED INFORMATION ABOUT THESE PRACTICES, INCLUDING
LIMITATIONS DESIGNED TO REDUCE THESE RISKS.
OPTIONS. The fund may seek to increase its current return by
writing covered call and put options on securities it owns or in
which it may invest. The fund receives a premium from writing a
call or put option, which increases the return if the option
expires unexercised or is closed out at a net profit.
When the fund writes a call option, it gives up the opportunity
to profit from any increase in the price of a security above the
exercise price of the option; when it writes a put option,
it takes the risk that it will be required to purchase a
security from the option holder at a price above the current
market price of the security. The fund may terminate an option
that it has written prior to its expiration by entering into a
closing purchase transaction in which it purchases an option
having the same terms as the option written.
The fund may also buy and sell put and call options ,
including combinations of put and call options on the same
underlying security . The aggregate value of the
securities underlying the options may not exceed 25% of fund
assets. The use of these strategies may be limited by applicable
law.
SECURITIES LOANS, REPURCHASE AGREEMENTS AND FORWARD COMMITMENTS.
The fund may lend portfolio securities amounting to not more than
25% of its assets to broker-dealers and may enter into
repurchase agreements on up to 25% of its assets. These
transactions must be fully collateralized at all times. The fund
may also purchase securities for future delivery, which may
increase its overall investment exposure and involves a risk of
loss if the value of the securities declines prior to the
settlement date. These transactions involve some risk if
the other party should default on its obligation and the fund is
delayed or prevented from recovering the collateral or completing
the transaction.
DIVERSIFICATION
The fund is a "diversified" investment company under the
Investment Company Act of 1940. This means that with
respect to 75% of its total assets, the fund may not invest more
than 5% of its total assets in the securities of any one issuer
(except U.S. government securities). The remaining 25% of
its total assets is not subject to this restriction. To
the extent the fund invests a significant portion of its assets
in the securities of a particular issuer, it will be
subject to an increased risk of loss if the market value of such
issuer's securities declines.
DERIVATIVES
Certain of the instruments in which the fund may invest,
such as futures contracts, options, forward contracts and CMOs, are
considered to be "derivatives." Derivatives are financial
instruments whose value depends upon, or is derived from, the value
of an underlying asset, such as a security or an index. Further
information about these instruments and the risks involved in their
use is included elsewhere in this prospectus and in the SAI.
LIMITING INVESTMENT RISK
SPECIFIC INVESTMENT RESTRICTIONS HELP TO LIMIT INVESTMENT
RISKS FOR THE FUND'S SHAREHOLDERS. These restrictions
prohibit the fund, with respect to 75% of its total assets, from
acquiring more than 10% of the voting securities of any one
issuer.* They also prohibit the fund from investing more than:
(a) (with respect to 75% of its total assets) 5% of its
total assets in securities of any one issuer other than
the U.S. government;* or
(b) 25% of its total assets in any one industry (other
than securities of the U.S. government, its agencies or
instrumentalities);* or
(c) 15% of its net assets in any combination of securities that
are not readily marketable, in securities restricted as to resale
(excluding securities determined by the fund's Trustees (or the
person designated by the Trustees to make such determinations) to
be readily marketable), and in repurchase agreements maturing in
more than seven days.
The restrictions marked with an asterisk (*) above
are summaries of fundamental investment
policies. See the SAI for the full text of these
policies and other fundamental investment policies. Except for
investment policies designated as fundamental in this prospectus
or the SAI, the investment policies described in this prospectus
and in the SAI are not fundamental policies. The Trustees may
change any non-fundamental investment policy without
shareholder approval. As a matter of policy, the Trustees would
not materially change the fund's investment objective without
shareholder approval.
HOW PERFORMANCE IS SHOWN
FUND ADVERTISEMENTS MAY, FROM TIME TO TIME, INCLUDE
PERFORMANCE INFORMATION. "Yield" for each class of shares is
calculated by dividing the annualized net investment income per
share during a recent 30-day period by the maximum public
offering price per share of the class on the last day of that
period.
For purposes of calculating yield, net investment income is
calculated in accordance with SEC regulations and may differ from
net investment income as determined for tax purposes. SEC
regulations require that net investment income be calculated on a
"yield-to-maturity" basis, which has the effect of amortizing any
premiums or discounts in the current market value of fixed-income
securities. The current dividend rate is based on net investment
income as determined for tax purposes, which may not reflect
amortization in the same manner. See "How the fund pursues its
objective -- Investments in premium securities."
Yield is based on the price of the shares, including the maximum
initial sales charge in the case of class A and class M shares,
but does not reflect any contingent deferred sales charge in the
case of class B shares.
"Total return" for the one-, five- and ten-year periods (or for the
life of a class, if shorter) through the most recent calendar
quarter represents the average annual compounded rate of return on
an investment of $1,000 in the fund invested at the maximum public
offering price (in the case of class A and class M shares) or
reflecting the deduction of any applicable contingent deferred sales
charge (in the case of class B shares). Total return may also be
presented for other periods or based on investment at reduced sales
charge levels. Any quotation of investment performance not
reflecting the maximum initial sales charge or contingent deferred
sales charge would be reduced if the sales charge were used.
ALL DATA ARE BASED ON PAST INVESTMENT RESULTS AND DO NOT PREDICT
FUTURE PERFORMANCE. Investment performance, which will
vary, is based on many factors, including market conditions,
portfolio composition , fund operating expenses and
which class of shares the investor purchases. Investment
performance also often reflects the risks associated with the
fund's investment objective and policies. These factors should
be considered when comparing the fund's investment results with
those of other mutual funds and other investment vehicles.
Quotations of investment performance for any period when an
expense limitation was in effect will be greater than if the
limitation had not been in effect. Fund performance may
be compared to that of various indexes. See the SAI.
HOW THE FUND IS MANAGED
THE TRUSTEES ARE RESPONSIBLE FOR GENERALLY OVERSEEING THE
CONDUCT OF FUND BUSINESS. Subject to such policies as the
Trustees may determine, Putnam Management furnishes a continuing
investment program for the fund and makes investment decisions on
its behalf. Subject to the control of the Trustees, Putnam
Management also manages the fund's other affairs and business.
The fund pays Putnam Management a quarterly fee for these
services based on average net assets. See "Expenses summary" and
the SAI.
The following officers of Putnam Management have had primary
responsibility for the day-to-day management of the fund's
portfolio since the years stated below:
<PAGE>
Business experience
Year (at least 5 years)
------ ----------------------
D. William Kohli
1994 Employed as an investment
Managing Director professional by Putnam
Management since 1994.
Prior to September, 1994, Mr.
Kohli was Executive Vice
President and Co-Director of
Global Bond Management and,
prior to October,
1993, Senior Portfolio
Manager at Franklin
Advisors/Templeton Investment
Counsel.
Michael Martino
1994 Employed as an investment
Managing Director professional by Putnam
Management since 1994. Prior
to January, 1994, Mr. Martino
was employed by Back Bay
Advisors as Executive Vice
President and Chief Investment
Officer .
Jennifer E. Leichter 1996 Employed as an investment
Senior Vice President professional by Putnam
Management since 1987.
Kenneth J. Taubes
1997 Employed as an investment Senior
Vice President professional by Putnam
Management since 1991.
Gail S. Attridge
1997 Employed as an investment
Vice President professional by Putnam
Management since 1993. Prior
to November, 1993, Ms.
Attridge was an Analyst at
Keystone Custody
International.
The fund pays all expenses not assumed by Putnam Management,
including Trustees' fees, auditing, legal, custodial, investor
servicing and shareholder reporting expenses, and payments under
its distribution plans (which are in turn allocated to the
relevant class of shares). The fund also reimburses Putnam
Management for the compensation and related expenses of certain
fund officers and their staff who provide administrative
services . The total reimbursement is determined annually
by the Trustees.
Putnam Management places all orders for purchases and sales of
fund securities. In selecting broker-dealers, Putnam
Management may consider research and brokerage services furnished
to it and its affiliates. Subject to seeking the most favorable
price and execution available, Putnam Management may consider
sales of fund shares (and, if permitted by law, shares of
the other Putnam funds) as a factor in the selection of broker-
dealers.
ORGANIZATION AND HISTORY
Putnam Diversified Income Trust II is a Massachusetts business
trust organized on October 5, 1994. A copy of the
Agreement and Declaration of Trust, which is governed by
Massachusetts law, is on file with the Secretary of State of The
Commonwealth of Massachusetts. Prior to January 4, 1996, the
fund was known as Putnam Investment-Grade Bond Fund.
The fund is an open-end, diversified management investment
company with an unlimited number of authorized shares of
beneficial interest. The Trustees may, without
shareholder approval , create two or more series of shares
representing separate investment portfolios. Any such
series of shares may be divided without shareholder approval into
two or more classes of shares having such preferences and special
or relative rights and privileges as the Trustees determine. The
fund's shares are not currently divided into series.
Only class A, B and M shares are offered by this prospectus. The
fund may also offer other classes of shares with different sales
charges and expenses. Because of these different sales charges
and expenses, the investment performance of the classes will
vary. For more information, including your eligibility to
purchase any other class of shares, contact your investment
dealer or Putnam Mutual Funds at 1-800-225-1581 .
Each share has one vote, with fractional shares voting
proportionally. Shares of all classes will vote together
as a single class except when otherwise required by law or as
determined by the Trustees. Shares are freely transferable, are
entitled to dividends as declared by the Trustees, and, if the
fund were liquidated, would receive the net assets of the fund.
The fund may suspend the sale of shares at any time and may
refuse any order to purchase shares. Although the fund is not
required to hold annual meetings of its shareholders,
shareholders holding at least 10% of the outstanding shares
entitled to vote have the right to call a meeting to elect or
remove Trustees, or to take other actions as provided in the
Agreement and Declaration of Trust.
If you own fewer shares than the minimum set by
the Trustees (presently 20 shares), the fund may choose to redeem
your shares. You will receive at least 30 days' written notice
before the fund redeems your shares, and you may purchase
additional shares at any time to avoid a redemption. The fund
may also redeem shares if you own shares above a maximum amount
set by the Trustees. There is presently no maximum, but the
Trustees may establish one at any time, which could apply to both
present and future shareholders.
THE FUND'S TRUSTEES: GEORGE PUTNAM,* CHAIRMAN. President of the
Putnam funds. Chairman and Director of Putnam Management and
Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director,
Marsh & McLennan Companies, Inc.; WILLIAM F. POUNDS, VICE
CHAIRMAN. Professor of Management, Alfred P. Sloan School of
Management, Massachusetts Institute of Technology; JAMESON ADKINS
BAXTER, President, Baxter Associates, Inc.; HANS H. ESTIN, Vice
Chairman, North American Management Corp.; JOHN A. HILL, Chairman
and Managing Director, First Reserve Corporation; RONALD J.
JACKSON, Former Chairman, President and Chief Executive Officer
of Fisher-Price, Inc., Director of Safety 1st, Inc. Trustee of
Salem Hospital and the Peabody Essex Museum ;
ELIZABETH T. KENNAN, President Emeritus and Professor, Mount
Holyoke College; LAWRENCE J. LASSER,* Vice President of the
Putnam funds. President, Chief Executive Officer and Director of
Putnam Investments, Inc. and Putnam Management. Director, Marsh
& McLennan Companies, Inc.; ROBERT E. PATTERSON, Executive Vice
President and Director of Acquisitions, Cabot Partners Limited
Partnership; DONALD S. PERKINS,* Director of various
corporations, including Cummins Engine Company, Lucent
Technologies, Inc., Springs Industries, Inc. and Time Warner
Inc.; GEORGE PUTNAM, III,* President, New Generation Research,
Inc. ; A.J.C. SMITH,* Chairman and Chief Executive Officer,
Marsh & McLennan Companies, Inc.; and W. NICHOLAS THORNDIKE,
Director of various corporations and charitable organizations,
including Data General Corporation, Bradley Real Estate, Inc. and
Providence Journal Co. Also, Trustee of Massachusetts General
Hospital and Eastern Utilities Associates. The Trustees
are also Trustees of the other Putnam funds. Those marked with
an asterisk (*) are or may be deemed to be "interested persons"
of the fund, Putnam Management or Putnam Mutual Funds.
ABOUT YOUR INVESTMENT
ALTERNATIVE SALES ARRANGEMENTS
CLASS A SHARES. An investor who purchases class A shares pays a
sales charge at the time of purchase. As a result, class A
shares are not subject to any charges when they are redeemed,
except for certain sales at net asset value that are subject to a
contingent deferred sales charge ("CDSC"). Certain purchases of
class A shares qualify for reduced sales charges. Class A shares
bear a lower 12b-1 fee than class B and class M shares. See "How
to buy shares -- Class A shares" and "Distribution plans."
CLASS B SHARES. Class B shares are sold without an initial sales
charge, but are subject to a CDSC if redeemed within a specified
period after purchase. Class B shares also bear a higher 12b-1
fee than class A and class M shares. Class B shares
automatically convert into class A shares, based on relative net
asset value, approximately eight years after purchase. For more
information about the conversion of class B shares, see the SAI.
This discussion includes information about how shares
acquired through reinvestment of distributions are treated for
conversion purposes. The discussion also notes
certain circumstances under which a conversion may not occur.
Class B shares provide an investor the benefit of putting all of
the investor's dollars to work from the time the investment is
made. Until conversion, class B shares will have a higher
expense ratio and pay lower dividends than class A and class M
shares because of the higher 12b-1 fee. See "How to buy shares -
- - Class B shares" and "Distribution plans."
CLASS M SHARES. An investor who purchases class M shares pays a
sales charge at the time of purchase that is lower than the sales
charge applicable to class A shares. Certain purchases of class
M shares qualify for reduced sales charges. Class M shares bear
a 12b-1 fee that is lower than class B shares but higher than
class A shares. Class M shares are not subject to any CDSC and
do not convert into any other class of shares. See "How to buy
shares -- Class M shares" and "Distribution plans."
WHICH ARRANGEMENT IS BEST FOR YOU? The decision as to which
class of shares provides a more suitable investment for an
investor depends on a number of factors, including the amount and
intended length of the investment. Investors making investments
that qualify for reduced sales charges might consider class A or
class M shares. Investors who prefer not to pay an initial sales
charge might consider class B shares. Orders for class B shares
for $250,000 or more will be treated as orders for class A shares
or declined. For more information about these sales
arrangements, consult your investment dealer or Putnam Investor
Services. Shares may only be exchanged for shares of the same
class of another Putnam fund. See "How to exchange shares."
HOW TO BUY SHARES
You can open a fund account with as little as $500 and make
additional investments at any time with as little as $50. You
can buy fund shares three ways - through most investment dealers,
through Putnam Mutual Funds (at 1-800-225-1581), or through a
systematic investment plan. If you do not have a dealer, Putnam
Mutual Funds can refer you to one.
BUYING SHARES THROUGH PUTNAM MUTUAL FUNDS. Complete an order
form and write a check for the amount you wish to invest, payable
to the fund. Return the completed form and check to Putnam
Mutual Funds, which will act as your agent in purchasing shares
through your designated investment dealer.
BUYING SHARES THROUGH SYSTEMATIC INVESTING. You can make regular
investments of $25 or more per month through automatic deductions
from your bank checking or savings account. Application forms
are available from your investment dealer or through Putnam
Investor Services.
Shares are sold at the public offering price based on the net
asset value next determined after Putnam Investor Services
receives your order. In most cases, in order to receive that
day's public offering price, Putnam Investor Services must
receive your order before the close of regular trading on the New
York Stock Exchange. If you buy shares through your investment
dealer, the dealer must receive your order before the close of
regular trading on the New York Stock Exchange to receive that
day's public offering price.
CLASS A SHARES
The public offering price of class A shares is the net asset
value plus a sales charge that varies depending on the size of
your purchase. The fund receives the net asset value. The sales
charge is allocated between your investment dealer and Putnam
Mutual Funds as shown in the following table, except when Putnam
Mutual Funds, in its discretion, allocates the entire amount to
your investment dealer.
SALES CHARGE AMOUNT OF
AS A PERCENTAGE OF: SALES CHARGE
------------------- REALLOWED TO
NET DEALERS AS A
AMOUNT OF TRANSACTION AMOUNT OFFERING PERCENTAGE OF
AT OFFERING PRICE ($) INVESTED PRICE OFFERING PRICE
- -----------------------------------------------------------------
Under 50,000 4.99% 4.75% 4.25%
50,000 but under 100,000 4.71 4.50 4.00
100,000 but under 250,000 3.63 3.50 3.00
250,000 but under 500,000 2.56 2.50 2.25
500,000 but under 1,000,000 2.04 2.00 1.75
- -----------------------------------------------------------------
No initial sales charge applies to purchases of
class A shares of $1 million or more, or to purchases by
employer-sponsored retirement plans that have at least 200
eligible employees. However, a CDSC of 1.00% or 0.50%,
respectively, is imposed within the first or
second year after purchase on redemptions of these
shares, unless the dealer of record waived its commission with
Putnam Mutual Funds' approval, or unless the purchaser is a class
A qualified benefit plan (a retirement plan for which Putnam
Fiduciary Trust Company or its affiliates provide recordkeeping
or other services in connection with purchases of class A
shares).
Class A qualified benefit plans may also purchase class A shares
with no initial sales charge. However, except as stated below,
a CDSC of 0.75% of the total amount redeemed (1.00% in the case
of plans for which Putnam Mutual Funds and its affiliates do not
act as trustee or recordkeeper) is imposed on redemptions of
these shares if, within two years of a plan's initial purchase
of class A shares, it redeems 90% or more of its cumulative
purchases. Thereafter, such a plan is no longer liable for any
CDSC. The two-year CDSC applicable to class A qualified benefit
plans for which Putnam Mutual Funds or its affiliates serve as
trustee or recordkeeper ("full service plans") is 0.50% of the
total amount redeemed for full service plans that initially
invest at least $5 million but less than $10 million in Putnam
funds and other investments managed by Putnam Management or its
affiliates ("Putnam Assets"), and is 0.25% of the total amount
redeemed for full service plans that initially invest at least
$10 million but less than $20 million in Putnam Assets. Class A
qualified benefit plans that initially invest at least $20
million in Putnam Assets, or whose dealer of record has,
with Putnam Mutual Funds' approval, waived its commission or
agreed to refund its commission to Putnam Mutual Funds in the
event a CDSC would otherwise be applicable, are not subject to
any CDSC.
In determining whether a CDSC is payable, the fund will first
redeem shares not subject to any charge. Any CDSC will be
calulated based on the lower of the shares' cost and current
net asset value and any shares acquired by reinvestment of
distributions will be redeemed without a CDSC. Putnam Mutual
Funds receives the entire amount of any CDSC you pay. See the
SAI for more information about the CDSC.
As described in the SAI, Putnam Mutual Funds pays the
dealer of record a commission of up to 1% on sales to class A
qualified benefit plans. Putnam Mutual Funds pays investment
dealers of record commissions on sales of class A shares of $1
million or more and sales of class A shares to employer-sponsored
retirement plans that have at least 200 eligible employees and
that are not class A qualified benefit plans based on an
investor's cumulative purchases during the one-year period
beginning with the date of the initial purchase at net asset
value. Each subsequent one-year measuring period for these
purposes will begin with the first net asset value purchase
following the end of the prior period. Such commissions are paid
at the rate of 1.00% of the amount under $3 million, 0.50% of the
next $47 million and 0.25% thereafter.
CLASS B SHARES
Class B shares are sold without an initial sales charge, although
a CDSC will be imposed if you redeem shares within a specified
period after purchase, as shown in the table below.
YEAR 1 2 3 4 5 6 7+
- -------------------------------------------------------------
CHARGE 5% 4% 3% 3% 2% 1% 0%
Putnam Mutual Funds pays a sales commission equal to
4.00% of the amount invested to dealers who sell class B shares.
These commissions are not paid on exchanges from other Putnam
funds or on sales to investors exempt from the CDSC.
CLASS M SHARES
The public offering price of class M shares is the net asset
value plus a sales charge that varies depending on the size of
your purchase. The fund receives the net asset value. The sales
charge is allocated between your investment dealer and Putnam
Mutual Funds as shown in the following table, except when Putnam
Mutual Funds, at its discretion, allocates the entire amount to
your investment dealer.
SALES CHARGE AMOUNT OF
AS A PERCENTAGE OF: SALES CHARGE
------------------- REALLOWED TO
NET DEALERS AS A
AMOUNT OF TRANSACTION AMOUNT OFFERING PERCENTAGE OF
AT OFFERING PRICE ($) INVESTED PRICE OFFERING PRICE
- -----------------------------------------------------------------
Under 50,000 3.36% 3.25% 3.00%
50,000 but under 100,000 2.30 2.25 2.00
100,000 but under 250,000 1.52 1.50 1.25
250,000 but under 500,000 1.01 1.00 1.00
500,000 and above NONE NONE NONE
Sales charges will not apply to class M shares purchased with
redemption proceeds received within the prior 90 days from non-
Putnam mutual funds on which the investor paid a front-end or a
contingent deferred sales charge. Class M qualified retirement
plans (retirement plans for which Putnam Fiduciary Trust company
provides recordkeeping or other services in connection with the
purchase of class M shares) and members of qualified groups may
also purchase class M shares without a sales charge.
GENERAL
YOU MAY BE ELIGIBLE TO BUY FUND SHARES AT REDUCED SALES
CHARGES OR TO SELL SHARES WITHOUT A CDSC.
Consult your investment dealer or Putnam Mutual Funds for details
about Putnam's combined purchase privilege, cumulative quantity
discount, statement of intention, group sales plan,
qualified benefit plans, and other plans. Descriptions are also
included in the order form and in the SAI.
The fund may sell class A, class B and class M shares at net
asset value without an initial sales charge or a CDSC to
current and retired Trustees (and their families), current and
retired employees (and their families) of Putnam Management and
affiliates, registered representatives and other employees (and
their families) of broker-dealers having sales agreements with
Putnam Mutual Funds, employees (and their families) of financial
institutions having sales agreements with Putnam Mutual Funds (or
otherwise having an arrangement with a broker-dealer or financial
institution with respect to sales of fund shares), financial
institution trust departments investing an aggregate of $1
million or more in Putnam funds, clients of certain
administrators of tax-qualified plans, tax-qualified plans when
proceeds from repayments of loans to participants are invested
(or reinvested) in Putnam funds, "wrap accounts" for the benefit
of clients of broker-dealers, financial institutions or financial
planners adhering to certain standards established by Putnam
Mutual Funds, and investors meeting certain requirements who sold
shares of certain Putnam closed-end funds pursuant to a tender
offer by the closed-end fund.
In addition, the fund may sell shares at net asset value without
an initial sales charge or a CDSC in connection with the
acquisition by the fund of assets of an investment company or
personal holding company. The CDSC will be waived on redemptions
of shares arising out of the death or post-purchase disability of
a shareholder or settlor of a living trust account, and on
redemptions in connection with certain withdrawals from IRA or
other retirement plans. Up to 12% of the value of shares subject
to a systematic withdrawal plan may also be redeemed each year
without a CDSC. The SAI contains additional information about
purchasing shares at reduced sales charges.
Shareholders of other Putnam funds may be entitled to exchange
their shares for, or reinvest distributions from their funds in,
fund shares at net asset value.
If you are considering redeeming shares or transferring
shares to another person shortly after purchase, you should pay
for those shares with a certified check to avoid any delay in
redemption or transfer. Otherwise , payment may
be delayed until the purchase price of those shares has been
collected or, if you redeem by telephone, until 15 calendar days
after the purchase date. To eliminate the need for safekeeping,
certificates will not be issued for your shares
unless you request them.
In determining whether a CDSC is payable on any redemption,
shares not subject to any charge will be redeemed first, followed
by shares held longest during the CDSC period. Any CDSC will be
based on the lower of the shares' cost and net asset value. For
this purpose, the amount of any increase in a share's value above
its initial purchase price is not regarded as a share exempt from
the CDSC. Thus, when a share you redeem that has appreciated in
value during the CDSC period, a CDSC is assessed on its initial
purchase price. Any shares acquired by reinvestment of
distributions will be redeemed without a CDSC. For information
on how sales charges are calculated if you exchange your shares,
see "How to exchange shares." Putnam Mutual Funds receives the
entire amount of any CDSC you pay. See the SAI for more
information about the CDSC.
Putnam Mutual Funds will from time to time, at its expense,
provide additional promotional incentives or payments to dealers
that sell shares of the Putnam funds. These incentives or
payments may include payments for travel expenses, including
lodging, incurred in connection with trips taken by invited
registered representatives and their guests to locations within
and outside the United States for meetings or seminars of a
business nature. In some instances, these incentives or payments
may be offered only to certain dealers who have sold or may sell
significant amounts of shares. Certain dealers may not sell all
classes of shares.
DISTRIBUTION PLANS
The fund has adopted distribution plans to compensate
Putnam Mutual Funds for services provided and expenses incurred
by it as principal underwriter of fund shares, including the
payments to dealers mentioned below. The plans provide for
payments by the fund to Putnam Mutual Funds at annual
rates (expressed as a percentage of average net assets) of up to
0.35% on class A shares and 1.00% on class B and class M shares.
The Trustees currently limit payments on class A and
Class M shares to 0.25% and 0.50% of average net assets,
respectively.
Putnam Mutual Funds compensates qualifying dealers
(including, for this purpose, certain financial institutions)
for sales of shares and the maintenance of shareholder
accounts.
Putnam Mutual Funds makes quarterly payments to dealers
at the annual rate of up to 0.25% of the average net asset value
of class A shares. The payments to dealers for shares held by
class A qualified benefit plans are made at reduced rates, as
described in the SAI. No payments are made during the first
year after purchase on shares purchased at net asset
value by shareholders investing $1 million or more
or by employer-sponsored retirement plans that have at
least 200 eligible employees or that are class A
qualified benefit plans, unless the shareholder has made
arrangements with Putnam Mutual Funds and the dealer of record
has waived the sales commission.
Putnam Mutual Funds makes quarterly payments to
dealers at the annual rates of 0.25% and 0.40% of
the average net asset value of class B and class M shares,
respectively .
Putnam Mutual Funds may suspend or modify its payments to
dealers. The payments are also subject to the
continuation of the relevant distribution plan, the terms of
service agreements between dealers and Putnam Mutual Funds, and
any applicable limits imposed by the National Association of
Securities Dealers, Inc.
HOW TO SELL SHARES
You can sell your shares to the fund any day the New York Stock
Exchange is open, either directly to the fund or through your
investment dealer. The fund will only redeem shares for which it
has received payment.
SELLING SHARES DIRECTLY TO YOUR FUND. Send a signed
letter of instruction or stock power form to Putnam Investor
Services, along with any certificates that represent shares you
want to sell. The price you will receive is the next net asset
value calculated after the fund receives your request in proper
form less any applicable CDSC. In order to receive that day's
net asset value, Putnam Investor Services must receive your
request before the close of regular trading on the New York Stock
Exchange.
If you sell shares having a net asset value of $100,000 or more,
the signatures of registered owners or their legal
representatives must be guaranteed by a bank, broker-dealer or
certain other financial institutions. See the SAI for more
information about where to obtain a signature guarantee. Stock
power forms are available from your investment dealer, Putnam
Investor Services and many commercial banks.
If you want your redemption proceeds sent to an address other
than your address as it appears on Putnam's records, a signature
guarantee is required. Putnam Investor Services usually requires
additional documentation for the sale of shares by a corporation,
partnership, agent or fiduciary, or a surviving joint owner.
Contact Putnam Investor Services for details.
YOUR FUND GENERALLY SENDS YOU PAYMENT FOR YOUR SHARES THE
BUSINESS DAY AFTER YOUR REQUEST IS RECEIVED. Under unusual
circumstances, the fund may suspend redemptions, or postpone
payment for more than seven days, as permitted by federal
securities law.
You may use Putnam's Telephone Redemption Privilege to redeem
shares valued up to $100,000 unless you have notified
Putnam Investor Services of an address change within the
preceding 15 days. Unless an investor indicates otherwise on the
account application, Putnam Investor Services will be authorized
to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as
his or her representative, who can provide Putnam Investor
Services with his or her account registration and address as it
appears on Putnam Investor Services' records.
Putnam Investor Services will employ these and other reasonable
procedures to confirm that instructions communicated by telephone
are genuine; if it fails to employ reasonable procedures, Putnam
Investor Services may be liable for any losses due to
unauthorized or fraudulent instructions. For information,
consult Putnam Investor Services.
During periods of unusual market changes and shareholder
activity, you may experience delays in contacting Putnam Investor
Services by telephone. In this event, you may wish to submit a
written redemption request, as described above, or contact your
investment dealer, as described below. The Telephone Redemption
Privilege is not available if you were issued certificates for
shares that remain outstanding. The Telephone Redemption
Privilege may be modified or terminated without notice.
SELLING SHARES THROUGH YOUR INVESTMENT DEALER. Your dealer must
receive your request before the close of regular trading on the
New York Stock Exchange to receive that day's net asset value.
Your dealer will be responsible for furnishing all necessary
documentation to Putnam Investor Services, and may charge you for
its services.
HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of
certain other Putnam funds at net asset value . Not all
Putnam funds offer all classes of shares. If you exchange shares
subject to a CDSC, the transaction will not be subject to the CDSC.
However, when you redeem the shares acquired through the exchange,
the redemption may be subject to the CDSC, depending upon when you
originally purchased the shares. The CDSC will be computed using
the schedule of any fund into or from which you have exchanged your
shares that would result in your paying the highest CDSC applicable
to your class of shares. For purposes of computing the CDSC, the
length of time you have owned your shares will be measured from the
date of original purchase and will not be affected by any exchange.
To exchange your shares, simply complete an Exchange Authorization
Form and send it to Putnam Investor Services. The form is
available from Putnam Investor Services. For federal income tax
purposes, an exchange is treated as a sale of shares and generally
results in a capital gain or loss. A Telephone Exchange Privilege
is currently available for amounts up to $500,000. Putnam Investor
Services' procedures for telephonic transactions are described
above under "How to sell shares." The Telephone Exchange Privilege
is not available if you were issued certificates for shares that
remain outstanding. Ask your investment dealer or Putnam Investor
Services for prospectuses of other Putnam funds. Shares of certain
Putnam funds are not available to residents of all states.
The exchange privilege is not intended as a vehicle for short-term
trading. Excessive exchange activity may interfere with portfolio
management and have an adverse effect on all shareholders. In
order to limit excessive exchange activity and in other
circumstances where Putnam Management or the Trustees believe doing
so would be in the best interests of your fund, the fund
reserves the right to revise or terminate the exchange privilege,
limit the amount or number of exchanges or reject any exchange.
Consult Putnam Investor Services before requesting an
exchange. See the SAI to find out more about the exchange
privilege.
HOW THE FUND VALUES ITS SHARES
THE FUND CALCULATES THE NET ASSET VALUE OF A SHARE OF EACH CLASS
BY DIVIDING THE TOTAL VALUE OF ITS ASSETS, LESS LIABILITIES, BY
THE NUMBER OF ITS SHARES OUTSTANDING. SHARES ARE VALUED AS OF
THE CLOSE OF REGULAR TRADING ON THE NEW YORK STOCK EXCHANGE EACH
DAY THE EXCHANGE IS OPEN.
Portfolio securities for which market quotations are readily
available are valued at market value. Short-term investments
that will mature in 60 days or less are valued at amortized cost,
which approximates market value. All other securities and assets
are valued at their fair value following procedures approved by
the Trustees.
Securities quoted in foreign currencies are translated into U.S.
dollars at current exchange rates or at such other rates as the
Trustees may determine in computing net asset value. As a
result, fluctuations in the value of such currencies in relation
to the U.S. dollar may affect the net asset value of fund shares
even though there has not been any change in the values of such
securities as quoted in such foreign currencies.
HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION
The fund will declare a distribution each day in an amount which
is based on Putnam Management's projections of the fund's
estimated net investment income. Normally, the fund will pay
these distributions monthly. The amount of each daily
distribution may differ from actual net investment income
determined in accordance with generally accepted accounting
principles. See "Distributions" in the SAI. The fund
will distribute, at least annually, all net realized capital
gains, if any, after applying any available capital loss
carryovers. Distributions paid on class A shares will generally
be greater than those paid on class B and class M shares because
expenses attributable to class B and class M shares will
generally be higher.
You begin earning distributions on the business day that Putnam
Mutual Funds receives payment for your shares. It is your
responsibility to see that your dealer forwards payment promptly.
YOU CAN CHOOSE FROM THREE DISTRIBUTION OPTIONS:
- - Reinvest all distributions in additional shares
without a sales charge;
- - Receive distributions from net investment income in cash
while reinvesting capital gains distributions in additional
shares without a sales charge; or
- - Receive all distributions in cash.
You can change your distribution option by notifying Putnam
Investor Services in writing. If you do not select an option
when you open your account, all distributions will be reinvested.
All distributions not paid in cash will be reinvested in shares
of the class on which the distributions are paid. You will
receive a statement confirming reinvestment of distributions in
additional shares (or in shares of other Putnam funds for
Dividends Plus accounts) promptly following the quarter in which
the reinvestment occurs.
If a check representing a fund distribution is not cashed within a
specified period, Putnam Investor Services will notify you that
you have the option of requesting another check or reinvesting the
distribution in the fund or in another Putnam fund. If Putnam
Investor Services does not receive your election, the distribution
will be reinvested in the fund. Similarly, if correspondence sent
by the fund or Putnam Investor Services is returned as
"undeliverable," fund distributions will automatically be
reinvested in the fund or in another Putnam fund.
The fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other requirements
necessary for it to be relieved of federal taxes on income and
gains it distributes to shareholders. The fund will distribute
substantially all of its ordinary income and capital gain net
income on a current basis.
Fund distributions will be taxable to you as ordinary
income, except that any distributions of net long-term capital gains
will be taxable as such, regardless of how long you have held the
shares. Distributions will be taxable as described above whether
received in cash or in shares through the reinvestment of
distributions.
Fund investments in foreign securities may be subject to withholding
taxes at the source on dividend or interest payments. In that case,
the fund's yield on those securities would be decreased.
The fund does not expect to be eligible to elect to permit
shareholders to claim a credit or deduction on their income tax
return for their pro rata share of such taxes.
Fund transactions in foreign currencies and hedging activities may
give rise to ordinary income or loss to the extent such income or
loss results from fluctuations in value of the foreign currency
concerned. In addition, such activities will likely produce a
difference between book income and taxable income. This difference
may cause a portion of the fund's income distributions to constitute
a return of capital for tax purposes or require the fund to make
distributions exceeding book income to qualify as a regulated
investment company for tax purposes.
Investment in an entity that qualifies as a "passive foreign
investment company" under the Internal Revenue Code could subject
the fund to a U.S. federal income tax or other charge on certain
"excess distributions" with respect to the investment, and on the
proceeds from disposition of the investment.
Early in each year Putnam Investor Services will notify you of
the amount and tax status of distributions paid to you for the
preceding year.
The foregoing is a summary of certain federal income tax
consequences of investing in the fund. You should consult your
tax adviser to determine the precise effect of an investment in
the fund on your particular tax situation (including possible
liability for state and local taxes).
ABOUT PUTNAM INVESTMENTS, INC.
PUTNAM MANAGEMENT HAS BEEN MANAGING MUTUAL FUNDS SINCE 1937.
Putnam Mutual Funds is the principal underwriter of the fund and
of other Putnam funds. Putnam Fiduciary Trust Company is the
custodian of the fund. Putnam Investor Services, a
division of Putnam Fiduciary Trust Company, is the
investor servicing and transfer agent for the fund.
Putnam Management, Putnam Mutual Funds and Putnam Fiduciary Trust
Company are subsidiaries of Putnam Investments, Inc., which is
wholly owned by Marsh & McLennan Companies, Inc., a publicly-
owned holding company whose principal businesses are
international insurance and reinsurance brokerage, employee
benefit consulting and investment management.
APPENDIX
SECURITIES RATINGS
THE FOLLOWING RATING SERVICES DESCRIBE RATED SECURITIES AS
FOLLOWS:
MOODY'S INVESTORS SERVICE, INC.
BONDS
AAA -- Bonds which are rated AAA are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged." Interest
payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of
such issues.
AA -- Bonds which are rated AA are judged to be of high quality
by all standards. Together with the AAA group they comprise what
are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may not
be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat
larger than the AAA securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated BAA are considered as medium grade
obligations, (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear
adequate for the present but certain protective elements
may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
BA -- Bonds which are rated BA are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
CAA -- Bonds which are rated CAA are of poor standing. Such
issues may be in default, or there may be present elements of
danger with respect to principal or interest.
CA -- Bonds which are rated CA represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
STANDARD & POOR'S
BONDS
AAA -- Debt rated `AAA' has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal
is extremely strong.
AA -- Debt rated `AA' has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only
in small degree.
A -- Debt rated `A' has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB -- Debt rated `BBB' is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
BB -B-CCC-CC-C -- Debt rated 'BB', 'B', 'CCC', 'CC' and 'C'
is regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. 'BB' indicates the
lowest degree of speculation and 'C' the highest. While such debt
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to
adverse conditions.
BB -- Debt rated `BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The `BB' rating
category is also used for debt subordinated to senior debt that
is assigned an actual or implied `BBB-' rating.
B -- Debt rated `B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The `B' rating category is also
used for debt subordinated to senior debt that is assigned an
actual or implied `BB' or `BB-' rating.
CCC -- Debt rated `CCC' has a currently identifiable
vulnerability to default, and is dependent upon favorable
business, financial, and economic conditions to meet timely
payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal.
The `CCC' rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied `B' or `B-'
rating.
CC -- The rating `CC' typically is applied to debt subordinated
to senior debt that is assigned an actual or implied `CCC'
rating.
C -- The rating `C' typically is applied to debt subordinated to
senior debt which is assigned an actual or implied `CCC-' debt
rating. The `C' rating may be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are
continued.
D -- Bonds rated `D' are in payment default. The `D' rating
category is used when interest payments or principal payments are
not made on the date due even if the applicable grace period has
not expired, unless S&P believes that such payments will
be made during such grace period. The `D' rating also will be
used on the filing of a bankruptcy petition if debt service
payments are jeopardized.
DUFF & PHELPS CORPORATION
LONG-TERM DEBT
AAA -- Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
A+, A, A- -- Protection factors are average but adequate.
However, risk factors are more variable and greater in periods of
economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still
considered sufficient for prudent investment. Considerable
variability in risk during economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial
protection factors fluctuate according to industry conditions or
company fortunes. Overall quality may move up or down frequently
within this category.
B+, B, B- -- Below investment grade and possessing risk that
obligations will not be met when due. Financial protection
factors will fluctuate widely according to economic cycles,
industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a
higher or lower rating grade.
CCC -- Well below investment-grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or
preferred dividends. Protection factors are narrow and risk can
be substantial with unfavorable economic/industry conditions,
and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
FITCH INVESTORS SERVICE, INC.
AAA -- Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA -- Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated AAA.
A -- Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
BB -- Bonds considered to be speculative. The obligor's ability
to pay interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in
satisfying its debt service requirements.
B -- Bonds are considered highly speculative. Bonds in this class
are lightly protected as to the obligor's ability to pay interest
over the life of the issue and repay principal when due.
CCC -- Bonds have certain characteristics which, with passing of
time, could lead to the possibility of default on either
principal or interest payments.
CC -- Bonds are minimally protected. Default in payment of
interest and/or principal seems probable.
C -- Bonds are in actual or imminent default in payment of
interest or principal.
DDD -- Bonds are in default and in arrears in interest and/or
principal payments. Such bonds are extremely speculative and
should be valued only on the basis of their value in liquidation
or reorganization of the obligor.
<PAGE>
PUTNAM DIVERSIFIED INCOME TRUST II
One Post Office Square
Boston, MA 02109
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
INVESTOR SERVICING AGENT
Putnam Investor Services
Mailing address:
P.O. Box 41203
Providence, RI 02940-1203
CUSTODIAN
Putnam Fiduciary Trust Company
One Post Office Square
Boston, MA 02109
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
PUTNAMINVESTMENTS
One Post Office Square
Boston, Massachusetts 02109
Toll-free 1-800-225-1581
<PAGE>
PUTNAM DIVERSIFIED INCOME TRUST II
FORM N-1A
PART B
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
JULY 30, 1997
This SAI is not a prospectus and is only authorized for
distribution when accompanied or preceded by the prospectus of
the fund dated July 30, 1997, as revised from time to time. This
SAI contains information which may be useful to investors but
which is not included in the prospectus. If the fund has more
than one form of current prospectus, each reference to the
prospectus in this SAI shall include all of the fund's
prospectuses, unless otherwise noted. The SAI should be read
together with the applicable prospectus. Investors may obtain a
free copy of the applicable prospectus from Putnam Investor
Services, Mailing address: P.O. Box 41203, Providence, RI 02940-
1203.
Part I of this SAI contains specific information about the fund.
Part II includes information about the fund and the other Putnam
funds.
<PAGE>
TABLE OF CONTENTS
PART I
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . .I-3
DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .I-4
CHARGES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . .I-5
INVESTMENT PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . I-11
ADDITIONAL OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . I-11
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS . . . . . . . . . . . I-12
PART II
MISCELLANEOUS INVESTMENT PRACTICES . . . . . . . . . . . . . . . . . . II-1
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-29
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-34
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . .II-44
HOW TO BUY SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . .II-45
DISTRIBUTION PLANS . . . . . . . . . . . . . . . . . . . . . . . . . .II-57
INVESTOR SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . .II-58
SIGNATURE GUARANTEES . . . . . . . . . . . . . . . . . . . . . . . . .II-64
SUSPENSION OF REDEMPTIONS. . . . . . . . . . . . . . . . . . . . . . .II-64
SHAREHOLDER LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . .II-64
STANDARD PERFORMANCE MEASURES. . . . . . . . . . . . . . . . . . . . .II-65
COMPARISON OF PORTFOLIO PERFORMANCE. . . . . . . . . . . . . . . . . .II-66
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-71
<PAGE>
SAI
PART I
INVESTMENT RESTRICTIONS
AS FUNDAMENTAL INVESTMENT RESTRICTIONS, WHICH MAY NOT BE CHANGED
WITHOUT A VOTE OF A MAJORITY OF THE OUTSTANDING VOTING
SECURITIES, THE FUND MAY NOT AND WILL NOT:
(1) Borrow money in excess of 10% of the value (taken at the
lower of cost or current value) of its total assets (not
including the amount borrowed) at the time the borrowing is made,
and then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such
borrowings will be repaid before any additional investments are
purchased.
(2) Underwrite securities issued by other persons except to the
extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under certain
federal securities laws.
(3) Purchase or sell real estate, although it may purchase
securities of issuers which deal in real estate, securities which
are secured by interests in real estate, and securities which
represent interests in real estate, and it may acquire and
dispose of real estate or interests in real estate acquired
through the exercise of its rights as a holder of debt
obligations secured by real estate or interests therein.
(4) Purchase or sell commodities or commodity contracts, except
that the fund may purchase and sell financial futures contracts
and options.
(5) Make loans, except by purchase of debt obligations in which
the fund may invest consistent with its investment policies, by
entering into repurchase agreements with respect to not more than
25% of its total assets (taken at current value) or through the
lending of its portfolio securities with respect to not more than
25% of its total assets (taken at current value).
(6) With respect to 75% of its total assets, invest in
securities of any issuer if, immediately after such investment,
more than 5% of the total assets of the fund (taken at current
value) would be invested in the securities of such issuer;
provided that this limitation does not apply to obligations
issued or guaranteed as to interest or principal by the U.S.
government or its political subdivisions.
(7) With respect to 75% of its total assets, acquire more than
10% of the voting securities of any issuer.
(8) Purchase securities (other than securities of the U.S.
government, its agencies or instrumentalities) if, as a result of
such purchase, more than 25% of the fund's total assets would be
invested in any one industry.
(9) Issue any class of securities which is senior to the fund's
shares of beneficial interest.
For the purpose of fundamental investment restriction (8) above,
the fund will consider securities backed by the credit of
different foreign governments as representing separate
industries.
Although certain of the fund's fundamental investment
restrictions permit it to borrow money to a limited extent, the
fund does not currently intend to do so and did not do so last
year.
The Investment Company Act of 1940 provides that a "vote of a
majority of the outstanding voting securities" of the fund means
the affirmative vote of the lesser of (1) more than 50% of the
outstanding fund shares, or (2) 67% or more of the shares
present at a meeting if more than 50% of the outstanding fund
shares are represented at the meeting in person or by proxy.
IT IS CONTRARY TO THE FUND'S PRESENT POLICY, WHICH MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL, TO:
Invest in (a) securities which are not readily marketable,
(b) securities restricted as to resale (excluding securities
determined by the Trustees of the fund (or the person designated
by the Trustees of the fund to make such determinations) to be
readily marketable), and (c) repurchase agreements maturing in
more than seven days, if, as a result, more than 15% of the
fund's net assets (taken at current value) would be invested in
securities described in (a), (b) and (c) above.
---------------------
All percentage limitations on investments other than pursuant to
the non-fundamental restriction will apply at the time of the
making of an investment and shall not be considered violated
unless an excess or deficiency occurs or exists immediately after
and as a result of such investment.
---------------------
DISTRIBUTIONS
The distribution declared by the fund each day will be in an
amount equal to the projected net investment income for a
specified period (which is generally expected to be one month,
although it may be longer or shorter if deemed appropriate by
Putnam Management in light of existing or anticipated market
conditions to avoid sharp fluctuations in the amount of daily
distributions), plus for certain periods undistributed amounts of
such income, divided by the number of days in that period. The
amount of the daily distribution will generally differ from the
fund's daily taxable investment income and book net investment
income computed in accordance with generally accepted accounting
principles, since the daily distribution is calculated on the
assumption that estimated taxable income and book net investment
income for the period are earned pro-rata throughout the period
on a daily basis. Estimated net investment income for any period
will be based upon Putnam Management's projections of investment
income to be accrued during the period less projected expenses of
the fund to be accrued for the period.
In estimating net investment income, Putnam Management may reduce
the amounts to provide a reserve of undistributed amounts which
could be paid in subsequent periods. This procedure may enable
the fund to avoid sharp fluctuations in the total daily
distributions from period to period and to minimize the
possibility of making distributions from paid-in surplus or other
capital sources. The reserve may increase the net asset value of
the fund, thereby causing redeeming shareholders to experience
higher capital gains or lower capital losses. For example, if
Putnam Management estimates that the fund's net investment income
for a period will be $.27 per share and if the fund has a reserve
of $.06 per share of undistributed income, the daily distribution
might be initially established at $.01 ($.30 divided by 30 days)
per share for each day during the period, leaving a reserve of
$.03 per share available for distribution in subsequent periods.
Putnam Management may revise its estimates of the amounts of net
investment income, in which case the subsequent daily
distributions during the period may be revised accordingly.
CHARGES AND EXPENSES
MANAGEMENT FEES
Under a Management Contract dated January 8, 1996, the fund pays
a quarterly fee to Putnam Management based on the average net
assets of the fund, as determined at the close of each business
day during the quarter, at the annual rate of 0.70% of the first
$500 million of average net assets, 0.60% of the next $500
million, 0.55% of the next $500 million, 0.50% of the next $5
billion, 0.475% of the next $5 billion, 0.455% of the next $5
billion, 0.44% of the next $5 billion and 0.43% of any excess
thereafter. For the past two fiscal years, pursuant to the
Management Contract, the fund incurred the following fees:
REFLECTING A
REDUCTION IN THE
FOLLOWING AMOUNTS
Fiscal Management pursuant to an
year fee paid expense limitation
1997 $424,705 $174,482
1996 $2,986 $11,148
EXPENSE LIMITATION. In order to limit the fund's expenses,
Putnam Management has agreed to limit its compensation (and, to
the extent necessary, bear other expenses of the fund) through
March 31, 1998 to the extent that expenses of the fund (exclusive
of brokerage, interest, taxes, deferred organizational and
extraordinary expenses, and payments under the fund's
distribution plans) would exceed an annual rate of 1.00% of the
fund's average net assets. For the purpose of determining any
such limitation on Putnam Management's compensation, expenses of
the fund do not reflect the application of commissions or cash
management credits that may reduce designated fund expenses.
With Trustee approval, this expense limitation may be terminated
earlier, in which event shareholders would be notified and this
SAI would be revised.
BROKERAGE COMMISSIONS
The following table shows brokerage commissions paid during the
fiscal periods indicated:
FISCAL BROKERAGE
YEAR COMMISSIONS
1997 $731
1996 $0
The following table shows transactions placed with brokers and
dealers during the most recent fiscal year to recognize research,
statistical and quotation services received by Putnam Management
and its affiliates:
DOLLAR
VALUE PERCENT OF
OF THESE TOTAL AMOUNT OF
TRANSACTIONS TRANSACTIONS COMMISSIONS
$503,106 2.58% $1,270
ADMINISTRATIVE EXPENSE REIMBURSEMENT
The fund reimbursed Putnam Management in the following amount for
administrative services during fiscal 1997, including the
following amount for compensation of certain fund officers and
contributions to the Putnam Investments, Inc. Profit Sharing
Retirement Plan for their benefit:
PORTION OF TOTAL
REIMBURSEMENT FOR
COMPENSATION
TOTAL AND
REIMBURSEMENT CONTRIBUTIONS
$4,793 $4,219
<PAGE>
TRUSTEE FEES
Each Trustee receives a fee for his or her services. Each
Trustee also receives fees for serving as Trustee of other Putnam
funds. The Trustees periodically review their fees to assure
that such fees continue to be appropriate in light of their
responsibilities as well as in relation to fees paid to trustees
of other mutual fund complexes. The Trustees meet monthly over a
two-day period, except in August. The Compensation Committee,
which consists solely of Trustees not affiliated with Putnam
Management and is responsible for recommending Trustee
compensation, estimates that Committee and Trustee meeting time
together with the appropriate preparation requires the equivalent
of at least three business days per Trustee meeting. The
following table shows the year each Trustee was first elected a
Trustee of the Putnam funds, the fees paid to each Trustee by the
fund for fiscal 1997 and the fees paid to each Trustee by all of
the Putnam funds during calendar 1996:
[CAPTION]
<TABLE>
COMPENSATION TABLE
Pension or Estimated Total
Aggregate retirement annual benefits compensation
compensation benefits accrued from all from all
from the as part of Putnam funds Putnam
Trustees/Year fund(1) fund expenses(2) upon retirement(3) funds(4)
<S> <C> <C> <C> <C>
Jameson A. Baxter/1994 $538 $35 $85,646 $172,291(5)
Hans H. Estin/1972 530 86 85,646 171,291
John A. Hill/1985 532 32 85,646 170,791(5)
Ronald J. Jackson/1996(6) 521 15 85,646 94,807(5)
Elizabeth T. Kennan/1992 534 45 85,646 171,291
Lawrence J. Lasser/1992 532 34 85,646 169,791
Robert E. Patterson/1984 558 26 85,646 182,291
Donald S. Perkins/1982 538 94 85,646 170,291
William F. Pounds/1971 (7) 552 97 98,146 197,291
George Putnam/1957 538 99 85,646 171,291
George Putnam, III/1984 538 17 85,646 171,291
A.J.C. Smith/1986 524 58 85,646 169,791
W. Nicholas Thorndike/1992 550 64 85,646 181,291
(1) Includes an annual retainer and an attendance fee for each meeting attended.
(2) The Trustees approved a Retirement Plan for Trustees of the Putnam funds on October 1,
1996. Prior to that date, voluntary retirement benefits were paid to certain retired
Trustees.
(3) Assumes that each Trustee retires at the normal retirement date. Estimated benefits for
each Trustee are based on Trustee fee rates in effect during calendar 1996.
(4) As of December 31, 1996, there were 96 funds in the Putnam family.
(5) Includes compensation deferred pursuant to a Trustee Compensation Deferral Plan.
(6) Elected as a Trustee in May 1996.
(7) Includes additional compensation for service as Vice Chairman of the Putnam funds.
</TABLE>
<PAGE>
Under a Retirement Plan for Trustees of the Putnam funds (the "Plan"),
each Trustee who retires with at least five years of service as a
Trustee of the funds is entitled to receive an annual retirement
benefit equal to one-half of the average annual compensation paid to
such Trustee for the last three years of service prior to retirement.
This retirement benefit is payable during a Trustee's lifetime,
beginning the year following retirement, for a number of years equal
to such Trustee's years of service. A death benefit is also available
under the Plan which assures that the Trustee and his or her
beneficiaries will receive benefit payments for the lesser of an
aggregate period of (i) ten years or (ii) such Trustee's total years
of service.
The Plan Administrator (a committee comprised of Trustees that are not
"interested persons" of the fund, as defined in the Investment Company
Act of 1940) may terminate or amend the Plan at any time, but no
termination or amendment will result in a reduction in the amount of
benefits (i) currently being paid to a Trustee at the time of such
termination or amendment, or (ii) which a current Trustee would have
been entitled to receive had he or she retired immediately prior to
such termination or amendment.
For additional information concerning the Trustees, see "Management"
in Part II of this SAI.
SHARE OWNERSHIP
At June 30, 1997, the officers and Trustees of the fund as a group
owned less than 1% of the outstanding shares of each class of the
fund, and, except as noted below, to the knowledge of the fund no
person owned of record or beneficially 5% or more of any class of
shares of the fund:
SHAREHOLDER NAME PERCENTAGE
CLASS AND ADDRESS OWNED
B MLPF&S is Merrill Lynch 7.30%
4800 Deer Lake Dr. E. Fl. 3
Jacksonville, FL 32246-6484
M Donaldson Lufkin Jenrette 7.00%
P.O. Box 2052
Jersey City, NJ 07303
DISTRIBUTION FEES
During fiscal 1997, the fund paid the following 12b-1 fees to Putnam
Mutual Funds:
CLASS A CLASS B CLASS M
$55,646 $348,936 $17,386
CLASS A SALES CHARGES AND CONTINGENT DEFERRED SALES CHARGES
Putnam Mutual Funds received sales charges with respect to class A
shares in the following amounts during the periods indicated:
SALES CHARGES
RETAINED BY PUTNAM CONTINGENT
TOTALMUTUAL FUNDS DEFERRED
FISCALFRONT-END AFTER SALES
YEARSALES CHARGES DEALER CONCESSIONS CHARGES
1997 $946,314 $86,350 $88
1996 $89,221$3,693 $0
CLASS B CONTINGENT DEFERRED SALES CHARGES
Putnam Mutual Funds received contingent deferred sales charges upon
redemptions of class B shares in the following amounts during the
periods indicated:
CONTINGENT DEFERRED
FISCAL YEAR SALES CHARGES
1997 $55,923
1996 $0
CLASS M SALES CHARGES
Putnam Mutual Funds received sales charges with respect to class M
shares in the following amounts during the periods indicated:
SALES CHARGES
RETAINED BY PUTNAM
MUTUAL FUNDS
TOTAL AFTER
SALES CHARGES DEALER CONCESSIONS
Fiscal year
1997 $85,410 $5,447
1996 $10,419 $80
INVESTOR SERVICING AND CUSTODY FEES AND EXPENSES
During the 1997 fiscal year, the fund incurred $185,771 in fees and
out-of-pocket expenses for investor servicing and custody services
provided by Putnam Fiduciary Trust Company.
<PAGE>
INVESTMENT PERFORMANCE
STANDARD PERFORMANCE MEASURES
(for periods ended March 31, 1997)
Class A Class B Class M
Inception date: 2/26/96 2/26/96 2/26/96
ANNUALIZED
TOTAL RETURN+
1 year 2.24% 1.58% 3.63%
Life of class 1.20% 1.38% 2.31%
YIELD++
30-day
Yield 7.08% 6.71% 6.96%
+ Reflecting an expense limitation in effect during the period. In
the absence of the expense limitation, total return would have been
lower. The per share amount of the expense limitation is set forth in
the footnotes to the table in the section entitled "Financial
highlights."
++ Reflecting an expense limitation then in effect. In the absence of
the expense limitation, the fund's yield would have been 6.89% for
class A, 6.52 % for class B and 6.79% for class M shares.
Data represent past performance and are not indicative of future
results. Total return and yield for class A and class M shares
reflect the deduction of the maximum sales charge of 4.75% and 3.25%,
respectively. Total return for class B shares reflects the deduction
of the applicable contingent deferred sales charge ("CDSC"). The
maximum class B CDSC is 5.0%. See "Standard performance measures" in
Part II of this SAI for information on how performance is calculated.
ADDITIONAL OFFICERS
In addition to the persons listed as fund officers in Part II of this
SAI, each of the following persons is also a Vice President of the
fund and certain of the other Putnam funds, the total number of which
is noted parenthetically. Officers of Putnam Management hold the same
offices in Putnam Management's parent company, Putnam Investments,
Inc.
<PAGE>
OFFICER NAME (AGE) (NUMBER OF FUNDS)
GARY N. COBURN (51) (60 funds). Senior Managing Director of Putnam
Management.
WILLIAM J. CURTIN (37) (58 funds). Managing Director of Putnam
Management. Prior to August, 1996, Mr. Curtin was Managing Director
of Lehman Brothers.
DAVID L. WALDMAN (31) (11 funds). Managing Director of Putnam
Management. Employed as an investment professional by Putnam
Management since June, 1997. Prior to June, 1997, Mr. Waldman a
Senior Portfolio Manager at Lazard Freres, and prior to April 1995
held various titles at Goldman Sachs including Analyst, Associate,
Portfolio Manager and Vice President.
D. WILLIAM KOHLI (36) (10 funds). Managing Director of Putnam
Management. Prior to September, 1994, Mr. Kohli was Executive Vice
President and Co-Director of Global Bond Management and, prior to
October, 1993, Senior Portfolio Manager at Franklin Advisors/Templeton
Investment Counsel.
JENNIFER E. LEICHTER (36) (7 funds). Senior Vice President of Putnam
Management.
MICHAEL MARTINO (44) (6 funds). Managing Director of Putnam
Management. Prior to January, 1994, Mr. Martino was employed by Back
Bay Advisors in the positions of Executive Vice President and Chief
Investment Officer from 1992 to 1994, and Senior Vice President and
Senior Portfolio Manager prior to 1992.
KENNETH J. TAUBES (39) (15 funds). Senior Vice President of Putnam
Management. Senior Vice President of Putnam Fiduciary Trust Company.
GAIL S. ATTRIDGE (35) (9 funds). Vice President of Putnam Management.
Prior to November, 1993, Ms. Attridge was an Analyst at Keystone
Custody International.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, MA 02109,
are the fund's independent accountants, providing audit services, tax
return review and other tax consulting services and assistance and
consultation in connection with the review of various Securities and
Exchange Commission filings. The Report of Independent Accountants,
financial highlights and financial statements included in the fund's
Annual Report for the fiscal year ended March 31, 1997, filed
electronically on May 30, 1997 (File No. 811-7221), are incorporated
by reference into this SAI. The financial highlights included in the
prospectus and incorporated by reference into this SAI and the
financial statements incorporated by reference into the prospectus and
this SAI have been so included and incorporated in reliance upon the
report of the independent accountants, given on their authority as
experts in auditing and accounting.<PAGE>
<PAGE>
6
Putnam
High Yield
Total
Return
Fund
Portfolio
of
investment
s owned
April 30,
1997
(Unaudited
)
Corporate Bonds and Notes (60.1%) (a)
PRINCIPAL VALUE
AMOUNT
Advertising (0.3%)
$ Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 $
50,000 49,860
Aerospace and Defense
(0.1%)
15,000 L-3 Communications Corp. 144A sr. sub. notes 10 15,450
3/8s, 2007
10,000 Tracor, Inc. 144A sr. sub. notes 8 1/2s, 2007 9,800
Agriculture (1.8%) 25,250
299,734 Premium Standard Farms, Inc. sr. secd. notes 11s, 319,217
2003 (PIK)
Apparel (0.1%)
25,000 GFSI, Inc. 144A sr. sub. notes 9 5/8s, 2007 24,750
Automotive (2.4%)
200,000 A.P.S Inc. company guaranty 11 7/8s, 2006 200,000
25,000 CSK Auto, Inc. 144A sr. sub. notes 11s, 2006 25,625
75,000 Exide Corp. sr. notes 10s, 2005 75,938
50,000 Harvard Industries Inc. sr. notes 11 1/8s, 2005 22,500
80,000 Hawk Corp. sr. notes 10 1/4s, 2003 80,600
15,000 Key Plastics Corp. 144A sr. sub. notes 10 1/4s, 15,150
2007
419,813
Broadcasting
(4.0%)
50,000 Capstar Broadcasting 144A sr. disc. notes stepped- 27,875
coupon zero % (12 3/4s, 2/1/02), 2009 (STP)
150,000 Comcast UK Cable, Ltd. deb. stepped-coupon zero % 103,500
(11.2s, 11/15/00), 2007(Bermuda) (STP)
272,000 Grupo Televisa S.A. sr. disc. notes stepped-coupon 173,400
zero % (13 1/4s, 5/15/01), 2008(Mexico) (STP)
150,000 Marcus Cable Co. (L.P.) sr. sub. disc. notes 124,125
stepped-coupon zero % (13 1/2s, 8/1/99), 2004 (STP)
10,000 RBS Participacoes S.A. 144A company guaranty 11s, 10,098
2007(Brazil)
25,000 SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 26,188
3/4s, 2006
15,000 Spanish Broadcasting Systems 144A sr. notes 11s, 15,075
2004
125,000 Sullivan Broadcasting sr. sub. notes 10 1/4s, 2005 125,000
10,000 TCI Satellite Entertainment 144A sr. sub. notes 10 9,500
7/8s, 2007
50,000 TV Azteca Sa De Cv 144A sr. notes 10 1/2s, 49,188
2007(Mexico)
50,000 Young Broadcasting Inc. company guaranty Ser. B, 47,250
9s, 2006
711,199
Building and Construction
(3.0%)
100,000 Consumers International 144A sr. notes 10 1/4s, 103,000
2005
5,000 Continental Homes Holding Corp. sr. notes 10s, 2006 4,925
75,000 Nortek, Inc. sr. sub. notes 9 7/8s, 2004 74,250
125,000 Presley Cos. sr. notes 12 1/2s, 2001 120,938
100,000 Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 105,000
50,000 Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 54,938
75,000 Triangle Pacific Corp. sr. notes 10 1/2s, 2003 78,750
541,801
Cable Television (1.5%)
60,000 Adelphia Communications Corp. 144A sr. notes 9 56,700
7/8s, 2007
50,000 Cablevision Systems Corp. sr. sub. notes 9 1/4s, 48,750
2005
125,000 Diamond Cable Communication Co. sr. disc. notes 86,563
stepped-coupon zero % (11 3/4s, 12/15/00),
2005(United Kingdom) (STP)
115,000 Diamond Cable Communications Co. 144A sr. disc. 68,425
notes stepped-coupon zero % (10 3/4s, 2/15/02),
2007 (STP)
260,438
Chemicals (0.8%)
25,000 Harris Chemical Corp. sr. sub. notes 10 3/4s, 2003 24,750
120,000 NL Industries, Inc. sr. notes stepped-coupon zero % 110,850
(13s, 10/15/98), 2005 (STP)
135,600
Connecticut (0.4%)
50,000 Mohegan Tribal Gaming sr. secd. notes Ser. B, 13 65,500
1/2s, 2002
Consumer Products (0.4%)
100,000 Revlon Worldwide Corp. 144A sr. disc. notes zero %, 65,500
2001
Consumer Services (2.6%)
25,000 Affinity Group Holdings 144A sr. notes 11s, 2007 25,625
20,000 AMC Entertainment, Inc. 144A sr. sub. notes 9 1/2s, 19,800
2009
50,000 Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 55,000
26,375 Falcon Holdings Group, Inc. sr. sub. notes 11s, 22,946
2003 (PIK)
125,000 FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 129,375
10,000 Hollinger International Publishing, Inc. company 9,875
guaranty 8 5/8s, 2005
200,000 Sun International Hotels Ltd. 144A sr. sub. notes 197,500
9s, 2007
460,121
Electronics and Electrical Equipment
(1.0%)
20,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 17,666
11.74s, 2008
165,000 Fairchild Semiconductor Corp. 144A sr. sub. notes 166,650
10 1/8s, 2007
184,316
Entertainment (1.2%)
50,000 Panda Global Energy Co. 144A sr. notes 12 1/2s, 47,500
2004
Food (0.3%)
50,000 Cinemark USA, Inc. sr. sub. notes 9 5/8s, 2008 49,000
45,000 Cobb Theatres LLC company guaranty 10 5/8s, 2003 46,575
50,000 Premier Parks, Inc. sr. notes 9 3/4s, 2007 50,625
75,000 Trump A.C. 1st mtge. 11 1/4s, 2006 72,938
219,138
Food and Beverage (0.9%)
50,000 Mafco, Inc. sr. sub. notes 11 7/8s, 2002 53,125
Forest Products (0.3%)
5,000 Del Monte Corp. 144A sr. sub. notes 12 1/4s, 2007 5,150
150,000 Doane Products Co. sr. notes 10 5/8s, 2006 156,000
161,150
Health Care (2.1%)
50,000 Gaylord Container Corp. sr. sub. disc. deb. 12 53,750
3/4s, 2005 (STP)
Insurance and Finance
(3.5%)
10,000 IMED Corp. sr. sub. notes 9 3/4s, 2006 10,000
150,000 Integrated Health Services sr. sub. notes 10 3/4s, 160,500
2004
150,000 Paracelsus Healthcare sr. sub. notes 10s, 2006 141,750
55,000 Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 54,725
366,975
Insurance and Finance (3.5%)
225,000 Aames Financial Corp. sr. notes 9 1/8s, 2003 209,250
10,000 Dime Capital Trust I bank guaranty Ser. A, 9.33s, 10,000
2027
150,000 First Nationwide Holdings sr. sub. notes 9 1/8s, 150,000
2003
125,000 Imperial Credit Industries, Inc. 144A sr. notes 9 115,000
7/8s, 2007
25,000 Provident Capital Trust company guaranty 8.6s, 2026 24,125
50,000 PRT Funding Corp. sr. notes 11 5/8s, 2004 36,000
50,000 Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 51,375
2003
10,000 Sovereign Capital Trust 144A company guaranty 9s, 9,750
2027
10,000 Webster Capital Trust I 144A bonds 9.36s, 2027 10,206
615,706
Medical Supplies and Devices
(0.4%)
75,000 Wright Medical Technology, Inc. sr. secd. notes 75,750
Ser. B, 10 3/4s, 2000
Metals and Mining (1.7%)
10,000 Acindar Industria Argentina de Aceros S.A. bonds 11 10,150
1/4s, 2004(Argentina)
10,000 Altos Hornos De Mexico 144A bonds 11 7/8s, 10,125
2004(Mexico)
15,000 Continental Global Group 144A sr. notes Ser. A, 15,450
11s, 2007
10,000 Echo Bay Mines jr. sub. deb. 11s, 2027(Canada) 9,850
50,000 Maxxam Group Holdings sr. nores Ser. B, 12s, 2003 50,500
150,000 Royal Oak Mines, Inc. company guaranty Ser. B, 11s, 150,750
2006(Canada)
50,000 Weirton Steel Co. sr. notes 11 3/8s, 2004 50,500
297,325
Oil and Gas
(6.1%)
125,000 Cliffs Drilling Co. company guaranty Ser. B, 10 129,688
1/4s, 2003
100,000 Falcon Drilling Co., Inc. sr. notes Ser. B, 9 3/4s, 102,000
2001
50,000 Flores & Rucks, Inc. sr. notes 13 1/2s, 2004 58,125
50,000 Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 51,750
5,000 Forcenergy, Inc. 144A sr. sub. notes 8 1/2s, 2007 4,750
50,000 KCS Energy, Inc. company guaranty Ser. B, 11s, 2003 53,250
50,000 Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 51,375
2006
25,000 Transamerican Refining 144A 15s, 1998 25,000
600,000 Transamerican Refining Corp. var. rate 1st mtge. 556,500
zero % (18.5s 2/15/98), 2002 (STP)
50,000 TransTexas Gas Corp. sr. secd. notes 11 1/2s, 2002 55,625
1,088,06
3
Packaging and Containers
(0.5%)
15,000 Innova S De R.L. 144A sr. notes 12 7/8s, 14,775
2007(Mexico)
75,000 Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 81,469
96,244
Paper and Forest Products
(1.0%)
50,000 Buckeye Cellulose Corp. sr. sub. notes 9 1/4s, 2008 51,000
50,000 Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 48,000
2003
50,000 Repap New Brunswick sr. notes 10 5/8s, 2005(Canada) 47,000
25,000 Riverwood International Corp. company guaranty 10 23,500
1/4s, 2006
169,500
Publishing (0%)
5,000 Sun Media Corp. 144A sr. sub. notes 9 1/2s, 4,825
2007(Canada)
Real Estate (0.1%)
20,000 Prime Hospitality Corp. 144A sr. sub. notes 9 3/4s, 20,400
2007
Recreation (3.3%)
50,000 Alliance Gaming Corp. 12 7/8s, 2003 53,938
150,000 Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 134,250
100,000 Colorado Gaming & Entertainment Co. sr. notes 12s, 99,000
2003 (PIK)
150,000 Hollywood Casino Corp. sr. notes 12 3/4s, 2003 153,750
150,000 Lady Luck Gaming 1st mtge. 11 7/8s, 2001 150,000
590,938
Retail (1.6%)
100,000 Eagle Food Centers. Inc. sr. notes 8 5/8s, 2000 97,000
50,000 Loehmanns, Inc. sr. notes 11 7/8s, 2003 52,000
10,000 Quality Food Centers, Inc. 144A sr. sub. notes 9,850
8.7s, 2007
125,000 Supermercados Norte 144A bonds 10 7/8s, 2004 125,000
(Argentina)
10,000 William Carter Co. 144A sr. sub. notes 12s, 2008 10,200
294,050
Telecommunications
(10.3%)
125,000 Arch Communications Group sr. disc. notes stepped- 56,875
coupon zero % (10 7/8s, 3/15/01), 2008 (STP)
50,000 Brooks Fiber Properties, Inc. sr. disc. notes 32,750
stepped-coupon zero % (10 7/8s, 3/1/01), 2006 (STP)
225,000 Cencall Communications Corp. sr. disc. notes 166,500
stepped-coupon
zero % (10 1/8s, 1/15/99), 2004 (STP)
75,000 Centennial Cellular Corp. sr. notes 10 1/8s, 2005 75,656
25,000 Charter Communications International, Inc. sr. 25,813
notes Ser. B, 11 1/4s, 2006
10,000 Consorcio Ecuatoriano 144A notes 14s, 2002 10,100
(Ecuador)
150,000 Dobson Communications Corp. 144A sr. notes 11 3/4s, 144,000
2007
25,000 Frontiervision Operating Partners L.P. sr. sub. 25,063
notes 11s, 2006
150,000 GST Telecommunications, Inc. company guaranty 93,000
stepped-coupon zero % (13 7/8s, 15/15/00), 2005
(STP)
25,000 Hyperion Telecommunication Corp. sr. disc. notes 12,750
stepped-coupon Ser. B, zero % (13s, 4/15/01), 2003
(STP)
275,000 Intelcom Group (USA), Inc. company guaranty stepped- 163,625
coupon zero % (12 1/2s, 5/1/01), 2006 (STP)
100,000 Intermedia Communications, Inc. sr. disc. notes 64,500
stepped-coupon zero % (12 1/2s, 5/15/01), 2006
(STP)
150,000 International Cabletel, Inc. sr. notes stepped- 98,250
coupon Ser. B, zero % (11 1/2s, 2/01/01), 2006
(STP)
40,000 International Cabletel, Inc. 144A sr. notes 10s, 39,100
2007
85,000 McLeod, Inc. 144A sr. disc. notes stepped-coupon 48,663
zero % (10 1/2s, 3/1/02), 2007 (STP)
50,000 MFS Communications sr. disc. notes stepped-coupon 37,927
zero % (8 7/8s, 1/1/01), 2006 (STP)
275,000 Millicom International Cellular S.A. sr. disc. 192,500
notes stepped-coupon zero % (13 1/2s, 6/1/01),
2006(Luxembourg) (STP)
100,000 Mobile Telecommunications Tech. sr. notes 13 1/2s, 99,000
2002
50,000 NEXTEL Communications, Inc. sr. disc. notes stepped- 36,375
coupon zero % (9 3/4s, 2/15/99), 2004 (STP)
150,000 Omnipoint Corp. sr. notes 11 5/8s, 2006 117,000
25,000 Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 19,500
50,000 Paging Network, Inc. sr. sub. notes 10s, 2008 44,500
75,000 Pricellular Wireless Corp. sr. disc. notes stepped- 77,250
coupon Ser. B, zero % (14s, 11/15/97), 2001 (STP)
50,000 Rogers Cantel, Inc. deb. 9 3/8s, 2008(Canada) 51,375
125,000 Teleport Communications Group Inc. sr. disc. notes 85,938
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 (STP)
15,000 Winstar Equipment Corp. 144A company guaranty 12 14,363
1/2s, 2004
1,832,37
3
Textiles (1.2%)
50,000 Foamex (L.P.) Capital Corp. sr. disc. notes stepped- 44,000
coupon
Ser. B, zero % (14s, 7/1/99), 2004 (STP)
60,000 Glenoit Corp. 144A sr. sub. notes 11s, 2007 60,600
100,000 Polysindo International Finance company guaranty 11 105,000
3/8s, 2006(Indonesia)
209,600
Transportation
(1.0%)
50,000 Atlantic Express, Inc. 144A company guaranty 10 51,250
3/4s, 2004
125,000 Eletson Holdings, Inc. 1st pfd. mtge. notes 9 1/4s, 122,500
2003(Greece)
173,750
Utilities (5.9%)
325,000 AES China Generating Co. sr. notes 10 1/8s, 333,531
2006(China)
300,000 Calpine Corp. sr. notes 10 1/2s, 2006 320,250
50,000 Cleveland Electric Illuminating Co. 1st mtge. Ser. 51,365
17-A, 9 3/8s, 2017
100,000 Cleveland Electric Illuminating Co. 1st mtge. Ser. 106,996
B, 9 1/2s, 2005
150,000 Cleveland Electric Illuminating Co. 1st mtge. Ser. 153,933
E, 9s, 2023
50,000 Niagara Mohawk Power Corp. mtge. 9 1/2s, 2000 51,793
25,000 Toledo Edison Co. med. term notes 9.22s, 2021 25,570
1,043,43
8
Total Corporate Bonds and Notes (cost $10,903,400) 10,676,96
5
Brady Bonds (11.0%)
(a)
PRINCIPAL VALUE
AMOUNT
$ 567,450 Argentina (Republic of) deb. 6.75s, 2005 $
520,635
135,000 Argentina (Republic of) FRN Ser. L-GP, 5 1/4s, 2023 87,919
35,000 Bulgaria (Republic of) deb. Ser. PDI, 6.5625s, 2011 21,919
451,621 Brazil (Republic of) FRB 8s, 2014 (POR) 342,667
87,000 Ecuador (Government of) bonds 6.4375s, 2025 58,073
90,000 Poland (Government of) bonds 6.9375s, 2024 87,413
560,000 United Mexican States deb. Ser. A, 6 1/4s, 2019 406,700
250,000 United Mexican States FRB Ser. D, 6.35156s, 2019 221,406
238,095 Venezuela (Government of)deb. Ser. B, 6.75s, 2007 213,095
Total Brady Bonds (cost $1,973,487)
1,959,82
7
Convertible Bonds and Notes (7.6%)
(a)
PRINCIPAL VALUE
AMOUNT
Automotive (0.2%)
$ Magna International cv. sub. deb. 5s, 2002 $
23,000 25,013
Basic Industrial Products
(0%)
7,000 Cooper Industries, Inc. cv. sub. 7.05s, 2015 7,770
Broadcasting (0.2%)
22,000 International Cabletel Inc. 144A cv. deb. 7 1/4s, 21,148
2005
48,000 Jacor Communications, Inc. cv. sr. notes zero %, 22,320
2011
43,468
Business Equipment and Services
(0.6%)
100,000 Corporate Express, Inc. cv. notes 4 1/2s, 2000 84,250
28,000 U.S. Office Products Co. 144A cv. sub. notes 5 23,485
1/2s, 2003
107,735
Cellular Broadcasting (0.2%)
55,000 Comcast Corp. cv. notes 1 1/8s, 2007 28,050
Chemicals (0.1%)
9,000 Hercules, Inc. cv. deb. 8s, 2010 23,929
Computer Services and Software
(0.1%)
25,000 Intevac, Inc. 144A cv. sub. notes 6 1/2s, 2004 21,125
Computers (0.3%)
25,000 Safeguard Scientifics, Inc. 144A cv. sub. notes 6s,
2006 22,719
28,000 Softkey International, Inc. 144A cv. sr. notes 5 20,825
1/2s, 2000
20,000 Synoptics Communications Inc. 144A cv. sub. deb. 5 17,475
1/4s, 2003
61,019
Conglomerates
(0.3%)
18,000 Hexcel Corp. cv. sub. notes 7s, 2003
23,490
20,000 Thermo Electron Corp. 144A cv. subordinated 4 1/4s, 21,575
2003
45,065
Consumer Non Durables
(0.3%)
74,000 Coleman Worldwide Corp. cv. sr. sec. notes Liquid
Yeild Option Note ( LYON) zero %, 2013 22,385
24,000 Standard Commercial Corp. cv. sub. deb. 7 1/4s, 21,660
2007 (NON)
44,045
Consumer Services (0.5%)
60,000 Boston Chicken, Inc. cv. notes LYON zero %, 2015
14,775
20,000 Boston Chicken, Inc. cv. sub. deb. 7 3/4s, 2004 21,650
55,000 Hollinger, Inc. cv. LYON zero %, 2013 20,075
22,000 Pharmaceutical Marketing Services Inc. 144A cv. 18,040
deb. 6 1/4s, 2003
16,000 Protection One, Inc. cv. sr. sub. notes 6 3/4s, 15,220
2003
89,760
Electronics and Electrical Equipment
(1.4%)
9,000 Diagnostic Retrieval Systems cv. sr. sub. deb. 9s,
2003 11,070
29,000 HMT Technology Corp. 144A cv. sub. notes 5 3/4s, 23,345
2004
29,000 Integrated Device Technology, Inc. cv. sub. notes 5 24,469
1/2s, 2002
30,000 Motorola, Inc. cv. sub. deb. LYON zero %, 2013 22,275
14,000 Plasma & Materials Technologies, Inc. 144A cv. notes 9,520
7 1/8s, 2001
27,000 S3, Inc. 144A cv. sub. notes 5 3/4s, 2003 22,343
20,000 SCI Systems, Inc. cv. sub. notes 5s, 2006 27,525
10,000 Texas Instruments cv. sub. deb. 2 3/4s, 2002 21,538
20,000 Thermo Instrument Systems, Inc. 144A cv. deb. 4 18,750
1/2s, 2003
23,000 Thermo Optek Corp. 144A cv. bonds 5s, 2000 23,230
21,000 Thermo Quest Corp. cv. co. guaranty 5s, 2000 21,000
20,000 Xilinx, Inc. 144A cv. sub. notes 5 1/4s, 2002 22,900
247,96
5
Environmental Control (0.1%)
12,000 USA Waste Services, Inc. cv. sub. notes 4s, 2002
11,850
14,000 WMX Technologies, Inc. cv. sub. notes 2s, 2005 12,110
23,960
Health Care (0.9%)
50,000 Alza Corp. cv. sub. LYON zero %, 2014
21,938
30,000 NovaCare, Inc. cv. sub. deb. 5 1/2s, 2000 27,188
30,000 PhyMatrix, Inc. cv. sub. deb. 6 3/4s, 2003 24,525
20,000 Renal Treatment Centers, Inc. cv. sub. notes 5 5/8s, 18,100
2006
18,000 Rotech Medical Corp. cv. sub. deb. 5 1/4s, 2003 15,390
22,000 U.S. Diagnostic Laboratories, Inc. 144A cv. sub. 21,120
deb. 9s, 2003
23,000 Vivra, Inc. 144A cv. sub. notes 5s, 2001 21,936
150,19
7
Hospital Management and Medical Services
(0.1%)
19,000 Integrated Health Services, Inc. cv. sub. deb. 6s, 20,235
2003
Insurance and Finance (0.5%)
24,000 Berkshire Hathaway, Inc. cv. sr. notes 1s, 2001
23,010
22,000 Mitsubishi Bank Ltd. International Finance cv. trust 22,358
guaranteed notes 3s, 2002(Bermuda)
17,000 Pioneer Financial Services, Inc. cv. sub. notes 6 24,544
1/2s, 2003
40,000 USF&G Corp. cv. sub. notes zero %, 2009 26,200
96,112
Medical Supplies and Devices
(0.1%)
25,000 Uromed Corp. 144A cv. sub. notes 6s, 2003 15,031
Metals and Mining
(0.1%)
20,000 Quanex Corp. cv. sub. deb. 6.88s, 2007 20,300
Oil and Gas (0.3%)
21,000 Lomak Petroleum, Inc. 144A cv. sub. deb. 6s, 2007 23,730
3,000 Pride Petroleum Services, Inc. cv. sub. deb. 6 4,361
1/4s, 2006
16,000 Swift Energy Co. cv. sub. notes 6 1/4s, 2006 14,840
42,931
Paper and Forest Products (0.1%)
24,000 Stone Container Corp. cv. sr. sub. notes 8 7/8s, 25,500
2000
Pharmaceuticals (0.2%)
16,000 North American Vaccine, Inc. 144A cv. sub. notes 6 15,420
1/2s, 2003
40,000 Roche Holdings, Inc. 144A cv. unsub. LYON zero %, 18,400
2010(Switzerland)
33,820
Pharmaceuticals and Biotechnology
(0.1%)
23,000 Nabi, Inc. cv. sub. notes 6 1/2s, 2003 18,113
4,000 North American Vaccine, Inc. 144A cv. sub. notes 6 3,855
1/2s, 2003
21,968
Recreation (0.4%)
100,000 Argosy Gaming cv. sub. notes 12s, 2001 71,000
Retail (0.5%)
20,000 Home Depot, Inc. cv. sub. notes 3 1/4s, 2001 20,425
26,000 Michaels Stores, Inc. cv. sub. notes 6 3/4s, 2003 22,653
20,000 Pier 1 Imports, Inc. cv. sub. notes 5 3/4s, 2003 24,325
25,000 Rite Aid Corp. cv. deb. zero %, 2006 18,375
85,778
Telecommunications
(0%)
10,000 MIDCOM Communications, Inc. 144A cv. sub. deb. 8 8,300
1/4s, 2003
Total Convertible Bonds and Notes (cost $1,428,901) 1,360,07
6
Preferred Stocks (4.3%) (a)
NUMBER OF VALUE
SHARES
518 Alliance Gaming Corp. Ser. B, $15.00 pfd. (PIK)
51,800
1,159 American Radio Systems Corp. 144A $11.375 pfd. 114,451
1,798 Cablevision Systems Corp. Ser. M, $11.125 dep. shs. 165,416
pfd.(PIK)
400 California Federal Bancorp Inc. Ser. A, $2.281 pfd. 10,000
1,070 Chancellor Radio Broadcasting 144A $12.00 pfd. 105,930
1,500 Chevy Chase Capital Corp. Ser. A, $10.375 pfd. 72,750
127 Granite Broadcasting Corp. 144A 12.75% pfd. (PIK) 115,888
25 ICG Holdings, Inc. 14.00% (Canada) 24,125
5 Intermedia Communications, Inc. 144A 13.50% pfd. 48,375
20 NTL Inc. 144A 13.00% pfd. (PIK) 19,400
800 Public Service Co. of New Hampshire $10.60 1st 18,000
mtge. pfd.
20 Spanish Broadcasting Systems 144A 14.25% pfd. 17,600
(PIK)
Total Preferred Stocks (cost $795,863) 763,735
Convertible Preferred Stocks
(3.6%) (a)
NUMBER OF VALUE
SHARES
Automotive (0.1%)
170 Ford Motor Co. Ser. A, $4.20 dep. shs. cv. pfd.
19,040
Banks (0.1%)
230 Sovereign Bancorp Inc. $3.13 cv. pfd. 17,020
Basic Industrial Products (0.1%)
170 Case Corp. $4.50 cv. pfd. ($4.50) 22,823
Broadcasting
(0.2%)
342 Chancellor Broadcasting Corp. 144A $3.50 cv. pfd. 18,212
360 SFX Broadcasting, Inc. Ser. D, $3.25 cv. pfd. 16,200
34,412
Building and Construction
(0.1%)
227 Greenfield Capital Trust $3.00 cv. pfd. 9,307
Business Equipment and Services
(0.1%)
150 Ikon Office Solutions Inc. Ser. BB, $5.04 cv. pfd. 10,200
Computer Services and Software
(0.1%)
240 Vanstar Corp. 144A $3.375 cv. pfd. 7,350
407 Wang Laboratories, Inc. Ser. B, $3.25 cv. pfd. 18,519
25,869
Consumer Non Durables (0.1%)
340 Corning Deleware(L.P.) $3.00 cv. pfd. 25,840
Consumer Services (0.1%)
220 Service Corp. $3.125 cv. pfd. 25,218
Food and Beverages (0.1%)
276 Chiquita Brands International, Inc. Ser. B, $3.75 16,146
cv. pfd.
Insurance and Finance
(1.1%)
285 Ahmanson (H.F.) & Co. $3.00 cv. pfd. 22,515
251 American Bankers Insurance Group, Inc. Ser. B, 15,782
$3.125 cv. pfd.
575 American General Delaware Corp. $3.00 cv. pfd. 33,566
160 Devon Financing Trust $3.25 cv. pfd. 10,200
452 Finova Finance Trust $2.75 cv. pfd. 24,069
700 Matewan Bancshares, Inc. Ser. A, $3.75 cv. pfd. 16,975
385 Penncorp Financial Group, Inc. 144A $3.50 cv.pfd. 22,426
120 Roosevelt Financial Group $3.25 cv. pfd. 10,230
340 St. Paul Capital LLC $3.00 cv. pfd. 20,910
400 Timet Capital Trust I 144A $3.3125 cv. pfd. 18,800
195,473
Metals and Mining (0.2%)
285 Amax Gold, Inc. Ser. B, $3.75 cv. pfd. 14,784
950 Freeport-McMoRan Copper Co., Inc. $1.25 cv. pfd. 25,650
($1.75)
40,434
Oil and Gas (0.6%)
360 Neuvo Energy Ser. A, $2.875 cv. pfd. 16,425
435 Occidental Petroleum Corp. 144A $3.875 cv. pfd. 23,816
360 Tejas Gas Corp. $2.65 cv. pfd. 19,260
380 Tosco Financing Trust 144A $2.875 cv. pfd. 20,995
500 Unocal Capital Trust $3.125 cv. pfd. 28,125
108,621
Real Estate (0.1%)
430 Insignia Financial Group, Inc. 144A $3.25 cv. pfd. 19,135
Retail (0.3%)
350 Ann Taylor Finance Trust $4.25 cv. pfd. 23,713
465 Kmart Financing I $3.875 cv. pfd. 26,796
50,509
Telecommunications (0.2%)
600 Airtouch Communications, Inc. Ser. C, $2.125 cv. 27,300
pfd.
Total Convertible Preferred Stocks (cost $660,470) 647,347
Foreign Government Bonds and Notes (1.3%)
(a)
PRINCIPAL VALUE
AMOUNT
Bank of Foreign Economic Affairs of Russia
USD (Vnesheconombank) principal loan 144A 8s, 2020 $
305,000 (NON)(WIS)(PIK) 178,806
USD Morocco (Government of) bonds Ser. A, 6.375s, 2009 35,150
40,000
ZAR South Africa (Republic of) bonds Ser. 153, 13s, 9,980
50,000 2010
Total Foreign Government Bonds and Notes (cost 223,936
$219,478)
Common Stocks (0.2%) (a)
NUMBER OF VALUE
UNITS
15 Advanced Radio Telecommunications units 14s, 2007
15,900
5 Anvil Holdings 144A units 13s, 2009 (PIK) 4,925
200 Colt Telecommunications Group PLC units stepped- 117,000
coupon zero % (12s, 12/15/01), 2006(United Kingdom)
(STP)
25 Esat Holdings Ltd. 144A units stepped-coupon zero % 14,000
(12 1/2s, 2/1/02), 2007(Ireland) (STP)
110 Globalstar L.P. Capital units 11 3/8s, 2004 108,900
20 McCaw International Ltd. 144A units stepped-coupon 9,800
zero % (13s, 4/15/02), 2007 (STP)
50 Nextlink Communications 144A pfd. units zero % 2,350
(.14s,), 2009 (PIK)(STP)
50,000 Winstar Communications, Inc. 144A sr. disc. notes 26,000
stepped-coupon zero % (14s, 10/15/00), 2005 (STP)
Total Units (cost $331,486) 298,875
Common Stocks (0.2%) (a)
NUMBER OF VALUE
SHARES
27,272 Capstar Broadcasting Partners (NON)
29,999
316 Catellus Development Corp. (NON) 4,661
Total Common Stocks (cost $34,711) 34,660
Warrants (0%) (a)
NUMBER OF VALUE
WARRANTS
Expiration
Date
25 Hyperion Telecommunications 144A 750
4/15/01
20 Spanish Broadcasting Systems 144A 2,200
6/30/99
Total Warrants (cost $2,700) 2,950
Short-Term Investments (8.0%) (a)
PRINCIPAL VALUE
AMOUNT
MXP Mexican Treasury Bill zero %, April 2, 1998 $
57,529 59,760
Interest in $473,073,000 joint repurchase agreement
1,367,000 dated April 30, 1997 with Merrill Lynch
due May 1, 1997 with respect to various U.S.
Treasury obligations -- maturity value of
$1,367,205
for an effective yeild of 5.40%.
1,367,20
5
Total Short-Term Investments (cost $1,426,965) 1,426,96
5
total Investments (cost $17,777,461) (b) 17,395,33
6
FOOTNOTES
NOTES
(a) Percentages indicated are based
on net assets of $17,762,038.
(b) The aggregate identified cost on
a tax basis is
$17,777,461, resulting in gross
unrealized appreciation and
depreciation of $130,645 and
$512,770, respectively,
or net unrealized depreciation
of $382,125.
(NON) Non-income-producing security.
(STP) 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.
(PIK) Income may be received in cash
or additional securities at the
discretion of the issuer.
(WIS) When-issued securities (Note 1).
The coupon rate will be LIBOR
plus 13/16.
(BRA) Brady bonds are foreign bonds
collateralized by the U.S.
Government.
The rates are floating and are
the current rates at April 30,
1997.
144A after the name of a
security represents a security
purchased in a transaction
exempt from registration under
Rule 144A of the Securities Act
of 1933. These securities may be
resold only in transactions
exempt from registration,
normally to qualified
institutional buyers.
The accompanying notes are an
integral part of these financial
statements.
Putnam High Yield Total Return
Statement of assets and liabilities
April 30,1997 (Unaudited)
Assets
Investments in securities, at value
(identified cost $17,777,461) (Note 1) $17,395,33
6
Cash 107,295
Dividends, interest and other receivables 291,423
Receivable for shares of the fund sold 445,849
Receivable for securities sold 253,143
Receivable from Manager (Note 2) 33,864
Unamortized organization expenses (Note 1) 80,672
Total assets 18,607,582
Liabilities
Payable for securities purchased 693,696
Payable for investor servicing and custodian fees 9,942
(Note 2)
Payable for compensation of Trustees (Note 2) 4,000
Payable for administrative services (Note 2) 1,333
Payable for distribution fees (Note 2) 8,228
Payable for organization expenses (Note 1) 80,943
Other accrued expenses 45,893
Total liabilities 844,035
Net assets $17,763,54
7
Represented by
Paid-in capital (Notes 1 and 4) $18,071,79
5
Undistributed net investment income (Note 1) 111,334
Accumulated net realized loss on investments (37,457)
(Note 1)
Net unrealized depreciation of investments (382,125)
Total - Representing net assets applicable to
capital shares outstanding $17,763,54
7
Computation of net asset value and offering price
Net asset value and redemption price per class A
share
($7,816,161 divided by 936,769 shares) $8.34
Offering price per class A share (100/95.25 of $8.76
$8.34)*
Net asset value and offering price per class B
share
($8,901,350 divided by 1,068,486 shares)** $8.33
Net asset value and redemption price per class M
share
($1,044,527 divided by 125,260 shares) $8.34
Offering price per class M share (100/96.75 of $8.62
$8.34)*
* On single 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.
Putnam High Yield Total Return
Statement of operations
Period January 2, 1997 (commencement of
operations) to
April 30,1997 (Unaudited)
Investment income:
Interest $233,411
Dividends 18,004
Total investment income 251,415
Expenses:
Compensation of Manager (Note 2) 23,481
Investor servicing and custodian fees (Note 2) 19,408
Compensation of Trustees (Note 2) 4,000
Administrative services (Note 2) 1,333
Distribution fees -- Class A (Note 2) 3,185
Distribution fees -- Class B (Note 2) 15,015
Distribution fees -- Class M (Note 2) 775
Amortization of organization expenses (Note 1) 271
Reports to shareholders 6,333
Registration fees 5,456
Auditing 22,867
Legal 2,667
Postage 7,336
Other 1,703
Fees waived by Manager (Note 2) (57,345)
Total expenses 56,485
Expense reduction (Note 2) (13,079)
Net expenses 43,406
Net investment income 208,009
Net realized loss on investments (Notes 1 and 3) (37,457)
Net unrealized depreciation of investments during (382,125
the period )
Net loss on investments (419,582)
Net decrease in net assets resulting from $(211,57
operations 3)
The accompanying notes are an integral part of these financial
statements.
Putnam High Yield Total Return
Statement of changes in net assets For the
period
January 2,
1997
(commencement
of
operation) to
April 30,
1997*
Decrease in net assets
Operations:
Net investment income $208,009
Net realized loss on investments (37,457)
Net unrealized depreciation of investments (382,125)
Net decrease in assets resulting from operations (211,573)
Distributions to shareholders:
From net investment income
Class A (46,942)
Class B (44,326)
Class M (5,407)
Increase from capital share transactions (Note 4) 18,068,795
Total increase in net assets 17,760,547
Net Assets
Beginning of period 3,000
End of period (including undistributed net investment
income $17,763,54
of $109,825) 7
*Unaudited
The accompanying notes are an integral part of
these financial statements.
Putnam High Yield Total Return Fund
Financial highlights
(For a share outstanding throughout the period)
CLASS A
For the period
January 2, 1997+
Per share to April 30
operating performance (unaudited)
----------------
1997
----------------
Net asset value, beginning of period $8.50
Investment operations:
Net investment income .20(c)
Net realized and unrealized loss on investments (.29)
Total from investment operations (.09)
Less distributions:
From net investment income (.07)
Net realized gain on investments --
Total distributions (.07)
Net asset value, end of period $8.34
Total investment return at net asset value (%)(a) (1.10)*
Net assets, end of period (in thousands) $7,817
Ratio of expenses to average net assets (%)(b) .50*
Ratio of net investment income to average
net assets (%) 2.41*
Portfolio turnover (%) 38.59*
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and
does not
reflect the effect of sales charges.
(b) The ratio of expenses to average net assets include amounts paid through
brokerage service and expense offset arrangements. (Note 2)
(c) Per share net investment loss has been determined on the basis
of weighted average number of shares outstanding during the
period.
Putnam High Yield Total Return Fund
Financial highlights
(For a share outstanding throughout the period)
CLASS B
For the period
January 2, 1997+
Per share to April 30
operating performance (unaudited)
----------------
1997
----------------
Net asset value, beginning of period
$8.50
Investment operations:
Net investment income .18(c)
Net realized and unrealized loss on investments (.29)
Total from investment operations (.11)
Less distributions:
From net investment income (.06)
Net realized gain on investments --
Total distributions (.06)
Net asset value, end of period $8.33
Total investment return at net asset value (%)(a) (1.35)*
Net assets, end of period (in thousands) $8,902
Ratio of expenses to average net assets (%)(b) .75*
Ratio of net investment income to average
net assets (%) 2.21*
Portfolio turnover (%) 38.59*
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and
does not
reflect the effect of sales charges.
(b) The ratio of expenses to average net assets include amounts paid through
brokerage service and expense offset arrangements. (Note 2)
(c) Per share net investment loss has been determined on the basis
of weighted average number of shares outstanding during the
period.
Putnam High Yield Total Return Fund
Financial highlights
(For a share outstanding throughout the period)
CLASS M
For the period
January 2, 1997+
Per share to April 30
operating performance (unaudited)
----------------
1997
----------------
Net asset value, beginning of period $8.50
Investment operations:
Net investment income .19(c)
Net realized and unrealized loss on investments (.29)
Total from investment operations (.10)
Less distributions:
From net investment income (.06)
Net realized gain on investments --
Total distributions (.06)
Net asset value, end of period $8.34
Total investment return at net asset value (%)(a) (1.15)*
Net assets, end of period (in thousands) $1,045
Ratio of expenses to average net assets (%)(b) .58*
Ratio of net investment income to average
net assets (%) 2.39*
Portfolio turnover (%) 38.59*
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and
does not
reflect the effect of sales charges.
(b) The ratio of expenses to average net assets include amounts paid through
brokerage service and expense offset arrangements. (Note 2)
(c) Per share net investment loss has been determined on the basis
of weighted average number of shares outstanding during the
period.
Putnam High Yield Total Return Fund
Notes to
financial statements
April 30, 1997 (Unaudited)
Note 1
Significant
accounting
policies
Putnam High Yield Total Return Fund (the "fund") is registered
under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The fund
seeks total return through high current income and capital
appreciation by investing primarily in high-yielding, lower-rated
fixed-income securities.
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 are stated at fair value following
procedures approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued
by the Securities and Exchange Commission, the fund may transfer
uninvested cash balances into a joint trading account along with
the cash of other registered investment companies and certain
other accounts managed by Putnam 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, 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) Federal taxes It is the policy of the fund to distribute all
of its taxable income within the prescribed time and otherwise
comply with the provisions of the Internal Revenue Code
applicable to regulated investment companies. It is also the
intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal
Revenue Code of 1986, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on
income and capital gains.
F) Distributions to shareholders Distributions to shareholders
from net investment income are recorded by the fund on the ex-
dividend date. Capital gain distributions, if any, are recorded
on the ex-dividend date and paid at least annually. The amount
and character of income and gains to be distributed are
determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution (or
available capital loss carryovers) under income tax regulations.
G) 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 $80,943. These
expenses are being amortized on projected net asset levels over
a five-year period.
Note 2
Management fee,
administrative services,
and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net
assets of the fund. Such fee is based on the following annual
rates: 0.80% of the first $500 million of the average net assets,
0.70% of the next $500 million, 0.65% of the next $500 million,
0.60% of the next $5 billion, 0.575% of the next $5 billion,
0.555% of the next $5 billion, 0.54% of the next $5 billion,
0.53% of any amount over $21.5 billion.
Putnam Management has agreed to limit its compensation (and, to
the extent necessary, bear other expenses) through June 30, 1997,
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 1.25% of the fund's average net assets.
The fund reimburses Putnam Management for the compensation and
related expenses of certain officers of the fund and their staff
who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the
Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of
Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam
Investor Services, a division of PFTC.
For the period ended April 30, 1997, fund expenses were reduced
by $13,079 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 $650 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 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 covering all Trustees of the Fund who have served as
Trustee for at least five years. Benefits under the 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 Trustee fees in the Statement of
operations for the period ended April 30, 1997. 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%, 0.25% and .050% of the
average net assets attributable to class A, class B and class M
shares respectively.
Note 3
Purchase and sales of securities
During the period ended April 30, 1997, purchases and sales of
investment securities other than U.S. government obligations and
short-term investments aggregated $20,253,306 and $3,911,133,
respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on
securities sold, the cost of securities has been determined on
the identified cost basis.
Note 4
Capital shares
At April 30, 1997, there was an unlimited number of shares of
beneficial interest authorized.
For the period January 2,
1997
(commencement of
operations) to
April 30
1997
Class A Shares Amount
Shares sold 980,136 $8,308,988
Shares issued in connection with 4,596 38,222
reinvestment of distributions
984,732 8,347,210
Shares repurchased (48,081) (406,686)
Net increase 936,651 $7,940,524
For the period January 2,
1997
(commencement of
operations) to
April 30
1997
Class B Shares Amount
Shares sold 1,153,33 $9,781,816
4
Shares issued in connection with 4,514 37,505
reinvestment of distributions
1,157,84 9,819,321
8
Shares repurchased (89,480) (749,928)
Net increase 1,068,36 $9,069,393
8
For the period January 2,
1997
(commencement of
operations) to
April 30
1997
Class M Shares Amount
Shares sold 126,277 $1,068,346
Shares issued in connection with 513 4,266
reinvestment of distributions
126,790 1,072,612
Shares repurchased (1,648) (13,734)
Net increase 125,142 $1,058,878
Note 5
Initial capitalization and offering of shares
The fund was established as a Massachusetts business trust on
January 22, 1996. During the period January 22, 1996 to January
2, 1997, the fund had no operations other than those related to
organizational matters, including the initial capital
contribution of $1,000, $1,000 and $1,000 for class A, class B
and class M, respectively, and $80,943 of initial organizational
expenses, and the issuance of 118 shares for each class to Putnam
Mutual Funds Corp., a wholly-owned subsidiary of Putnam
Investments, Inc.
<PAGE>
Differences between the typeset (printed) prospectus and the
EDGAR filing version.
1. Each interior page of the prospectus includes the
word "prospectus" at the bottom of the page.
2. Pagination is different in printed prospectus.
3. Section headings and subheadings in the printed
prospectus are printed in boldface type with
colored ink.
4. The first page of the printed prospectus contains
an illustration of balanced scales, Putnam's logo.
5. The last page of the printed prospectus contains a
graphic recyclable logo.
<PAGE>
