Putnam
Preferred
Income
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
7-31-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The turbulent markets that prevailed throughout the first half of Putnam
Preferred Income Fund's fiscal 1999 continued to inflict their volatility
during the second half. Despite the ongoing uncertainty, however, your
fund's portfolio of preferred securities was able to continue delivering a
competitive level of current income for the full fiscal year.
Throughout the period, Fund Manager Jeanne Mockard maintained the fund's
focus on securities issued by high-quality companies. She frequently finds
attractive investments in securities of solid companies working their way
out of temporary difficulties. In addition, she looks for securities that
will not be called in for several years. Such call protection helps
maintain the stability she seeks in the flow of current income.
In the following report, Jeanne reviews fiscal 1999 performance and
discusses prospects for the months ahead.
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
September 15, 1999
Report from the Fund Manager
Jeanne L. Mockard
Throughout the fiscal year ended July 31, 1999, shareholders of Putnam
Preferred Income Fund continued to benefit from relative stability of
principal and regular dividend income. During this period, the stock and
bond markets alternately reflected elation and anxiety. Stock prices
plunged and then soared, and the Federal Reserve Board first cut
short-term interest rates and then shifted toward a tightening policy as
the 1999 fiscal year drew to a close. Because preferred stocks are
influenced by trends in both the equity and bond markets, this fund's
performance during the year reflected these trends but with a lower level
of volatility. Preferred stocks rarely make headlines, but they generally
make sense for investors seeking dependability and relative stability.
Furthermore, a properly structured portfolio of quality preferred stocks
can offer highly competitive returns, especially if all the fund's
dividend income qualifies for the dividends-received deduction (DRD).
Total return for 12 months ended 7/31/99
Class A Class M
NAV POP NAV POP
- ----------------------------------------------------------------
0.19% -3.09% -0.07% -2.10%
- ----------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 5.
* PUTNAM PREFERRED INCOME FUND IS BELIEVED TO BE ONE OF A KIND
According to our analysis, this fund is unique with regard to its record
of paying dividends that are 100% eligible for DRD status for federal
income tax purposes. Other, similar mutual funds only promise to make as
much of their dividends as possible qualify for DRD status. Today, after
one of the longest bull markets in history, the size of the preferred
market has been greatly diminished and many investors seeking a
combination of relative stability and income have had to turn to other
investment alternatives.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Electric utilities 29.1%
Finance 13.3
Financial services 12.8
Combined utilities 11.5
Gas pipelines 7.3
Footnote reads:
*Based on net assets as of 7/31/99. Holdings will vary over time.
Call protection and quality issuers have always been our principal focus
in managing this fund. With the help of our extensive research department,
this focus has resulted in a portfolio that is both highly marketable and
difficult to replicate. Another factor contributing to the strength of the
fund's portfolio has been our policy of trying to sell issues a little in
advance of the call date rather than waiting for them to be called, when
competition to reinvest the proceeds is strongest.
The adjustments to your fund's portfolio that we made in the course of the
year emphasize call protection and flexibility. The fund's holdings in
adjustable-rate preferreds (ARPs) were decreased to 10% of total net
assets as of July 31, 1999, from 17% one year ago. Because the coupons on
ARPs are adjusted at intervals (usually every six months), they are most
effective as a defensive strategy because of their relative price
stability. The proceeds from the sale of ARPs were diverted to perpetual
preferreds, which increased to 78% of total net assets in the past 12
months from 73%.
"During difficult market periods, even quality companies in search of capital
may conclude that the price of their common shares is too low to make a new
equity offering advisable. Preferreds offer these companies an opportunity to
raise funds without adding to their debt position."
- -- Jeanne L. Mockard, manager
Putnam Preferred Income Fund
We also diverted some assets to sinking fund preferred stocks, which were
increased to 9% of total assets at July 31, 1999, from 6% at the beginning
of the period. Perpetual preferreds offer the best opportunities when
interest rates are flat to down because they offer a fixed return with no
maturity date. Sinkers also pay a fixed return, but they are retired on a
predetermined schedule, which makes them act somewhat like
intermediate-term bonds.
* FUND SEEKS GOOD COMPANIES IN TEMPORARY DISTRESS
One of the most widely accepted keys to investment success is to target
industries that are temporarily out of favor with investors and then to
seek out companies within that group that offer the best prospects for
recovery. This approach may be even more effective for preferreds than it
is for common stocks. During difficult market periods, even quality
companies in search of capital may conclude that the price of their common
shares is too low to make a new equity offering advisable. Preferreds
offer these companies an opportunity to raise funds without adding to
their debt position because preferred stock is carried on their books as
an equity even though it pays a fixed return.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Merrill Lynch & Co., Inc. Ser. A, $2.25, dep. shs. cum. pfd.
Finance
El Paso Tennessee Pipeline Co. Ser. A, $4.125, cum. pfd.
Gas pipelines
Chase Manhattan Corp. Ser. C, $2.71, cum. pfd.
Banks
Baltimore Gas & Electric Co. Ser. 93, $7.125, cum. pfd.
Combined utilities
Anadarko Petroleum Corp., $5.46, dep. shs. pfd.
Oil and gas
Alabama Power Co., $1.30, cum. pfd.
Electric utilities
Peco Energy, $7.48, cum. pfd.
Electric utilities
Florida Power & Light Co. Ser. U, $6.75, cum. pfd.
Combined utilities
J.P. Morgan & Co., Inc. Ser. H, $3.313, dep. shs. cum. pfd.
Financial services
J.P. Morgan & Co., Inc. Ser. A, $5.00, cum. ARP
Financial services
Footnote reads:
These holdings represent 35.1% of the fund's net assets as of 7/31/99.
Portfolio holdings will vary over time.
El Paso Tennessee Pipeline and Baltimore Gas & Electric Company are two
names that have emerged as portfolio leaders since we bought them. The oil
and gas industry has been undergoing substantial changes in recent years,
and investors tend to flee from uncertainty. However, both of these
companies have benefited from favorable deregulation legislation, and both
operate in regions that we believe offer substantial growth. Both names
are among the top 10 holdings in your fund's portfolio largely as a result
of appreciation. Please bear in mind that although these holdings were
viewed favorably at the end of the period, all holdings are subject to
review and adjustment in accordance with the fund's investment strategy
and will vary in the future.
Two names that climbed into the top 10 list within the past 12 months are
Peco Energy and Chase Manhattan Corp. Like the two companies cited above,
Peco is adapting to the problems and opportunities arising from
deregulation in the utilities industry. New offerings of preferreds in the
utilities industry have been scarce lately and we have been trying to
build up your fund's holdings in this sector for some time. Recently we
were able to move out of Peco ARPs as they were about to be called,
shifting assets into perpetual preferreds with a longer call date.
We have also been adding to the fund's position in Chase Manhattan
throughout the year because we believe in the company's financial strength
and growth potential. In the course of the year, Chase Manhattan's 9.76%
preferreds began to approach their call date, and so we replaced them with
10.84% preferreds, which are callable in 2001, locking in a higher yield
and extending the call date in one move.
* OVERALL MARKET OUTLOOKS ARE POSITIVE
As Putnam Preferred Income Fund entered fiscal 2000, sentiment in the bond
market had reached a low, reflecting widespread speculation that the Fed
would continue a tightening policy begun as the old fiscal year drew to a
close. Our forecast calls for interest rates to remain relatively flat for
at least the next six months because inflation factors remain low. As for
the stock market, high price ratios for many widely held stocks and
continuing speculation about valuations of high tech and Internet stocks
are likely to perpetuate the equity market's recent volatility. Here too,
however, the long-term outlook remains positive.
As for the preferred markets, supply/demand ratios of preferred stocks
continue to work in favor of your fund. Although there can be no
assurance, we believe the marketability of the securities the fund owns
will continue to benefit the corporate shareholders it was designed to
serve, providing relative price stability and a competitive yield.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 7/31/99, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which should
always be considered in light of its investment strategy. Putnam Preferred
Income Fund seeks a high level of income that qualifies for the 70% corporate
dividends-received deduction for federal income-tax purposes. The
dividends-received deduction is not available to non-corporate investors.
TOTAL RETURN FOR PERIODS ENDED 7/31/99
Class A Class M
(inception dates) (1/4/84) (4/20/95)
NAV POP NAV POP
- ------------------------------------------------------------------------
1 year 0.19% -3.09% -0.07% -2.10%
- ------------------------------------------------------------------------
5 years 43.97 39.30 41.24 38.42
Annual average 7.56 6.85 7.15 6.72
- ------------------------------------------------------------------------
10 years 117.79 110.72 110.99 106.77
Annual average 8.09 7.74 7.75 7.53
- ------------------------------------------------------------------------
Life of fund 238.96 227.95 223.85 217.38
Annual average 8.16 7.93 7.84 7.70
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/99
Merrill Lynch
Perpetual Standard &
Preferred Poor's Consumer
Index 500 Index price index
- -------------------------------------------------------------------------
1 year 4.09% 20.20% 2.14%
- -------------------------------------------------------------------------
5 years 49.69 220.68 12.33
Annual average 8.40 26.25 2.35
- -------------------------------------------------------------------------
10 years 135.89 396.64 34.00
Annual average 8.96 17.39 2.97
- -------------------------------------------------------------------------
Life of fund --* 1,186.61 64.56
Annual average --* 17.82 3.25
- -------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 3.25% and
2.00% respectively. Returns shown for class M shares for periods prior to
their inception are derived from the historical performance of class A
shares, adjusted to reflect both the initial sales charge currently
applicable to each class and in the case of class M shares, the higher
operating expenses applicable to such shares. All returns assume
reinvestment of distributions at NAV. Investment return and principal
value will fluctuate so that an investor's shares when redeemed may be
worth more or less than their original cost.
*The Merrill Lynch Perpetual Preferred Index was introduced on 2/28/89.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 7/31/89
Fund's class A S&P 500 Consumer price
Date shares at POP Index index
7/31/89 9,675 10,000 10,000
7/31/90 9,750 10,650 10,482
7/31/91 11,112 12,009 10,949
7/31/92 12,973 13,545 11,294
7/31/93 14,653 14,727 11,608
7/31/94 14,635 15,487 11,929
7/31/95 15,820 19,531 12,259
7/31/96 16,964 22,767 12,621
7/31/97 19,390 34,637 12,902
7/31/98 21,131 41,317 13,119
7/31/99 $21,072 $49,664 $13,400
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class M shares would have
been valued at $21,099 ($20,677 at public offering price).
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 7/31/99
Class A Class M
- ------------------------------------------------------------------------
Distributions (number) 12 12
- ------------------------------------------------------------------------
Income $0.5873 $0.5574
- ------------------------------------------------------------------------
Return of capital1 0.0027 0.0026
- ------------------------------------------------------------------------
Capital gains -- --
- ------------------------------------------------------------------------
Total $0.5900 $0.5600
- ------------------------------------------------------------------------
Share value: NAV POP NAV POP
- ------------------------------------------------------------------------
7/31/98 $9.16 $9.47 $9.13 $9.32
- ------------------------------------------------------------------------
7/31/99 8.59 8.88 8.56 8.73
- ------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------
Current dividend rate2 6.52% 6.31% 6.22% 6.09%
- ------------------------------------------------------------------------
Taxable equivalent4 8.98 8.69 8.56 8.39
- ------------------------------------------------------------------------
Current 30-day SEC yield3 6.11 5.82 5.86 5.67
- ------------------------------------------------------------------------
Taxable equivalent4 8.41 8.01 8.07 7.81
- ------------------------------------------------------------------------
1 See page 24 for more information.
2 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3 Based only on investment income, calculated using SEC guidelines.
4 The taxable equivalent examples in this table show the return that a
corporation taxed at the 35% Federal corporate tax rate would have to earn
from a non tax-advantaged investment to produce an after-tax return equal
to that of the fund's, assuming 100% of distributions qualify for the
dividend-received deduction.
TOTAL RETURN FOR PERIODS ENDED 6/30/99 (most recent calendar quarter)
Class A Class M
(inception dates) (1/4/84) (4/20/95)
NAV POP NAV POP
- -------------------------------------------------------------------------
1 year 0.07% -3.20% -0.07% -2.10%
- -------------------------------------------------------------------------
5 years 45.66 40.93 43.06 40.20
Annual average 7.81 7.10 7.42 6.99
- -------------------------------------------------------------------------
10 years 120.77 113.59 114.15 109.85
Annual average 8.24 7.88 7.91 7.69
- -------------------------------------------------------------------------
Life of fund 238.27 227.29 223.66 217.19
Annual average 8.19 7.95 7.88 7.74
- -------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns and principal value will fluctuate so that an investor's shares
when sold may be worth more or less than their original cost. See first
page of performance section for performance calculation method.
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 3.25% maximum sales charge for class A
shares and 2.00% for class M shares.
Comparative benchmarks
Merrill Lynch Perpetual Preferred Index* is an unmanaged list of perpetual
preferred stocks that is commonly used as a general measure of performance
for the preferred-stock market.
Standard & Poor's 500 Index* is an unmanaged list of common stocks that is
frequently used as a general measure of stockmarket performance.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
A guide to the financial statements
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values as
of the last day of the reporting period. Holdings are organized by asset
type and industry sector, country, or state to show areas of concentration
and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price is determined. All investment and non-investment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for
the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that remain
in the portfolio -- any change in unrealized gains or losses over the
period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of
the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed here
may not match the sources listed in the Statement of operations because
the distributions are determined on a tax basis and may be paid in a
different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also
includes the current reporting period. For open-ended funds, a separate
table is provided for each share class.
Report of independent accountants
For the fiscal year ended July 31, 1999
To the Trustees and Shareholders of
Putnam Preferred Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly,
in all material respects, the financial position of Putnam Preferred
Income Fund (the "fund") at July 31, 1999, and the results of its
operations, the changes in its net assets and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at July 31, 1999 by correspondence with
the custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 14, 1999
<TABLE>
<CAPTION>
The fund's portfolio
July 31, 1999
PREFERRED STOCKS (97.2%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Automobiles (3.5%)
- --------------------------------------------------------------------------------------------------------------------------
40,600 Ford Motor Co. Ser. B, $2.063, dep. shs.
cum. preferred (pfd.) $ 1,146,950
109,000 General Motors Corp. Ser. G, $2.28, dep.
shs. cum. pfd. 3,011,125
--------------
4,158,075
Banks (6.5%)
- --------------------------------------------------------------------------------------------------------------------------
186,500 Chase Manhattan Corp. Ser. C, $2.71, cum. pfd. 5,361,875
79,866 Fleet Financial Group, Inc. Ser. E, $2.338, dep.
shs. cum. pfd. 2,096,483
15,000 Indosuez Holdings ADS 144A $2.594, pfd. (Mexico) 408,750
--------------
7,867,108
Chemicals (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
12,750 du Pont (E.I.) de Nemours & Co., Ltd. Ser. B,
$4.50, cum. pfd. 949,875
10,000 du Pont (E.I.) de Nemours & Co., Ltd. Ser. A,
$3.50, cum. pfd. 730,000
7,500 Praxair, Inc. Ser. B, $6.75, cum. pfd. 791,250
--------------
2,471,125
Combined Utilities (11.5%)
- --------------------------------------------------------------------------------------------------------------------------
40,000 Baltimore Gas & Electric Co. Ser. 93, $7.125, cum. pfd. 4,230,000
15,000 Baltimore Gas & Electric Co. Ser. 95, $6.99, cum. pfd. 1,612,500
31,200 Florida Power & Light Co. Ser. U, $6.75, cum. pfd. 3,322,800
9,000 Jersey Central Power & Light Co. Ser. E, $7.88,
cum. pfd. 891,000
76,000 Pacific Gas & Electric Co. Ser. U, $1.76, cum. pfd. 2,052,000
20,000 Pacific Gas & Electric Co. $1.643, cum. pfd. 520,000
11,750 Public Service Electric & Gas Co. $6.92, cum. pfd. 1,273,406
--------------
13,901,706
Computer Software (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
28,545 IBM Corp. Ser. A, $1.875, dep. shs. cum. pfd. 770,715
Consumer Services (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
99,373 AMERCO Ser. A, $2.125, cum. pfd. 2,534,012
Electric Utilities (29.1%)
- --------------------------------------------------------------------------------------------------------------------------
156,100 Alabama Power Co. $1.30, cum. pfd. 3,648,838
5,000 Atlantic City Electric Co. $7.80, cum. pfd. 533,500
20,000 Central Maine Power Co. Ser. A, Sinking Fund
$7.999, cum. pfd. 1,965,000
5,416 Duke Energy Corp. Ser. Y, $7.04, cum. pfd. 570,711
2,900 Entergy Mississippi, Inc. $4.92, cum. pfd. 252,300
18,021 Florida Power & Light Co. Ser. S, $6.98, cum. pfd. 1,932,752
14,000 Indianapolis Power & Light $5.65, cum. pfd. 1,421,000
7,000 Kentucky Utilities Co. $6.53, cum. pfd. 743,750
3,000 Monongahela Power Co. Ser. L, $7.73, cum. pfd. 331,125
50,000 Niagara Mohawk Power Corp. $2.375, cum. pfd. 1,262,500
40,000 Niagara Mohawk Power Corp. Ser. C, $1.75, cum.
Adjustable Rate Preferred (ARP) 995,000
39,800 Niagara Mohawk Power Corp. Ser. A, $1.625,
cum. ARP 990,025
49,000 Northern Indiana Public Services Ser. A, $3.00,
cum. ARP 2,358,272
25,800 Pacificorp Sinking Fund $7.70, cum. pfd. 2,692,872
8,700 Pacificorp Sinking Fund $7.48, cum. pfd. 942,863
30,000 Peco Energy $7.48, cum. pfd. 3,345,000
15,000 Portland General Electric Sinking Fund $7.75,
cum. pfd. 1,713,750
5,000 Potomac Electric Power Co. Ser. 92, $1.70, cum. pfd. 262,500
10,000 PP & L, Inc. Sinking Fund $6.33, cum. pfd. 987,500
10,000 PP & L, Inc. Sinking Fund $6.125, cum. pfd. 987,500
12,500 Southern California Edison Co. Sinking Fund $6.45,
cum. pfd. 1,234,375
22,500 Southern California Edison Co. $6.05, cum. pfd. 2,227,500
60,000 Texas Utilities Electric Co. Ser. A, $1.875, dep. shs.
cum. pfd. 1,507,500
50,000 Texas Utilities Electric Co. Ser. B, $1.805, dep. shs.
cum. pfd. 1,212,500
5,200 UGI Utilities $7.75, cum. pfd. 595,400
3,700 Virginia Electric & Power Co. $7.05, cum. pfd. 396,825
--------------
35,110,858
Finance (13.3%)
- --------------------------------------------------------------------------------------------------------------------------
39,500 Bear Stearns Companies Inc. Ser. E, $3.075, cum. pfd. 1,900,938
30,000 Bear Stearns Companies Inc. Ser. F, $2.86, cum. pfd. 1,342,500
10,000 Bear Stearns & Co. Ser. A, $2.75, cum. ARP 488,750
32,600 Bear Stearns Companies Inc. Ser. G, $2.745, cum. pfd. 1,401,800
15,200 MBNA Corp. Ser. A, $1.875, cum. pfd. 383,800
65,000 MBNA Corp. Ser. B, $1.387, cum. ARP 1,625,000
204,437 Merrill Lynch & Co., Inc. Ser. A, $2.25, dep. shs.
cum. pfd. 6,286,438
50,150 Morgan Stanley $3.875, dep. shs. cum. pfd. 2,582,725
--------------
16,011,951
Financial Services (12.8%)
- --------------------------------------------------------------------------------------------------------------------------
50,000 Citigroup, Inc. Ser. R, $3.183, dep. shs. cum. pfd. 2,537,500
16,000 Citigroup, Inc. Ser. M, $2.932, dep. shs. cum. pfd. 768,000
35,000 Citigroup, Inc. Ser. K, $2.10, dep. shs. cum. pfd. 927,500
10,000 Donaldson, Lufkin & Jenrette, Inc. Ser. B, 2.65, cum. 492,500
65,850 Household International, Inc. Ser. 92-A, $2.063,
dep. shs. cum. pfd. 1,794,413
33,259 J.P. Morgan & Co., Inc. Ser. A, $5.00, cum. ARP 3,014,097
62,200 J.P. Morgan & Co., Inc. Ser. H, $3.313, dep. shs.
cum. pfd. 3,234,400
20,000 Lehman Brothers Holding, Inc. Ser. C, $2.97, pfd. 880,000
41,500 Lehman Brothers Holding, Inc. Ser. D, $2.835,
dep. shs. pfd. 1,732,625
--------------
15,381,035
Gas Pipelines (7.3%)
- --------------------------------------------------------------------------------------------------------------------------
116,500 El Paso Tennessee Pipeline Co. Ser. A, $4.125,
cum. pfd. 6,087,125
110,000 Enserch Corp. F, $1.129 dep. shs. cum. ARP 2,722,500
--------------
8,809,625
Gas Utilities (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
65,000 Boston Gas Ser. A, $1.605, cum. pfd. 1,763,125
Metals and Mining (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
11,050 Alcoa, Inc. $3.75, cum. pfd. 835,656
Natural Gas (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
31,700 Puget Sound Energy Ser. II, $1.863, cum. pfd. 816,275
Oil and Gas (5.5%)
- --------------------------------------------------------------------------------------------------------------------------
41,000 Anadarko Petroleum Corp. $5.46, dep. shs. pfd. 3,720,750
10,000 Apache Corp. Ser. B, $5.68, cum. pfd. 915,000
20,000 Pennzenergy Co. Ser. A, $6.49, cum. pfd. 1,970,000
--------------
6,605,750
--------------
Total Preferred Stocks (cost $119,695,999) $ 117,037,016
CONVERTIBLE PREFERRED STOCKS (2.2%) (a) (cost $3,035,745)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
92,500 Lehman Brothers Holding, Inc. Ser. B, 5.00%, cv. pfd. $ 2,717,188
SHORT-TERM INVESTMENTS (0.7%) (a) (cost $798,000)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$798,000 Interest in $365,427,000 joint repurchase agreement
dated July 30, 1999 with Credit Suisse First Boston
due August 2, 1999 with respect to various U.S.
Treasury obligations -- maturity value of $798,335
for an effective yield of 5.04% $ 798,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $123,529,744) (b) $ 120,552,204
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $120,448,538.
(b) The aggregate identified cost on a tax basis is $123,530,806, resulting in gross unrealized appreciation and
depreciation of $2,026,804 and $5,005,406, respectively, or net unrealized depreciation of $2,978,602.
144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional
buyers.
ADS after the name of a foreign holding stands for American Depositary Shares representing ownership of foreign
securities on deposit with a domestic custodian bank.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
July 31, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $123,529,744) (Note 1) $120,552,204
- -----------------------------------------------------------------------------------------------
Cash 73
- -----------------------------------------------------------------------------------------------
Dividends, interest and other receivables 405,862
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 99,801
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 1,542,600
- -----------------------------------------------------------------------------------------------
Total assets 122,600,540
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 182,579
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 533,500
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,213,032
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 134,290
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 26,575
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 11,209
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,162
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 2,286
- -----------------------------------------------------------------------------------------------
Other accrued expenses 46,369
- -----------------------------------------------------------------------------------------------
Total liabilities 2,152,002
- -----------------------------------------------------------------------------------------------
Net assets $120,448,538
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $125,728,942
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (182,579)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (2,120,285)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (2,977,540)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $120,448,538
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($109,932,332 divided by 12,804,320 shares) $8.59
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/96.75 of $8.59)* $8.88
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($10,516,206 divided by 1,228,426 shares) $8.56
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/98.00 of $8.56)* $8.73
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $100,000. On sales of $100,000 or more and group
sales, the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended July 31, 1999
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $5,391) $ 8,794,176
- -----------------------------------------------------------------------------------------------
Interest 102,225
- -----------------------------------------------------------------------------------------------
Total investment income 8,896,401
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 857,231
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 193,802
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 10,377
- -----------------------------------------------------------------------------------------------
Administrative services 6,341
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 29,917
- -----------------------------------------------------------------------------------------------
Reports to shareholders 27,446
- -----------------------------------------------------------------------------------------------
Auditing 34,897
- -----------------------------------------------------------------------------------------------
Legal 7,009
- -----------------------------------------------------------------------------------------------
Postage 4,416
- -----------------------------------------------------------------------------------------------
Other 14,902
- -----------------------------------------------------------------------------------------------
Total expenses 1,186,338
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (24,912)
- -----------------------------------------------------------------------------------------------
Net expenses 1,161,426
- -----------------------------------------------------------------------------------------------
Net investment income 7,734,975
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 373,548
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (8,046,069)
- -----------------------------------------------------------------------------------------------
Net loss on investments (7,672,521)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 62,454
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended Eight months ended Year ended
July 31 July 31 November 30
1999 1998** 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 7,734,975 $ 5,406,278 $ 7,651,598
- ----------------------------------------------------------------------------------------------------------------
Net realized gain on investments 373,548 2,926,691 461,151
- ----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments (8,046,069) (733,122) 3,522,848
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 62,454 7,599,847 11,635,597
- ----------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------
From net investment income
Class A (7,107,667) (4,964,211) (7,391,392)
- ----------------------------------------------------------------------------------------------------------------
Class M (683,686) (389,706) (411,702)
- ----------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A (650,386) -- --
- ----------------------------------------------------------------------------------------------------------------
Class M (62,561) -- --
- ----------------------------------------------------------------------------------------------------------------
From return of capital
Class A (36,261) -- --
- ----------------------------------------------------------------------------------------------------------------
Class M (3,488) -- --
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) from
capital share transactions (Note 4) (7,803,543) 10,598,303 (2,778,276)
- ----------------------------------------------------------------------------------------------------------------
Total increase (decrease)
in net assets (16,285,138) 12,844,233 1,054,227
Net assets
- ----------------------------------------------------------------------------------------------------------------
Beginning of year 136,733,676 123,889,443 122,835,216
- ----------------------------------------------------------------------------------------------------------------
End of year (including distributions
in excess of net investment
income of $182,579, $163,994 and
$216,355, respectively) $120,448,538 $136,733,676 $123,889,443
- ----------------------------------------------------------------------------------------------------------------
** The fiscal year end was advanced from November 30 to July 31.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights **
(For a share outstanding throughout the period)
CLASS A
- --------------------------------------------------------------------------------------------------------------------------------
Eight months
Per-share Year ended ended
operating performance July 31 July 31+ Year ended November 30
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.16 $9.00 $8.71 $8.59 $7.88 $8.81
- --------------------------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income .53 .38 .56 .58 .57 .56
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.51) .16 .30 .12 .73 (.93)
- --------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .02 .54 .86 .70 1.30 (.37)
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.54) (.38) (.57) (.58) (.59) (.56)
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.05) -- -- --(c) -- --
- --------------------------------------------------------------------------------------------------------------------------------
From return
of capital --(c) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (.59) (.38) (.57) (.58) (.59) (.56)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.59 $9.16 $9.00 $8.71 $8.59 $7.88
- --------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 0.19 6.04* 10.22 8.61 17.05 (4.41)
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $109,932 $124,784 $116,413 $117,502 $120,591 $119,822
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .88 .59* .85 .89 .90 .81
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.90 4.13* 6.34 6.90 6.91 6.64
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 30.09 33.51* 20.46 29.51 34.76 32.84
- --------------------------------------------------------------------------------------------------------------------------------
+ The fiscal year end was advanced from November 30 to July 31.
++ Commencement of operations.
* Not annualized.
** The table has been restated to reflect a 5-for-1 share split declared by the fund to shareholders of record on
November 29, 1994.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended November 30, 1995 and thereafter, includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
(c) Distributions in excess of net investment income and return of capital amounted to less than $0.01 per share for each class.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights **
(For a share outstanding throughout the period)
CLASS M
- --------------------------------------------------------------------------------------------------------------------------------
Eight months For the period
Per-share Year ended ended Year ended Apr. 20, 1995++
operating performance July 31 July 31+ November 30 to Nov. 30
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.13 $8.97 $8.69 $8.58 $8.12
- --------------------------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income .50 .37 .54 .56 .33
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.51) .15 .29 .11 .46
- --------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.01) .52 .83 .67 .79
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.51) (.36) (.55) (.56) (.33)
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.05) -- -- --(c) --
- --------------------------------------------------------------------------------------------------------------------------------
From return
of capital --(c) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (.56) (.36) (.55) (.56) (.33)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.56 $9.13 $8.97 $8.69 $8.58
- --------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (0.07) 5.89* 9.85 8.22 9.88*
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $10,516 $11,950 $7,477 $5,333 $729
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.13 .76* 1.10 1.14 .67*
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.60 3.88* 6.01 6.41 3.73*
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 30.09 33.51* 20.46 29.51 34.76
- --------------------------------------------------------------------------------------------------------------------------------
+ The fiscal year end was advanced from November 30 to July 31.
++ Commencement of operations.
* Not annualized.
** The table has been restated to reflect a 5-for-1 share split declared by the fund to shareholders of record on
November 29, 1994.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended November 30, 1995 and thereafter, includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
(c) Distributions in excess of net investment income and return of capital amounted to less than $0.01 per share for each class.
</TABLE>
Notes to financial statements
July 31, 1999
Note 1
Significant accounting policies
Putnam Preferred Income 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 high after-tax income for
corporate shareholders and current income for all investors with minimum
fluctuations in principal.
The fund offers both class A and class M shares. Class A shares are sold
with a maximum front-end sales charge of 3.25%. Class M shares are sold
with a maximum front-end sales charge of 2.00% and pay an ongoing
distribution fee.
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 fee 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 that 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.
Preferred stocks, for which reliable market quotations are not readily
available, are stated at fair value on the basis of valuations furnished
by pricing services approved by the Trustees, which determine valuation
for normal, institutional-sized trading units of such securities using
methods based on market transactions for comparable securities and various
relationships between securities that are generally recognized by
institutional traders. Short-term investments having remaining maturities
of 60 days or less are stated at amortized cost, which approximates market
value. 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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. 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). Gains or losses on securities sold are determined on
the identified cost basis.
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.
E) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended July
31, 1999, the fund had no borrowings against the line of credit.
F) 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.
At July 31, 1999, the fund had a capital loss carryover of approximately
$1,741,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------- -------------
$ 208,000 July 31, 2002
1,533,000 July 31, 2003
G) Distributions to shareholders The fund declares a distribution each day
based upon the projected net investment income, for a specified period,
calculated as if earned prorata throughout the period on a daily basis.
Such distributions are recorded daily and paid monthly. Capital gain
distributions, if any, are recorded on the ex-dividend date and paid at
least annually. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
differences include temporary and permanent differences of losses on wash
sale transactions, post-October loss deferrals, the expiration of a
capital loss carryover and distributions in excess of ordinary income.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended July 31,
1999, the fund reclassified $750,740 to decrease distributions in excess
of net investment income and $5,270,936 to decrease paid-in-capital, with
a decrease to accumulated net realized losses of $4,520,196. The
calculation of net investment income per share in the financial highlights
tables excludes these adjustments.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly base on the average net assets of the fund for
the quarter. Such fee is based on the following annual rates: 0.65% of the
first $500 million of average net assets, 0.55% of the next $500 million
of average net assets, 0.50% on the next $500 million, 0.45% of the next
$5 billion, 0.425% of the next $5 billion, 0.405% of the next $5 billion,
0.39% of the next $5 billion, and 0.38% thereafter.
The fund reimburses Putnam Management an allocated amount 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 subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended July 31, 1999, fund expenses were reduced by $24,912
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense-offset arrangements in an income-producing
asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $579 has
been allocated to the fund and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted a distribution plan (the "Plan") with respect to its
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 class M shares of the
fund. The Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to 1.00% of the average net assets attributable
to class M shares. The Trustees have approved payment by the fund to an
annual rate of 0.25% of the average net assets attributable to class M
shares.
For the year ended July 31, 1999, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $35,883 and $4,519 from the sale
of class A and class M shares, respectively. A deferred sales charge of up
to 1% is assessed on certain redemptions of class A shares. For the year
ended July 31, 1999, Putnam Mutual Funds Corp., acting as underwriter,
received no monies on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended July 31, 1999, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $39,134,689 and $46,003,646, respectively. There were no
purchases and sales of U.S. government obligations.
Note 4
Capital shares
At July 31, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended July 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,069,307 $27,301,650
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 589,123 5,222,099
- -----------------------------------------------------------------------------
3,658,430 32,523,749
Shares
repurchased (4,481,328) (39,663,072)
- -----------------------------------------------------------------------------
Net decrease (822,898) $(7,139,323)
- -----------------------------------------------------------------------------
Eight months ended July 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,958,836 $17,861,242
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 374,099 3,416,156
- -----------------------------------------------------------------------------
2,332,935 21,277,398
Shares
repurchased (1,644,331) (15,007,112)
- -----------------------------------------------------------------------------
Net increase 688,604 $ 6,270,286
- -----------------------------------------------------------------------------
Year ended November 30, 1997
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 2,175,906 $19,266,739
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 561,520 4,960,386
- -----------------------------------------------------------------------------
2,737,426 24,227,125
Shares
repurchased (3,283,503) (28,924,047)
- -----------------------------------------------------------------------------
Net decrease (546,077) $(4,696,922)
- -----------------------------------------------------------------------------
Year ended July 31, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 520,897 $4,605,090
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 66,455 587,010
- -----------------------------------------------------------------------------
587,352 5,192,100
Shares
repurchased (667,458) (5,856,320)
- -----------------------------------------------------------------------------
Net decrease (80,106) $(664,220)
- -----------------------------------------------------------------------------
Eight months ended July 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 618,587 $5,631,081
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 35,190 320,568
- -----------------------------------------------------------------------------
653,777 5,951,649
Shares
repurchased (178,343) (1,623,632)
- -----------------------------------------------------------------------------
Net increase 475,434 $4,328,017
- -----------------------------------------------------------------------------
Year ended November 30, 1997
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 496,220 $4,370,534
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 38,069 336,218
- -----------------------------------------------------------------------------
534,289 4,706,752
Shares
repurchased (314,630) (2,788,106)
- -----------------------------------------------------------------------------
Net increase 219,659 $1,918,646
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 100% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
For the year ended 1999, a portion of the Fund's distribution represents a
return of capital and is therefore not taxable to shareholders.
The Form 1099 you receive in January 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
Fund information
WEB SITE
www.putnaminv.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Thomas V. Reilly
Vice President
Anthony Kreisel
Vice President
Jeanne L. Mockard
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
This report is for the information of shareholders of Putnam Preferred
Income Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For more
information or to request a prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site: www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
AN037-54563 029/295/867 9/99
