Putnam
Federal
Income
Trust
[Artwork]
ANNUAL REPORT
October 31, 1994
[Putnam Logo]
Boston * London * Tokyo
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PERFORMANCE HIGHLIGHTS
For the year ended October 31, 1994, the fund's class A share total return fi-
nished in the top 40% of all general U.S. government funds tracked by Lipper
Analytical Services. *
The fund's class A share total return of -4.54% at net asset value for the year
ended October 31, 1994, although negative, beat the average total return of
- -5.79% for the 143 general U.S. government funds tracked by Lipper Analytical
Services over the same period. *
Performance should always be considered in light of a fund's investment strate-
gy. Putnam Federal Income Trust is designed for investors seeking high current
income consistent with preservation of capital primarily through U.S. government
securities.
FISCAL 1994 RESULTS AT A GLANCE
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CLASS A CLASS B
Total return: NAV POP NAV CDSC
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(change in value during
period plus reinvested
distributions)
12 months ended 10/31/94 -4.54% -9.05% -- --
Life of class B (since 6/6/94) -- -- -1.42% -6.22%
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SHARE VALUE: NAV POP NAV
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10/31/93 $10.47 $10.99 --
6/6/94 (inception of class B shares) -- -- $9.68
10/31/94 9.32 9.78 9.30
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TAX RETURN
DISTRIBUTIONS NO. INCOME OF CAPITAL ++ TOTAL
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Class A 12 $0.656 $0.03 $0.686
Class B 5 0.233 0.01 0.243
CURRENT RETURN NAV POP NAV
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End of period
Current dividend rate (1) 6.31% 6.01% 5.81%
Current 30-day SEC yield (2) 7.45 7.09 6.65
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Performance data represent past results and will differ for each share class.
For performance over longer periods, see pages 8 and 9. POP assumes 4.75% maxi-
mum sales charge. CDSC assumes 5% maximum contingent deferred sales charge.
(1) Income portion of most recent distribution, annualized and divided by NAV or
POP at end of period. (2) Based only on investment income, calculated using SEC
guidelines.
* Rankings by Lipper, an industry research firm, vary over time and do not in-
clude the effects of sales charges. The firm ranked the fund's class A shares
51 out of 143 and 58 out of 79 General U.S. Government funds for the 1- and
5-year periods, respectively. Past performance is not indicative of future
results.
++ See Federal Tax Information on page 26 for details.
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FROM THE CHAIRMAN [Photograph of George Putnam]
* (C) Karsh, Ottawa
Dear Shareholder:
Putnam Federal Income Trust had hardly begun its 1994 fiscal year when signs
appeared that the sustained rise in the bond market was about to end. Interest
rates, at their lowest point in nearly 20 years, were fueling the economic reco-
very at an unsustainable rate.
Fund Managers Kenneth Taubes and Max Senter began taking defensive action. Had
they not done so, the toll on the fund's results would likely have been greater
in the wake of the Federal Reserve Board's swift and vigorous moves to slow the
pace of growth. Even so, the fund joined most other fixed-income investments in
the decline.
As we have recently seen, the Fed is adamantly sticking to its policy of keeping
inflation in check. The result is likely to be further bond market uncertainty.
This, in turn, could translate into continued price volatility over the next few
months.
Ken and Max have positioned the portfolio with this prospect in mind. In the re-
port that follows, they discuss the fund's fiscal '94 performance and outlook
for fiscal '95 in the context of this investment climate.
Respectfully yours,
George Putnam
Chairman of the Trustees
December 14, 1994
* (C) Copyright
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REPORT FROM THE FUND MANAGERS
KENNETH J. TAUBES, LEAD MANAGER
MAX S. SENTER
After several years of declining interest rates in which bond prices soared,
stronger-than-expected economic growth in the fourth quarter of 1993 brought a
historic multiyear bond market rally to a halt. The Federal Reserve Board, in
responding to the accelerating economy, shifted to a tighter stance on U.S. mo-
netary policy and, in February, initiated the first in a series of increases in
short-term interest rates. The now well-documented effect of those increases on
the bond market, in concert with continuing fears of rising inflation, produced
a difficult environment for all fixed-income funds.
While Putnam Federal Income Trust's performance was disappointing in absolute
terms, on a relative basis, the fund outperformed nearly two-thirds of the com-
petition. We attribute this relative outperformance to maintaining a shorter-
than-normal duration, concentrating maturities in a "barbell" strategy, and in-
creasing the fund's investment in foreign bonds.
LOW DURATION HELPS LIMIT PRICE FLUCTUATION
Falling prices are the natural outcome for fixed-income investments in a rising
interest rate environment. Many securities, especially those on the long end of
the yield curve, have incurred substantial price declines this year. Your fund,
however, took steps to limit the impact of market volatility by maintaining a
relatively short average duration of 4.78 years as of the fiscal year's end.
Duration is the measure of the price sensitivity of a given bond or portfolio of
bonds to changes in interest rates. A shorter duration means lower volatility
when rates go up, and thus, can be instrumental in protecting the portfolio's
value.
BARBELLING TREASURIES FOR GREATER CAPITAL PRESERVATION POTENTIAL
Early in the year, we began placing a stronger emphasis on capital preservation
strategies in addition to the fund's traditional income focus. To this end, we
concentrated the fund's Treasury holdings at both ends of the maturity spectrum
in what is known as a barbell structure.
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Over the fiscal year as a whole, the yield on the 30-year Treasury bond rose by
2.00%, while the yield on the two-year Treasury note rose by 2.83%. The greater
increase for the two-year Treasury illustrates the significant yield curve flat-
tening that occurred as short-term interest rates rose more than long-term ra-
tes.
In such an interest rate environment, intermediate-maturity securities -- those
with maturities of between three and ten years -- typically bear the brunt of
the selling pressure. By implementing a barbelled portfolio structure, we were
able to keep the fund's average maturity in the intermediate range of approxima-
tely eight years, without actually purchasing intermediate-term securities. This
tactic enabled us to further limit the fund's exposure to the damaging effects
of rising rates.
[Bar Chart - Page 5]
PORTFOLIO COMPOSITION*
Government Collateralized Foreign Short-
& agency mortgage Corporate bonds Yankee++ term
obligations obligations bonds and notes bonds investments
10/31/93 70.21% 23.9% 3.0% -- -- 0.8%
10/31/94 63.5 4.3 9.0 20.8% 1.0% 0.1
* Based on percentage of net assets. Holdings may vary in the future.
++ Yankee bonds are dollar-denominated bonds issued in the U.S. by foreign banks
and corporations.
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FOREIGN BONDS ATTRACTIVE IN WAKE OF GLOBAL SELL-OFF
In the wake of the dramatic global bond market sell-off in the first quarter of
calendar 1994, we capitalized on the attractive values that became available
overseas. Since international bonds are influenced by their respective interest
rate and currency dynamics, they provided us with an additional opportunity to
access value outside of the U.S. bond market. By the end of the fiscal year, we
had increased the fund's foreign position to approximately 20% of assets.
We largely restricted the fund's foreign investments to three well-established,
highly liquid markets: Germany, France, and Japan. These countries are running
several quarters behind the United States in their economic cycles and, as a re-
sult, are currently experiencing relatively low growth and inflation rates. The
bonds offer attractive appreciation potential and have been outperforming U.S.
bonds due to the countries. demonstrated monetary resolve, strengthening curren-
cies, and, in the case of Japan, the expectation that economic growth will re-
main relatively slow for some time.
Mortgage-backed securities provide further support. At the end of the fiscal
year, upwards of 40% of the fund was invested in AAA-rated, government-agency
mortgage-backed securities. While the higher-risk collateralized mortgage obli-
gation (CMO) sector of the mortgage-backed market performed poorly during the
fiscal year, your fund's investments were focused on conservative Government Na-
tional Mortgage Association (Ginnie Mae) and other government-agency securities.
These provided significant support for the fund's share price since non-CMO
mortgage-backed securities outperformed long-term Treasuries for the calendar
year through October 31, 1994.
OUTLOOK: FURTHER INTEREST RATE INCREASES LIKELY INTO 1995
Throughout the fall, signs of ongoing economic growth were consistently evident.
Consumer spending and business investment have been steady. Rising inventory in-
vestment and improving exports are adding breadth to the recovery, suggesting
that the economic expansion may continue for some time.
In light of prolonged economic strength, we anticipate further volatility in do-
mestic bond markets through perhaps the first quarter of calendar 1995. Real
yields -- yields minus inflation -- are at historically high and attractive le-
vels, but investors are not likely to be significant bond buyers until they are
convinced that rates have stabilized. In order for buyers to re-enter the market
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[Line Chart - Page 7]
LONG-TERM U.S. TREASURIES VERSUS DIVERSIFIED
U.S. GOVERNMENT SECURITIES *
Lehman Brothers Lehman Long-Term
Government Bond Index Treasury Index
11/93 -1.10 % -2.56 %
12/93 0.39 0.32
1/94 1.37 2.40
2/94 -2.12 -4.10
3/94 -2.25 -4.39
4/94 -0.79 -1.18
5/94 -0.13 -0.66
6/94 -0.23 -0.95
7/94 1.84 3.39
8/94 0.02 -0.73
9/94 -1.41 -3.15
10/94 -0.08 -0.35
* Based on monthly total returns.
This chart illustrates the performance advantage and lower relative volatility
of a diversified group of U.S. government securities versus long-term Treasury
Bonds for the year ended October 31, 1994.
in any meaningful way, signs of economic moderation must become pervasive. This
has yet to occur.
While we believe that the most dramatic rise in interest rates is behind us, we
also believe that additional increases by the Fed are likely into early next
year. We will be looking for the Fed to walk a fine line between fostering eco-
nomic growth and keeping inflation in check. While the markets are taking some
comfort in the fact that inflation is not excessive, the Fed must act decisively
and aggressively if it expects to dampen inflation expectations.
Accordingly, we plan to maintain the fund's defensive positioning through at
least the early part of calendar 1995. Moreover, we will continue to adjust the
fund's asset allocation according to where we believe the greatest relative va-
lue exists. As we execute this management process, we continuously strive to
produce competitive income and total returns in the midst of constantly changing
market conditions.
The views expressed in this report are exclusively those of Putnam Management,
and are not meant as investment advice. Although the described holdings were
viewed favorably as of October 31, 1994, there is no guarantee the fund will
continue to hold these securities in the future.
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PERFORMANCE SUMMARY
This section provides, at a glance, information about your fund's performance.
Total return shows how the value of the fund's shares changed over time, assum-
ing you held the shares through the entire period and reinvested all distribu-
tions back into the fund. We show total return in two ways: on a cumulative
long-term basis and on average how the fund might have grown each year over va-
rying periods. For comparative purposes, we show how the fund performed relative
to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDED 10/31/94
LEHMAN BROS.
CLASS A CLASS B GOVERNMENT
NAV POP NAV CDSC BOND INDEX CPI
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1 year -4.54% -9.05% -- -- -4.47% 2.61%
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5 years 34.79 28.39 -- -- 44.76 19.03
Annual average 6.15 5.12 -- -- 7.68 3.55
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Life of class A 68.08 60.13 -- -- 93.39 37.28
Annual average 6.37 5.76 -- -- 8.15 3.84
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Life of class B -- -- -1.42% -6.22% 0.12 1.36
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TOTAL RETURN FOR PERIODS ENDED 9/30/94
(most recent calendar quarter)
CLASS A CLASS B
NAV POP NAV CDSC
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1 year -4.59% -9.09% -- --
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5 years 37.98 31.42 -- --
Annual average 6.65 5.62 -- --
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Life of class A 67.73 59.80 -- --
Annual average 6.41 5.79 -- --
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Life of class B -- -- -1.58% -6.40%
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Fund performance data do not take into account any adjustment for taxes payable
on reinvested distributions. The fund began operations on June 2, 1986, offering
shares now known as class A. Effective June 6, 1994, the fund began offering
class B shares. Performance data represent past results and will differ for each
share class. Investment returns and principal value will fluctuate so an inves-
tor's shares, when sold, may be worth more or less than their original cost.
CLASS A SHARES are generally subject to an initial sales charge.
CLASS B SHARES may be subject to a sales charge upon redemption.
PUBLIC OFFERING PRICE (POP) is the price of a mutual fund share plus the maximum
sales charge levied at the time of purchase. POP performance figures shown here
assume the maximum 4.75% sales charge.
CONTINGENT DEFERRED SALES CHARGE (CDSC) is a charge applied at the time of the
redemption of class B shares and assumes redemption at the end of the period.
Your fund's CDSC declines from a 5% maximum during the first year to 1% during
the sixth year. After the sixth year, the CDSC no longer applies.
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[Line Chart - Page 9]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since June 2, 1986
Lehman Bros.
Lehman Bros. Mortgage-Backed Fund's Class A Consumer
Gov't Bond Index Securities Index shares at POP Price Index
6/2/86 $ 10,000 $ 10,000 $ 9,525 $ 10,000
11/86 10,672 10,691 9,955 10,129
10/87 10,868 11,129 9,815 10,588
10/88 11,926 12,658 10,763 11,038
10/89 13,361 14,078 11,879 11,534
10/90 14,153 15,268 12,525 12,259
10/91 16,219 17,850 14,391 12,617
10/92 17,895 19,307 15,507 13,021
10/93 20,244 20,832 16,773 13,379
10/94 19,339 20,524 16,013 13,728
Past performance is no assurance of future results. A $10,000 investment in the
fund's class B shares at inception on 6/6/94 would have been valued at $9,858 on
10/31/94 ($9,378 with a redemption at the end of the period).
COMPARATIVE BENCHMARKS
LEHMAN BROTHERS GOVERNMENT BOND INDEX is an unmanaged list of publicly issued
U.S. Treasury obligations and debt obligations of U.S. government agencies (ex-
cluding mortgage-backed securities). The average quality of bonds included in
the index may be higher than the average quality of those bonds in which the
fund customarily invests. The fund's securities will not match those in the in-
dex. The index does not take into account brokerage commissions or other costs.
Since the fund has the flexibility to diversify its assets across all classes of
government securities, in addition to government agency mortgage-backed securi-
ties, it is Putnam Management's opinion that this index is a more appropriate
benchmark than the Lehman Brothers Mortgage-Backed Securities Index, used in
previous fiscal years.
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX reflects performance of 15- and
30-year fixed-rate securities backed by mortgage pools of the Government Natio-
nal Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC),
and Federal National Mortgage Association (FNMA). It reflects changes in market
price and reinvestment of all interest payments but does not take into account
brokerage commissions or other costs. Securities in the fund do not match those
in the index and may pose different risks.
CONSUMER PRICE INDEX is a commonly used measure of inflation. It does not repre-
sent an investment return.
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[Pyramid Graph - Page 10]
THE PUTNAM FUND SELECTOR *(TM)
The Putnam Fund Selector shows the many opportunities for investors within every
investment strategy. All investors should first accumulate a base of conservati-
ve, cash-equivalent investments. Then, with the help of your investment advisor,
diversify your portfolio by investing in the Putnam Family of Funds.
Risk/Reward
PUTNAM GROWTH FUNDS
PUTNAM GROWTH AND INCOME FUNDS
PUTNAM INCOME OR TAX-FREE FUNDS
MOST CONSERVATIVE INVESTMENTS
* (TM) Trademark
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<PAGE>
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund Diversified Equity Trust
Europe Growth Fund Global Growth Fund
Health Sciences Trust Investors Fund
Natural Resources Fund * New Opportunities Fund
OTC Emerging Growth Fund Overseas Growth Fund
Vista Fund Voyager Fund
PUTNAM GROWTH AND INCOME FUNDS
Convertible Income-Growth Trust Dividend Growth Fund
Equity Income Fund The George Putnam Fund of Boston
The Putnam Fund for Growth and Income Managed Income Trust
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Adjustable Rate U.S. Government Fund American Government Income Fund
Balanced Government Fund Corporate Asset Trust
Diversified Income Trust Federal Income Trust
Global Governmental Income Trust High Yield Advantage Fund
High Yield Trust Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE INCOME FUNDS
Intermediate Tax Exempt Fund Municipal Income Fund
Tax Exempt Income Fund Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds +
Arizona, California, Florida, Massachusetts, Michigan,
Minnesota, New Jersey, New York, Ohio, and Pennsylvania
LIFESTAGE (SM) FUNDS
Putnam Asset Allocation Funds -- three investment portfolios that spread your
money across a variety of stocks, bonds, and money market investments to help
maximize your return and reduce your risk.
The three portfolios:
Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative Portfolio
Putnam Asset Allocation: Growth Portfolio
MOST CONSERVATIVE INVESTMENTS ++
Putnam money market funds:
Money Market Fund +++
Tax Exempt Money Market Fund
California Tax Exempt Money Market Fund
New York Tax Exempt Money Market Fund
CDs and savings accounts **
* Formerly Energy-Resources Trust.
+ Not available in all states.
++ Relative to above.
+++ Formerly Daily Dividend Trust.
** Not offered by Putnam Investments. Certificates of deposit offer a fixed ra-
te of return and may be insured, up to certain limits, by federal/state
agencies. Savings accounts may also be insured up to certain limits.
Please call your financial advisor or Putnam to obtain a prospectus for any
Putnam fund. It contains more complete information, including charges and
expenses. Read it carefully before you invest or send money.
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REPORT OF INDEPENDENT ACCOUNTANTS
For the Fiscal Year Ended October 31, 1994
To the Trustees and Shareholders of
Putnam Federal Income Trust
We have audited the accompanying statement of assets and liabilities of Putnam
Federal Income Trust, including the portfolio of investments owned, as of Octo-
ber 31, 1994, the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the "Financial Highlights" for each of the periods indicated therein.
These financial statements and "Financial Highlights" are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these fi-
nancial statements and "Financial Highlights" based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and "Financial High-
lights" are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of Octo-
ber 31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presenta-
tion. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and "Financial Highlights" referred to
above present fairly, in all material respects, the financial position of Putnam
Federal Income Trust as of October 31, 1994, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the "Financial Highlights" for each of the periods
indicated therein, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P
Boston, Massachusetts
December 15, 1994
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PORTFOLIO OF INVESTMENTS OWNED
October 31, 1994
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (63.5%)(a)
PRINCIPAL AMOUNT VALUE
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$ 5,943,153 Federal Home Loan Mortgage Corporation
10s, due date June 15, 2019 $ 6,082,647
Federal National Mortgage Association
2,500,000 10.2s, due date September 25, 2018 2,594,740
35,380,971 7 1/2s, with various due dates to October 1, 2024 33,198,653
Government National Mortgage Association
665,192 11 1/2s, with various due dates to February 15, 2019 741,689
2,351,700 10s, with various dates to October 15, 2020 2,529,557
9,946,655 9s, with various due dates to September 15, 2002 10,245,055
8,209,830 8 1/2s, with various due dates to October 15, 2006 8,253,445
23,929,495 8s, with various due dates to April 15, 2008 23,548,119
68,705,201 7 1/2s, with various due dates to September 15, 2024 65,043,494
18,812,854 7s, with various due dates to July 15, 2024 16,861,020
11,400,000 U.S. Treasury Bonds, 11 1/4s, February 15, 1995 11,588,813
23,800,000 U.S. Treasury Bonds, 8 1/8s, August 15, 2019 23,800,000
17,595,000 U.S. Treasury Bonds, 7 1/2s, November 15, 2024 16,660,263
17,000,000 U.S. Treasury Notes, 7 1/4s, August 15, 2004 16,362,500
13,080,000 U.S. Treasury Notes, 4 5/8s, February 29, 1996 12,781,613
36,610,000 U.S. Treasury Notes, 4s, January 31, 1996 35,580,344
---------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(cost $290,363,426) $285,871,952
COLLATERALIZED MORTGAGE OBLIGATIONS (4.3%) (a)
PRINCIPAL AMOUNT VALUE
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$ 981,329 Chase Manhattan Mortgage Finance Corp. Sub. Mtge.
Ser. 1993-3, CL B 6, 7.46s, October 29, 2024 $ 847,622
4,210,191 Chase Manhattan Mortgage Finance Corp. Sub. Mtge.
Ser. 1993-3, CL B 7, 7.46s, October 29, 2024 3,636,551
1,900,375 Homestead Mortgage Acceptance Corp.
Ser. E, 11.2s November 1, 2015 1,912,846
3,121,000 Housing Securities, Inc., Mtge. Pass Thru Certificate
Ser. 1993 J, 6.66s, January 25, 2009 2,704,314
3,035,546 Prudential Home Mortgage Securities,
Ser. 1992-13, CL B-2, 7 1/2s, June 25, 2022 2,781,319
2,776,133 Prudential Home Mortgage Securities,
6.803s, August 25, 2001 2,416,969
3,787,021 Prudential Home Mortgage Securities,
Ser. 1993-31, CL B-2, 6s, August 25, 2000 3,255,653
1,913,000 Securitized Asset Sales, Inc., Mtge. Pass Thru
Certificate, Ser. 1994-3, 6.11s, February 25, 1999 1,692,307
---------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(cost $17,461,569) $ 19,247,581
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CORPORATE AND BONDS NOTES (9.0%)(a)
PRINCIPAL AMOUNT VALUE
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$10,900,000 Chrysler Financial Corp. Notes, 5.625s, 1999 $ 10,000,750
15,444,000 Citizens Utilities Co. deb, 7.68s, 2034 15,318,517
9,300,000 Lasmo PLC notes, 7.125s, 2003 8,271,187
7,000,000 Procter & Gamble Co. deb, 8s, 2029 7,126,875
---------------
TOTAL CORPORATE BONDS AND NOTES (cost $44,183,759) $ 40,717,329
FOREIGN BONDS AND NOTES (20.8%) (a)(b)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------
DEM 60,300,000 Germany (Government of) bonds, 6 5/8s, 1998 $ 39,760,312
FRF 125,000,000 France (Government of) Treasury Bills, 8s, 1998 24,609,375
JPY 26,968,000,000 Japan (Government of) bonds, 5.3s, 1999 29,125,440
---------------
TOTAL FOREIGN BONDS AND NOTES (cost $90,780,249) $ 93,495,127
YANKEE BONDS (0.9%) (a) (cost $4,633,051)
PRINCIPAL AMOUNT VALUE
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$ 5,000,000 Australia and New Zealand Banking Group bonds,
6 1/4s, 2004 $ 4,271,875
SHORT TERM INVESTMENTS (0.1%) (a) (cost $509,067)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------
$ 509,000 Interest in $190,001,000 joint repurchase agreement
dated October 31, 1994 with JP Morgan Securities Inc.,
due November 1, 1994 with respect to various U.S.
Treasury obligations.maturity value of $509,067
for an effective yield of 4.75% $ 509,067
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TOTAL INVESTMENTS (cost $447,931,121)(c) $444,112,931
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $449,978,467, which corres-
pond to a net asset value per class A share and class B share of $9.32 and
$9.30 respectively.
(b) Foreign currency-denominated. Market value is translated at the current ex-
change rate.
(c) The aggregate identified cost for federal income tax purposes is
$447,931,490, resulting in gross unrealized appreciation and depreciation of
$3,699,192 and $7,517,751, respectively, or net unrealized depreciation of
$3,818,559.
FORWARD CURRENCY CONTRACTS OUTSTANDING (at October 31, 1994)
(aggregate face value $80,989,571)
Market Aggregate Delivery Unrealized
Value Face Value Date Depreciation
- -------------------------------------------------------------------------------
French Francs (Sell) $12,725,064 $12,393,713 11/25/94 $ (331,351)
French Francs (Sell) 13,011,400 12,845,289 11/30/94 (166,111)
Japanese Yen (Sell) 14,547,938 14,519,369 1/26/95 (28,569)
Deutsche Marks (Sell) 14,004,862 13,536,427 11/15/94 (468,435)
Deutsche Marks (Sell) 7,486,941 7,318,803 11/25/94 (168,138)
Deutsche Marks (Sell) 20,605,700 20,375,970 11/17/94 (229,730)
- -------------------------------------------------------------------------------
$(1,392,334)
The accompanying notes are an integral part of these financial statements.
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STATEMENT OF ASSETS AND LIABILITIES
October 31, 1994
ASSETS
- -------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $447,931,121) (Note 1) $444,112,931
Cash 480,017
Interest receivable 7,511,959
Receivable for shares of the fund sold 53,605
Receivable for securities sold 47,052,553
Receivable for closed forward currency contracts 6,580,874
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TOTAL ASSETS $505,791,939
LIABILITIES
- -------------------------------------------------------------------------------
Payable for securities purchased $ 44,974,302
Distributions payable to shareholders 63,849
Payable for shares of the fund repurchased 1,633,260
Payable for compensation of Manager (Note 2) 726,532
Payable for administrative services (Note 2) 4,863
Payable for compensation of Trustees (Note 2) 131
Payable for investor servicing (Note 2) 55,998
Payable for distribution fees (Note 2) 96,685
Other accrued expenses 60,840
Payable for open forward currency contracts 1,392,334
Payable for closed forward currency contracts 6,804,678
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TOTAL LIABILITIES 55,813,472
- -------------------------------------------------------------------------------
NET ASSETS $449,978,467
REPRESENTED BY
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1, 4 and 5) $706,805,612
Distributions in excess of net investment income (625,970)
Accumulated net realized loss on investment transactions (250,990,651)
Net unrealized depreciation of investments and forward
currency contracts (5,210,524)
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TOTAL -- REPRESENTING NET ASSETS APPLICABLE TO
CAPITAL SHARES OUTSTANDING $449,978,467
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
- -------------------------------------------------------------------------------
Net asset value and redemption price of class A shares
($449,480,075 divided by 48,239,807 shares) $9.32
Offering price per share (100/95.25 of $9.32) * $9.78
Net asset value and offering price of class B shares
($498,392 divided by 53,588 shares) + $9.30
- -------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
STATEMENT OF OPERATIONS
Year ended October 31, 1994
- -------------------------------------------------------------------------------
INTEREST INCOME $40,980,883
- -------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 3,143,405
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 562,646
- -------------------------------------------------------------------------------
Reports to shareholders 125,142
- -------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 20,902
- -------------------------------------------------------------------------------
Auditing 51,059
- -------------------------------------------------------------------------------
Legal 19,906
- -------------------------------------------------------------------------------
Postage 150,414
- -------------------------------------------------------------------------------
Administrative services (Note 2) 14,756
- -------------------------------------------------------------------------------
Distribution fees -- class A (Note 2) 1,301,587
- -------------------------------------------------------------------------------
Distribution fees -- class B (Note 2) 945
- -------------------------------------------------------------------------------
Registration fees 10,527
- -------------------------------------------------------------------------------
Other 32,486
- -------------------------------------------------------------------------------
TOTAL EXPENSES 5,433,775
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME 35,547,108
- -------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (50,586,392)
- -------------------------------------------------------------------------------
Net realized loss on forward currency contracts (Notes 1 and 3) (6,759,388)
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments and forward currency
contracts during the year (3,636,389)
- -------------------------------------------------------------------------------
NET LOSS ON INVESTMENT TRANSACTIONS (60,982,169)
- -------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(25,435,061)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Year ended October 31
1994 1993
- -------------------------------------------------------------------------------
DECREASE IN NET ASSETS
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $ 35,547,108 $ 50,224,400
- -------------------------------------------------------------------------------
Net realized gain (loss) on investments (50,586,392) 10,697,716
- -------------------------------------------------------------------------------
Net realized loss on forward currency contracts (6,759,388) (528,884)
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments
and forward currency contracts (3,636,389) (9,085,741)
- -------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (25,435,061) 51,307,491
- -------------------------------------------------------------------------------
Undistributed net investment income
included in price of shares sold and
repurchased, net -- (7,932)
- -------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (35,082,377) (50,490,037)
- -------------------------------------------------------------------------------
Class B (4,735) --
- -------------------------------------------------------------------------------
Tax return of capital
Class A (1,704,645) --
- -------------------------------------------------------------------------------
Class B (170) --
- -------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (87,976,030) (56,283,990)
- -------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (150,203,018) (55,474,468)
- -------------------------------------------------------------------------------
NET ASSETS
Beginning of year 600,181,485 655,655,953
- -------------------------------------------------------------------------------
END OF YEAR (including distributions in excess
of net investment income of $625,970 and
$273,569, respectively) $449,978,467 $600,181,485
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
For the period June 6, 1994
(commencement of operations) to
October 31 Year ended October 31
1994 1994 1993
- ----------------------------------------------------------------------------------------
Class B Class A
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING
(in thousands) $498 $449,480 $600,181
OF PERIOD $9.68 $10.47 $10.47
- ----------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .18 .61 .83
- ----------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments (.32) (1.07) --
- ----------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (.14) (.46) .83
- ----------------------------------------------------------------------------------------
Distributions to shareholders from: (a)
Net Investment Income (.23) (.66) (.83)
- ----------------------------------------------------------------------------------------
Net Realized Gain on Investments -- -- --
- ----------------------------------------------------------------------------------------
Paid-In Capital -- -- --
- ----------------------------------------------------------------------------------------
Tax return of capital (b) (.01) (.03) --
- ----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.24) (.69) (.83)
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.30 $9.32 $10.47
- ----------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) (c) -1.42(d) -4.54 8.17
- ----------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(in thousands) $498 $449,480 $600,181
- ----------------------------------------------------------------------------------------
Ratio of Expenses to Average
Net Assets (%) 0.72(d) 1.06 1.05
- ----------------------------------------------------------------------------------------
Ratio of Net Investment Income
to Average Net Assets (%) 2.34(d) 6.91 7.81
- ----------------------------------------------------------------------------------------
Portfolio Turnover (%) 317.91(d) 317.91 150.05
- ----------------------------------------------------------------------------------------
<FN>
(a) See Note 1 to the financial statements. Under the fund's prior policy, distributions were based on projections of its estimated
net investment income and net realized short-term gain. This distribution policy may at times have resulted in a return of ca-
pital to shareholders.
(b) Distributions from return of capital for the year ended 10/31/94 has been calculated in accordance with Statement of Position
93-2, "Determination, Disclosure, and Financial Statement Presentation, Capital Gain and Return of Capital Distributions by In-
vestment Companies." (See Notes 1 and 5.)
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(d) Not annualized.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
For the period
Eleven June 2, 1986
months (commencement
ended of operations) to
Year ended October 31 October 31 November 30
1992 1991 1990 1989 1988 1987 1986
- -----------------------------------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $10.52 $9.90 $10.21 $10.07 $10.04 $11.46 $11.45
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .84 .80 .82 .84 .83 .76 .41
- -----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments (.05) .62 (.29) .14 .10 (1.05) .23
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .79 1.42 .53 .98 .93 (.29) .64
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from: (a)
Net Investment Income (.72) (.80) (.82) (.84) (.81) (.77) (.42)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Realized Gain on Investments (.12) -- -- -- -- (.17) (.19)
- -----------------------------------------------------------------------------------------------------------------------------------
Paid-In Capital -- -- (.02) -- (.09) (.19) (.02)
- -----------------------------------------------------------------------------------------------------------------------------------
Tax return of capital (b) -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.84) (.80) (.84) (.84) (.90) (1.13) (.63)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.47 $10.52 $9.90 $10.21 $10.07 $10.04 $11.46
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) (c) 7.75 14.90 5.44 10.37 9.66 (2.53)(d) 5.72(d)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(in thousands) $655,656 $730,319 $807,890 $1,002,508 $1,345,223 $2,087,744 $997,390
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average
Net Assets (%) 1.11 1.17 1.13 1.09 1.01 .92(d) .55(d)
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income
to Average Net Assets (%) 6.83 7.90 8.17 8.55 8.46 6.94(d) 3.33(d)
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover (%) 248.37 215.17 269.04 241.99 24.71 130.14(d) 149.84(d)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
October 31, 1994
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
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 cu-
rrent income, consistent with preservation of capital, through investments pri-
marily in U.S. government securities.
The following is a summary of significant accounting policies consistently fo-
llowed by the fund in the preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles.
A SECURITY VALUATION Investments for which market quotations are readily avail-
able are stated at market value, which is determined using the last reported sa-
le price, or, if no sales are reported -- as in the case of some securities tra-
ded over-the-counter -- the last reported bid price, except that certain U.S.
government obligations are stated at the mean between the bid and asked prices.
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. (See Section
F of Note 1 with respect to valuation of futures.)
Securities quoted in foreign currencies are translated into U.S. dollars at the
current exchange rate. Gains and losses that arise from changes in exchange ra-
tes are not segregated from gains and losses that arise from changes in market
prices of investments. The effects on net investment income arising from changes
in exchange rates are also not segregated.
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 compa-
nies managed by Putnam Investment Management, Inc. (Putnam Management), the
fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc., and cer-
tain other accounts. These balances may be invested in one or more repurchase
agreements and/or short-term money market instruments.
C FORWARD CURRENCY CONTRACTS A forward currency contract is an agreement between
two parties to buy and sell a currency at a set price on a future date. The
market value of the contract will fluctuate with changes in currency exchange
rates. The contract is "marked to market" daily and the change in market value
is recorded by the fund as an unrealized gain or loss. When the contract is
closed, the fund records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value at the time it
was closed. The maximum potential loss from forward currency contracts is the
aggregate face value in U.S. dollars at the time the contract was opened; how-
ever management believes the likelihood of such a loss to be remote.
D REPURCHASE AGREEMENTS The fund, 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
<PAGE>
<PAGE>
equal to the resale price, including accrued interest. The fund's Manager 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.
E SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are
accounted for on the trade date (date the order to buy or sell is executed). In-
terest income is recorded on the accrual basis. Discount on zero coupon bonds is
amortized according to the effective yield method.
F FUTURES A futures contract is an agreement between two parties to buy and sell
a security at a set price on a future date. Upon entering into such a contract
the fund is required to pledge to the broker an amount of cash or U.S. govern-
ment securities equal to the minimum "initial margin" requirements of the ex-
change. Pursuant to the contract, the fund agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation in value of the con-
tract. Such receipts or payments are known as "variation margin," and are re-
corded by the fund as unrealized gains or losses. When the contract is closed,
the fund records a realized gain or loss equal to the difference between the va-
lue of the contract at the time it was opened and the value at the time it was
closed. The potential risk to the fund is that the change in value of the under-
lying securities may not correspond to the change in value of the futures con-
tracts.
G FEDERAL TAXES It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the In-
ternal 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. Therefo-
re, no provision has been made for federal taxes on income, capital gains or un-
realized appreciation of securities held and excise tax on income and capital
gains.
At October 31, 1994, the fund had a capital loss carryover of approximately
$250,990,000. Of this amount, $63,617,000, $118,265,000, $15,005,000 and
$54,103,000 will expire October 31, 1996, 1997, 1998 and 2002, respectively. In
order to provide more level monthly distributions, the fund may at times pay ta-
xable distributions from net realized short-term and long-term gains that could
have been retained by the fund and offset by the capital loss carryover. In such
circumstances, the fund would lose the benefit of the carryover.
H DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders are recorded by
the fund on the ex-dividend date. At certain times, the fund may pay distribu-
tions at a level rate even though, as a result of market conditions or invest-
ment decisions, the fund may not achieve projected investment results for a gi-
ven period. Distributions of $1,704,815 (4.6%) made during fiscal year ended
October 31, 1994 have been redesignated as a return of capital. The amount and
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences include treatment of certain gains and losses on
foreign currency transactions which are considered capital gains and losses for
book accounting purposes, but ordinary income for tax purposes. Losses on these
transactions result in a reduction of net investment income available from dis-
tribution. These losses can occur unpredictably at a point in the year after
monthly or quarterly distributions have already been made, necessitating a re-
designation. Reclassifications are
<PAGE>
<PAGE>
made to the fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax regula-
tions. For the year ended October 31, 1994, the fund reclassified $5,175,577 to
increase distribution in excess of net investment income and $5,175,577 to de-
crease realized losses.
I EQUALIZATION Prior to November 1, 1993, the fund used the accounting practice
known as equalization to keep a continuing shareholder's per share interest in
undistributed net investment income unaffected by sales or repurchases of fund
shares. This was accomplished by allocating a per share portion of the proceeds
from sales and the costs of repurchase of shares to undistributed net investment
income.
As of November 1, 1993, the fund discontinued using equalization. This change
has no effect on the fund's total net assets, net asset value per share, or its
net increase (decrease) in net assets from operations. Discontinuing the use of
equalization will result in simpler financial statements. The cumulative effect
of the change was to increase undistributed net investment income and decrease
paid in capital previously reported through October 31, 1993 by $32,765.
J FOREIGN CURRENCY TRANSLATION The accounting records of the fund are maintained
in U.S. dollars. Investments in securities and other assets and liabilities de-
nominated in a foreign currency are translated into U.S. dollars at the prevail-
ing rates of exchange at the period end. Purchases and sales of securities, in-
come receipts and expense payments are translated into U.S. dollars at the pre-
vailing exchange rate on the respective dates of transactions.
NOTE 2
MANAGEMENT FEE, ADMINISTRATIVE SERVICES, AND OTHER TRANSACTIONS
Compensation of Putnam Investment Management, for management and investment ad-
visory services, is paid quarterly based on the average net assets of the fund
for the quarter. Such fee is based on the following annual rates: 0.75% of the
first $100 million of average net assets, 0.65% of the next $100 million, 0.55%
of the next $300 million, 0.45% of the next $500 million, and 0.4% of any amount
over $1 billion, subject, under current law, to reduction in any year to the ex-
tent that expenses (exclusive of distribution fees, brokerage, interest and ta-
xes) of the fund exceed 2.5% of the first $30 million of average net assets, 2%
of the next $70 million, and 1.5% of any excess over $100 million and by the
amount of certain brokerage commissions and fees (less expenses) received by
affiliates of the Manager on the fund's portfolio transactions.
The fund also reimburses the Manager for the compensation and related expenses
of certain officers of the fund and their staff who provide administrative ser-
vices to the fund. The aggregate amount of all such reimbursements is determined
annually by the Trustees. For the year ended October 31, 1994, the fund paid
$14,756 for these services.
Trustees of the fund receive an annual Trustee's fee of $1,030, and an additio-
nal fee for each Trustees' meeting attended. Trustees who are not interested
persons of the Manager and who serve on committees of the Trustees receive
additional fees for attendance at certain committee meetings.
<PAGE>
<PAGE>
Custodial functions for the fund are provided by Putnam Fiduciary Trust Company
(PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing agent func-
tions are provided by Putnam Investor Services, a division of PFTC. Fees paid
for these investor servicing and custodial functions for the year ended October
31, 1994 amounted to $562,646.
Investor servicing and custodian fees reported in the Statement of operations
for the year ended October 31, 1994 have been reduced by credits allowed by
PFTC. Such credits amounted to $383,244.
The fund has adopted a distribution plan with respect to its class A shares (the
"Class A Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The purpose of the Class A Plan 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 A shares of the fund. The Trustees
have approved payment by the fund to Putnam Mutual Funds Corp. at an annual rate
of 0.25% of the fund's average net assets. For the year ended October 31, 1994,
the fund paid $1,301,587 in distribution fees, for class A shares.
During the fiscal year ended October 31, 1994, Putnam Mutual Funds Corp., acting
as the underwriter, received net commissions of $32,413 on the sale of class A
shares of the fund.
A deferred sales charge of up to 1.00% is assessed on certain redemptions of
class A shares purchased as part of an investment of $1 million or more. For
the year ended October 31, 1994 Putnam Mutual Funds Corp., acting as the under-
writer, received no monies on such redemptions.
The fund has adopted a separate distribution plan with respect to its class B
shares (the "Class B Plan") pursuant to Rule 12b-1 under the Investment Company
Act of 1940. The purpose of the Class B Plan is to compensate Putnam Mutual
Funds Corp., for services provided and expenses incurred by it in distributing
class B shares. The Trustees have approved payment by the fund to Putnam Mutual
Funds Corp. at an annual rate of 1.00% of the average net assets attributable to
class B shares. For the period ended October 31, 1994, the fund paid Putnam Mu-
tual Funds Corp. distribution fees of $945 for class B shares.
Putnam Mutual Funds Corp. also receives the proceeds on the contingent deferred
sales charges on certain class B share redemptions within six years of purcha-
se. The charge is based on declining rates, which begin at 5.00% of the net
asset value of the redeemed shares. Putnam Mutual Funds Corp. received no monies
from contingent deferred sales charges from redemptions during the period June
6, 1994 (commencement of operations) to October 31, 1994.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the year ended October 31, 1994, purchases and sales of investment secu-
rities other than U.S. government obligations and short-term investments aggre-
gated $190,301,168 and $100,917,913, respectively. Purchases and sales of U.S.
government obligations aggregated $1,422,868,735 and $1,604,644,652, respective-
ly. In determining the net gain or loss on securities sold, the cost of securi-
ties has been determined on the identified cost basis.
<PAGE>
<PAGE>
PURCHASES OF FORWARD CURRENCY CONTRACTS
AGGREGATE FACE VALUE
- -------------------------------------------------------------------------------
Contracts opened $299,058,184
Contracts closed (218,068,613)
- -------------------------------------------------------------------------------
OPEN AT END OF YEAR $ 80,989,571
- -------------------------------------------------------------------------------
NOTE 4
CAPITAL SHARES
At October 31, 1994, there was an unlimited number of shares of beneficial in-
terest authorized. Transactions in capital shares were as follows:
YEAR ENDED OCTOBER 31 1994
CLASS A SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 2,036,223 $20,180,628
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 1,818,844 17,818,233
- -------------------------------------------------------------------------------
3,855,067 37,998,861
- -------------------------------------------------------------------------------
Shares repurchased (12,947,301) (126,479,041)
- -------------------------------------------------------------------------------
NET DECREASE (9,092,234) $(88,480,180)
- -------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31 1993
CLASS A SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 1,965,135 $ 20,804,701
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 2,283,992 24,132,161
- -------------------------------------------------------------------------------
4,249,127 44,936,862
- -------------------------------------------------------------------------------
Shares repurchased (9,565,597) (101,228,784)
- -------------------------------------------------------------------------------
Portion represented by undistributed
net investment income -- 7,932
- -------------------------------------------------------------------------------
NET DECREASE (5,316,470) $(56,283,990)
- -------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31 1994
CLASS B SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 55,736 $524,009
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 223 2,077
- -------------------------------------------------------------------------------
55,960 526,086
- -------------------------------------------------------------------------------
Shares repurchased (2,371) (21,936)
- -------------------------------------------------------------------------------
NET INCREASE 53,588 $504,150
- -------------------------------------------------------------------------------
<PAGE>
<PAGE>
NOTE 5
RECLASSIFICATION OF CAPITAL ACCOUNTS
Effective November 1, 1993, Putnam Federal Income Trust has adopted the provi-
sions of Statement of Position 93-2 "Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain and Return of Capital distribu-
tions by Investment Companies." (SOP). The purpose of this SOP is to report the
accumulated undistributed net investment income (accumulated loss) and accumula-
ted net realized gain (loss) accounts in such a manner as to approximate amounts
available for future distributions (or to offset future realized capital gains)
and to achieve uniform presentation of distributions by investment companies.
In implementing the SOP, the fund has reclassified $42,747,626 to decrease accu-
mulated net realized loss, $4,330,415 to increase undistributed net investment
income with a decrease of $47,078,041 to additional paid-in capital. These ad-
justments represent the cumulative amount necessary to report these balances on
a tax basis through October 31, 1993. These reclassifications, which have no
impact on the total net asset value of the fund, are primarily attributable to
differences in the computation of distributable income and capital gains under
federal income tax rules and regulations versus generally accepted accounting
principles.
<PAGE>
<PAGE>
- -------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
For federal income tax purposes, 95.37% of the distributions totaling $0.686 and
$0.243 for class A and class B respectively per share for the year ended October
31, 1994 for class A, and for the period June 6, 1994 (commencement of opera-
tions) to October 31, 1994 for class B, should be designated as "dividend inco-
me". The fund has designated none of this amount as qualifying for the
dividends-received deduction for corporations.
The Form 1099 you will receive in January 1995 will show the tax status of all
distributions paid to your account in calendar 1994.
If you are a shareholder in an IRA or other tax-sheltered retirement plan, this
statement is for information only and will serve as a record of distributions
reinvested in your account during the fiscal year. Money invested in these plans
generally is not subject to federal income tax until you withdraw it.
As required by law, your Fund reports to the Internal Revenue Service on a ca-
lendar year basis the amount of distributions paid to each shareholder.
- -------------------------------------------------------------------------------
RETURN OF CAPITAL FOR FISCAL YEAR ENDED OCTOBER 31, 1994
Coincident with the year-end financial review of the portfolio, it was determi-
ned that 4.63% of the fiscal year's distribution must be reclassified as a re-
turn of capital and therefore is not taxable to shareholders.
Your Form 1099, which will be mailed in January 1995, will indicate the exact
amount of the distributions not subject to tax. In addition, you will now need
to adjust the cost basis of your shares when you eventually redeem or exchange
them. This will increase any resulting capital gain or decrease any capital loss
you incur at that time.
A return of capital is determined in accordance with federal tax law, which re-
quires that certain gains and losses on foreign currency transactions which are
considered capital gains and losses for book accounting purposes, be reclassi-
fied as ordinary income or deductions from ordinary income for tax purposes.
Losses on these transactions result in a reduction of net investment income
available for distribution. These losses can occur unpredictably at a point in
the year after monthly or quarterly distributions have already been made, nece-
ssitating a redesignation.
<PAGE>
<PAGE>
FUND INFORMATION
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman William F. Pounds, Vice Chairman
Jameson Adkins Baxter Hans H. Estin
John A. Hill Elizabeth T. Kennan
Lawrence J. Lasser Robert E. Patterson
Donald S. Perkins George Putnam, III
A.J.C. Smith W. Nicholas Thorndike
OFFICERS
George Putnam Charles E. Porter
President Executive Vice President
Patricia C. Flaherty John R. Verani
Senior Vice President Vice President
Lawrence J. Lasser Gordon H. Silver
Vice President Vice President
Gary N. Coburn Kenneth Taubes
Vice President Vice President and Fund Manager
Max S. Senter William N. Shiebler
Vice President and Fund Manager Vice President
Paul M. O.Neil John D. Hughes
Vice President Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Federal Income
Trust. It may also be used as sales literature when preceded or accompanied by
the current prospectus, which gives details of sales charges, investment objec-
tives 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.
<PAGE>
<PAGE>
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Bulk Rate
U.S. Postage
Paid
Putnam
Investments
008/223-15430
<PAGE>
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED AND
EDGAR-FILED TEXTS:
(1) Boldface typeface is displayed with capital letters, italic typeface is
displayed in normal type.
(2) Because the printed page breaks are not reflected, certain tabular and
columnar headings and symbols are displayed differently in this filing.
(3) Bullet points and similar graphic signals are omitted.
(4) Page numbering has been omitted.
(5) The trademark symbol has been replaced by (TM).
(6) The copyright symbol has been replaced by (C).
(7) The dagger symbol has been replaced by (+).
(8) The registered mark symbol has been replaced by (R).
