Putnam
Federal
Income
Trust
ANNUAL REPORT
October 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* According to Lipper Analytical Services, Putnam Federal Income Trust's
class A share total return ranked 20 out of 112 general U.S. government
funds for the three-year period ended October 31, 1996, placing the fund
in the top 18% in this category.*
* "With increasing signs of moderate economic growth, the markets
apparently have become convinced that the Federal Reserve will continue
to hold policy steady, at least through November and possibly into next
year."
-- Barron's, October 7, 1996
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
15 Portfolio holdings
19 Financial statements
*Lipper Analytical Services, an independent research organization, ranks
funds according to total return performance. Their rankings vary over
time and do not reflect the effects of sales charges. For periods ended
10/31/96, class A shares ranked 54 out of 169, 47 out of 71, and 24 out
of 40 funds for 1-, 5-, and 10-year performance, respectively; class B
and class M shares ranked 99 and 68, respectively, out of 169 funds for
1-year performance. Class B and class M shares were not ranked over
longer periods. Past performance is not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
Duration is a concept that few people outside the investment industry
fully understand, and most are satisfied when we describe it simply as a
measure of a fixed-income portfolio's tendency toward price volatility.
The longer the duration, expressed in years, the more sensitive a
portfolio is to a given change in interest rates. The shorter the
duration, the more stable a portfolio is likely to be.
Throughout the somewhat unsettled bond markets of the fiscal year ended
October 31, 1996, Putnam Federal Income Trust's managers, Kenneth Taubes
and Max Senter, spent considerable time managing the fund's duration,
playing it out and reeling it in as events warranted.
In the following report, Ken and Max discuss their management of
duration and the other factors that contributed to your fund's positive
performance in fiscal 1996. Then they offer some insights into prospects
for 1997.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
December 18, 1996
Report from the Fund Managers
Kenneth J. Taubes
Max S. Senter
After enduring the uncertainty that pervaded bond markets throughout the
early part of its fiscal year, Putnam Federal Income Trust rebounded
impressively in the second half, resulting in solid competitive
performance for the 12 months ended October 31, 1996. Through much of
the period, the U.S. economy continued to expand at a steady pace,
fueling continued growth in corporate earnings but contributing to
investors' fears of inflation. In turn, inflation fears dealt a blow to
the U.S. bond market, particularly restraining the performance of
Treasury securities for a portion of the year. Nevertheless, your fund's
flexibility enabled it to weather this brief storm by focusing on
corporate and international securities when market conditions warranted
such a strategy. Complete performance information for the fund appears
on pages 9 through 11.
* DURATION MANAGEMENT SPURS PERFORMANCE
After a brief respite during the bond market's decline early in calendar
1996, duration management reclaimed its place as a vital contributor to
the fund's performance in the second half of the fiscal year. Duration
is a measure of the price sensitivity of a portfolio of bonds to changes
in interest rates. Like maturity, with which it is often confused,
duration is measured in years.
Through the first few months of the period, we kept the portfolio's
duration relatively long, seeking to enhance the fund's value as long-
term interest rates continued to drop. Because bond prices rise as
interest rates fall, a longer duration gives the fund the potential to
derive greater benefit when long-term rates are in decline. However,
greater rewards always entail greater risks; in this case, such a
strategy can expose the fund to the negative effects of an interest-rate
increase.
When the bond market rally began to dissipate early this year, we
believed the prospects for a sustained decline in bond prices seemed
remote and initially maintained the portfolio's long duration. However,
when the intensity of the market's decline became evident in late
February, we shortened duration to protect the fund's value as interest
rates climbed. Subsequently, when the bond market regained its footing
and rates again headed downward late in the spring, we again extended
the portfolio's duration. For the fiscal year as a whole, our duration
management strategy was an essential contributor to the fund's
performance.
* CORPORATE BONDS CONTINUE TO PROSPER
The sustained growth in the U.S. economy was the primary cause of the
bond market's struggles this year. After enjoying calendar 1995's robust
economic growth, many investors expected the rate of growth to slow
considerably in 1996. As they came to realize that this slowdown might
not arrive on its own, they grew increasingly concerned that the Federal
Reserve would raise interest rates in order to induce it. In fact, the
Fed did not raise rates, instead allowing the rate of economic growth to
run its course while keeping an eye on inflation. Ultimately the bond
market rebounded.
While steady economic growth can be detrimental to general bond market
performance, it propelled the corporate bond market during the period.
As the economy thrived, so did corporate profitability. This, in turn,
helped to improve the demand for corporate securities and strengthened
the portfolio's corporate bond holdings relative to Treasuries. To enable
your fund to take advantage of this trend, we added to the portfolio's
investments in corporate bonds during the period, at times allocating
more than 10% of the fund's assets to this sector.
[GRAPHIC OF HORIZONTAL BAR CHART OMITTED: BOND MARKET PERFORMANCE BY
SECTOR*]
BOND MARKET PERFORMANCE BY SECTOR*
Comparison of total returns, 10/31/95-10/31/96
Lehman Mortgage Backed 6.92%
Lehman Corporate Bond 6.22%
Lehman Aggregate Bond 5.85%
Salomon World Government Bond 5.36%
Lehman Long-Term Treasury Bond 3.45%
Footnote reads:
*These indexes reflect the general performance of market sectors in
which the fund invests. The fund's performance will differ. Past
performance is not indicative of future results. The indexes may include
bonds different from those in the fund. It is not possible to invest in
an index.
* OPPORTUNITIES ABOUND IN INTERNATIONAL BOND MARKETS
As with the corporate bond sector, the fund's investments in
international bonds contributed substantially to its performance during
the period. In the first six months of the fiscal period, we emphasized
European government bonds. Specifically we emphasized bond markets in
Germany, Italy, and France. Since that time, these and most other
European countries have focused their efforts on reining in fiscal
budgets in order to gain acceptance in the European Monetary Union
(EMU), which intends to create a single currency to be used among member
nations. As a result of these efforts, several nations have driven down
both inflation and bond yields. At the same time, as the U.S. bond
market struggled, investors who sold Treasuries took advantage of
investment opportunities in these flourishing European bond markets.
Germany, in particular, enjoyed a rally that pushed its once-steep
yields below those of U.S. Treasuries by the end of the period.
During the second half of the period, slow economic growth and improved
fiscal management roused bond markets in Canada and Australia. In these
countries, yields at the outset of the period were considerably higher
than those in the United States. However, as their markets rallied over
the course of the year, interest rates in these countries fell
precipitously, substantially narrowing the yield spreads relative to
U.S. Treasuries and attracting investors.
As the U.S. dollar remained strong relative to major foreign currencies
during the period, we hedged a portion of our international bonds back
to the dollar in an effort to protect the fund's value from losses due
to currency fluctuations.
[GRAPHIC HORIZONTAL BAR CHART OMITTED: CHANGES IN PORTFOLIO
COMPOSITION*]
CHANGES IN PORTFOLIO COMPOSITION*
10/31/95 10/31/96
Mortgage-backed securities 34.9% 36.6%
U.S. Treasury securities 43.3% 35.8%
Foreign bonds and notes 9.8% 11.9%
Corporate bonds 8.1% 11.0%
Collateralized mortgage obligations 8.4% 8.1%
Short-term investments 0.3% 1.3%
Footnote reads:
*Based on total net assets as of indicated date. Holdings will vary over
time.
* U.S. BOND MARKETS MAY BENEFIT FROM SLOWDOWN IN ECONOMIC GROWTH
As we head into 1997, economic indicators suggest that the U.S.
economy's rate of growth is slowing and that inflation and interest
rates are likely to remain at moderate levels. For investors, this may
suggest an environment that's conducive to a thriving domestic bond
market. To prepare your fund to benefit from such an economic scenario,
we are currently maintaining a portfolio duration that's somewhat longer
than the industry average. We have invested a portion of the fund's
assets in U.S. Treasury securities in the 7- to 10-year maturity range,
since we consider these securities likely to prosper in a slow-growth
environment.
In the event that economic growth subsides, it is probable that
corporate earnings, which remained sturdy throughout fiscal 1996, may
decline moderately. However, we believe that the corporate bond market
is resilient enough to remain profitable even as earnings begin to
decline, and we currently plan to maintain a moderate allocation to this
sector.
Among international bond markets, we plan to continue to invest in
countries whose inflation rates are subsiding. We will also look to take
advantage of European markets as progress toward the EMU creates
opportunities.
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 10/31/96, there is no guarantee the fund
will continue to hold these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Federal Income Trust is designed for investors seeking
high current income consistent with preservation of capital primarily
through U.S. government securities.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 10/31/96
Class A Class B Class M
(inception date) (6/2/86) (6/6/94) (4/12/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 4.45% -0.54% 3.74% -1.19% 4.20% 0.83%
- ------------------------------------------------------------------------
5 years 34.78 28.44 -- -- -- --
Annual average 6.15 5.13 -- -- -- --
- ------------------------------------------------------------------------
10 years 94.84 85.58 -- -- -- --
Annual average 6.90 6.38 -- -- -- --
- ------------------------------------------------------------------------
Life of class -- -- 17.70 14.70 13.95 10.26
Annual average -- -- 7.00 5.86 8.73 6.46
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/96
Lehman Bros.
Government Consumer
Bond Index Price Index
- -----------------------------------------------------------------------
1 year 5.12% 2.99%
- ------------------------------------------------------------------------
5 years 44.62 15.21
Annual average 7.65 2.87
- ------------------------------------------------------------------------
10 years 119.79 43.52
Annual average 8.19 3.68
- -----------------------------------------------------------------------
Life of class B 21.43 7.32
Annual average 8.35 2.98
- -----------------------------------------------------------------------
Life of class M 15.34 4.56
Annual average 9.41 2.90
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions or,
for class A shares, distribution fees prior to implementation of the
class A distribution plan in 1990. Investment returns and net asset
value will fluctuate so that an investor's shares, when sold, may be
worth more or less than their original cost. POP assumes 4.75% maximum
sales charge for class A shares and 3.25% for class M shares. CDSC for
class B shares assumes the applicable sales charge, with the maximum
being 5%.
[GRAPHIC WORM CHART OMITTED: GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 10/31/86
Starting value (Insert ending Total)
$9,525 Fund's class A shares at POP $18,558
$10,000 Lehman Bros. Govt. Bond Index $21,979
$10,000 Consumer Price Index $14,352
(plot points for 10-year total return mountain chart)
Lehman Govt.
Date/year Fund at POP Bond Index CPI
- --------- ----------- ----------- ------
10/31/86 9,525 10,000 10,000
10/31/87 9,391 10,184 10,453
10/31/88 10,298 11,175 10,898
10/31/89 11,366 12,519 11,387
10/31/90 11,984 13,261 12,103
10/31/91 13,769 15,198 12,457
10/31/92 14,837 16,768 12,856
10/31/93 16,049 18,970 13,209
10/31/94 15,320 18,122 13,554
10/31/95 17,767 20,910 13,935
10/31/96 18,558 21,979 14,352
Footnote reads:
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 $11,770 on 10/31/96 ($11,470 with a redemption at the end of
the period). A $10,000 investment in the fund's class M shares at
inception on 4/12/95 would have been valued at $11,395 at net asset
value on 10/31/96 ($11,026 at public offering price).
TOTAL RETURN FOR PERIODS ENDED 9/30/96
(most recent calendar quarter)
Class A Class B Class M
(inception date) (6/2/86) (6/6/94) (4/12/95)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 3.56% -1.34% 2.96% -1.92% 3.31% -0.07%
- ------------------------------------------------------------------------
5 years 33.07 26.77 -- -- -- --
Annual average 5.88 4.86 -- -- -- --
- ------------------------------------------------------------------------
10 years 92.88 83.70 -- -- -- --
Annual average 6.79 6.27 -- -- -- --
- ------------------------------------------------------------------------
Life of class -- -- 15.05 12.05 11.23 7.63
Annual average -- -- 6.23 5.03 7.51 5.13
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns
and net asset value will fluctuate so that an investor's shares, when
sold, may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/96
Class A Class B Class M
- -----------------------------------------------------------------------
Distributions (number) 12 12 12
- -----------------------------------------------------------------------
Income $0.592 $0.522 $0.568
- ------------------------------------------------------------------------
Total $0.592 $0.522 $0.568
- -----------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------
10/31/95 $10.17 $10.68 $10.14 $10.17 $10.51
- ------------------------------------------------------------------------
10/31/96 10.01 10.51 9.98 10.01 10.35
- -----------------------------------------------------------------------
Current return
- ------------------------------------------------------------------------
End of period
- -----------------------------------------------------------------------
Current dividend rate1 6.11% 5.82% 5.41% 5.87% 5.68%
- ------------------------------------------------------------------------
Current 30-day SEC yield2 5.64 5.37 4.88 5.41 5.24
- -----------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales 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 maximum 4.75% sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B shares and assumes redemption at the end of
the period. Your fund's CDSC declines from a 5% maximum during the first
year to 1% during the sixth year. After the sixth year, the CDSC no
longer applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Government Bond Index* is an unmanaged list of publicly
issued U.S. Treasury obligations and debt obligations of U.S. government
agencies (excluding 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.
Lehman Brothers Aggregate Bond Index* is an unmanaged list of
investment-grade bonds.
Lehman Brothers Corporate Bond Index* is an unmanaged list of publicly
issued, fixed-rate non-convertible investment-grade domestic corporate
debt securities frequently used as a general measure of the performance
of fixed-income securities.
Lehman Brothers Long-Term Treasury Bond Index* is composed of all bonds
covered by the Lehman Brothers Treasury Bond Index with maturities of 10
years of greater.
Lehman Brothers Mortgage-Backed Securities Index* is an unmanaged list
of GNMA bonds.
Salomon Brothers World Government Bond Index* is a market-capitalization
weighted benchmark that tracks the performance of government-bond
markets in 14 countries.
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.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund *
Health Sciences Trust
International Growth Fund +
International New Opportunities Fund
Investors Fund
New Opportunities Fund
OTC & Emerging Growth Fund [DBL. Dagger]
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
MOST CONSERVATIVE
INVESTMENTS **
Putnam money market funds: ++
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts [2 DBL. DAGGERS]
* Formerly Natural Resources Fund
+ Formerly Overseas Growth Fund
[DBL. DAGGER] Formerly OTC Emerging Growth Fund
[SECTION MARK] Not available in all states.
** Relative to above.
++ An investment in a money market fund is neither insured
nor guaranteed by the U.S. government. These funds are managed to
maintain a price of $1.00 per share, although there is no assurance that
this price will be maintained in the future.
[2 DBL. DAGGERS] Not offered by Putnam Investments. Certificates of
deposit offer a fixed rate 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 at 1-
800-225-1581 to obtain a prospectus for any Putnam fund. It contains
more complete information, including charges and expenses. Please read
it carefully before you invest or send money.
Report of independent accountants
For the fiscal year ended October 31, 1996
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 October 31, 1996, and the related statement of operations
for the year then ended, the statements 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 fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of October 31, 1996,by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Federal Income Trust as of October 31,
1996, 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 16, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
October 31, 1996
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (72.3%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Pass-Through Certificates (36.6%)
- ----------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
$18,513,000 8s, with various due dates from September 1, 2026 to October 1, 2026 18,883,260
19,205,991 7s, with various due dates from October 1, 2017 to October 1, 2026 18,839,750
Government National Mortgage Association
17,624,735 8s, with various due dates from January 15, 2001 to June 15, 2023 18,368,607
39,768,295 7 1/2s, with various due dates from July 15, 2025 to April 15, 2026 39,892,274
26,812,390 7s, with various due dates from August 15, 2025 to June 15, 2026 26,292,792
20,517,883 6 1/2s, with various due dates from April 15, 2023 to November 15, 2025 19,613,692
------------
141,890,375
U.S. Treasury Obligations (35.7%)
- ----------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
$13,940,000 11 5/8s, November 15, 2004 18,544,521
27,440,000 7 1/2s, November 15, 2024 30,098,113
U.S. Treasury Notes
21,575,000 11 7/8s, November 15, 2003 (2 double daggers)# 28,381,265
27,626,000 9 1/4s, August 15, 1998 29,253,448
23,430,000 7s, July 15, 2006 24,462,326
8,000,000 6 3/8s, September 30, 2001 8,090,000
------------
138,829,673
------------
Total U.S. Government and Agency Obligations (cost $278,143,541) 280,720,048
FOREIGN GOVERNMENT BONDS AND NOTES (11.0%) *
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
AUD 11,240,000 Australia (Government of) bonds 10s, 2006 10,429,781
AUD 7,505,000 Australia (Government of) bonds Ser. 803, 9 1/2s, 2003 6,649,222
CAD 8,680,000 Canada (Government of) deb. 8 3/4s, 2005 7,549,771
CAD 9,100,000 Canada (Government of) deb. 7 1/2s, 2001 7,343,359
GBP 6,540,000 United Kingdom Treasury bonds 7 1/4s, 1998 10,743,683
------------
Total Foreign Government Bonds and Notes (cost $44,974,930) 42,715,816
CORPORATE BONDS AND NOTES (11.0%) *
PRINCIPAL AMOUNT VALUE
Entertainment (1.0%)
- ----------------------------------------------------------------------------------------------------------------------
$2,835,000 Time Warner Entertainment Co. deb. 7 1/4s, 2008 2,763,104
1,090,000 Time Warner Inc. notes 8 7/8s, 2012 1,186,302
------------
3,949,406
Insurance and Finance (3.3%)
- ----------------------------------------------------------------------------------------------------------------------
3,925,000 Advanta National Bank sr. notes 7.02s, 2001 3,941,956
3,245,000 Conseco Inc. sr. notes 10 1/2s, 2004 3,835,817
2,010,000 Salton Sea Funding Corp. company guaranty Ser. E, 8.3s, 2011 2,093,395
2,910,000 Sampoerna International Finance Co. 144A company guaranty 8 3/8s, 2006 (Indonesia) 2,969,248
------------
12,840,416
Metals and Mining (0.5%)
- ----------------------------------------------------------------------------------------------------------------------
1,770,000 PT Alatief Freeport sr. notes 9 3/4s, 2001 (Netherlands) 1,931,265
Publishing (0.8%)
- ----------------------------------------------------------------------------------------------------------------------
3,070,000 News America Hldgs, Inc. deb. 7.7s, 2025 2,935,135
Real Estate (1.7%)
- ----------------------------------------------------------------------------------------------------------------------
1,270,000 Health Care Property Investors, Inc. sr. notes 6 1/2s, 2006 1,209,040
3,335,000 Meditrust med. term notes 7.3s, 2006 (R) 3,258,262
2,020,000 Sun Communities, Inc. sr. notes 7 5/8s, 2003 (R) 2,055,411
------------
6,522,713
Telecommunications (0.8%)
- ----------------------------------------------------------------------------------------------------------------------
3,380,000 360 Communications Co. sr. notes 7 1/2s, 2006 3,349,073
Utilities (2.9%)
- ----------------------------------------------------------------------------------------------------------------------
9,944,000 Citizens Utilities Co. bonds 7.68s, 2034 11,083,284
------------
Total Corporate Bonds and Notes (cost $40,938,040) 42,611,292
NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (8.1%) *
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
Chase Mortgage Finance Corp.
$1,325,318 Ser.1994-G, Class B3, 7s, April 25, 2025 1,220,950
4,055,118 Interest Strip Ser.1993-3, Class B7, 7.47s, October 29, 2024 3,853,630
945,183 Interest Strip Ser. 1993-3, Class B6, 7.47s, October 29, 2024 898,220
1,137,576 CMC Securities Corp. III Ser.1994-F, Class B2, 6 1/4s, May 25, 2014 1,048,703
2,823,507 Housing Securities Inc. Ser.1993-J, Class J2, 6.66s, January 25, 2009 2,722,037
2,710,378 Prudential Home Mortgage Securities Ser. 1994-28, Class B2, 6.78s, September 25, 2001 2,621,444
Prudential Home Mortgage Securities 144A
3,705,622 Ser. 1993-31, Class B1, 6s, August 25, 2000 3,545,817
4,817,108 Ser.1994-D, Class 3B, 6.31s, August 28, 2009 4,522,061
Residential Funding Mortgage Securities
1,016,605 Ser. 93-S17, Class M3, 7s, May 25, 2008 980,071
777,509 Ser. 93-S23, Class M3, 6 1/2s, June 25, 2008 730,858
4,603,937 Ser. 1993-MZ3, Class A1, 6.97s, August 30, 2023 4,529,123
Securitized Asset Sales, Inc. Mtge. Pass Thru Certifcate
3,366,075 Ser.1993-J, Class 2B, 6.81s, December 30, 2023 3,091,530
1,859,486 Ser. 1994-3, Class B1, 6.09s, February 25, 1999 1,805,445
------------
Total Non-Agency Collateralized Mortgage Obligations (cost $29,444,175) 31,569,889
BRADY BONDS (0.9%) *(cost $3,702,236)
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
$3,839,000 Poland (Government of) 144A FRN 6 1/2s, 2024 3,666,245
SHORT-TERM INVESTMENTS (1.3%) * (cost $5,000,765)
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
$5,000,000 Interest in $356,650,000 joint repurchase agreement dated October 31, 1996,
with Morgan (J.P.) & Co. Inc., due November 1, 1996, with respect to various
U.S. Treasury obligations -- maturity value of $5,000,765 for an effective
yield of 5.51% 5,000,765
- ----------------------------------------------------------------------------------------------------------------------
Total Investments (cost $399,203,687)*** 406,284,055
- ----------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $388,003,379.
# A portion of these securities were
pledged and segregated with the custodian to cover margin
requirements for futures contracts at October 31, 1996.
The market value of these securities is $295,981
or .1% of net assets.
(R) Real Estate Investment Trust.
*** The aggregate identified cost on a tax basis is
$400,604,009, resulting in gross unrealized appreciation and
depreciation of $7,833,445 and $2,153,399, respectively,
or net unrealized appreciation of $5,680,046.
The rate shown on FRN (Floating Rate Notes) are the current interest rate
shown at October 31, 1996 which are subject to
change based on the terms of the security.
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.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Forward Currency Contracts to Buy at October 31, 1996
Market Aggregate Face Delivery Unrealized
Value Value Date Appreciation
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Canadian Dollars $13,757,252 $13,560,666 12/18/96 $196,586
- ------------------------------------------------------------------------------------------------------------
Forward Currency Contracts to Sell at October 31, 1996
(Aggregate face value $31,219,221)
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- ------------------------------------------------------------------------------------------------------------
Australian Dollars $6,854,241 $6,854,315 12/18/96 $74
British Pounds 11,079,796 10,831,183 12/18/96 (248,613)
Canadian Dollars 13,828,824 13,533,725 12/18/96 (295,099)
- ------------------------------------------------------------------------------------------------------------
$(543,638)
- ------------------------------------------------------------------------------------------------------------
Futures Contracts Outstanding at October 31, 1996
Market Aggregate Face Expiration Unrealized
Value Value Date Depreciation
- ------------------------------------------------------------------------------------------------------------
UST Bonds 20 Years (Short) $2,034,000 $1,998,563 Dec. 96 $(35,437)
UST Notes 5 Years (Short) 18,766,016 18,621,094 Dec. 96 $(144,922)
- ------------------------------------------------------------------------------------------------------------
$(180,359)
- ------------------------------------------------------------------------------------------------------------
TBA Sale Commitments at October 31, 1996
(Proceeds receivable $18,886,153)
- ------------------------------------------------------------------------------------------------------------
Principal Delivery Coupon Market
Agency Amount Month Rate Value
- ------------------------------------------------------------------------------------------------------------
FNMA $18,886,153 Nov. 8.0% $18,883,260
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1996
<S> <C>
Assets
- --------------------------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $399,203,687) (Note 1) $406,284,055
- --------------------------------------------------------------------------------------------------------------------
Cash 583,547
- --------------------------------------------------------------------------------------------------------------------
Interest receivable 6,747,663
- --------------------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 82,006
- --------------------------------------------------------------------------------------------------------------------
Receivable for securities sold 21,069,037
- --------------------------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 11,526
- --------------------------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 196,698
- --------------------------------------------------------------------------------------------------------------------
Total assets 434,974,532
Liabilities
- --------------------------------------------------------------------------------------------------------------------
Payable for variation margin 26,454
- --------------------------------------------------------------------------------------------------------------------
Payable for securities purchased 25,626,151
- --------------------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 408,920
- --------------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 609,220
- --------------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 95,034
- --------------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 106
- --------------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,750
- --------------------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 86,483
- --------------------------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 543,750
- --------------------------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 544,438
- --------------------------------------------------------------------------------------------------------------------
TBA sale commitment at value (proceeds receivable $18,886,153) 18,883,260
- --------------------------------------------------------------------------------------------------------------------
Other accrued expenses 144,587
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 46,971,153
- --------------------------------------------------------------------------------------------------------------------
Net Assets $388,003,379
Represented by
- --------------------------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $566,225,620
- --------------------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 3,815,033
- --------------------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investment
and foreign currency transactions (Note 1) (188,593,622)
- --------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments
and assets and liabilities in foreign currencies 6,556,348
- --------------------------------------------------------------------------------------------------------------------
Total - Representing net assets applicable to capital shares outstanding $388,003,379
Computation of net asset value and offering price
- --------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share ($379,928,822 divided by 37,937,926 shares) $10.01
- --------------------------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $10.01)* $10.51
- --------------------------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share ($7,535,341 divided by 754,697 shares)** $9.98
- --------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share ($539,216 divided by 53,853 shares) $10.01
- --------------------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $10.01)* $10.35
- --------------------------------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000
or more and on group sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1996
<S> <C>
Interest income: $29,275,782
Expenses:
- -------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,523,974
- -------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 790,022
- -------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 16,011
- -------------------------------------------------------------------------------------
Administrative services (Note 2) 6,837
- -------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 999,045
- -------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 46,715
- -------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,690
- -------------------------------------------------------------------------------------
Reports to shareholders 56,832
- -------------------------------------------------------------------------------------
Auditing 50,983
- -------------------------------------------------------------------------------------
Legal 11,503
- -------------------------------------------------------------------------------------
Postage 184,528
- -------------------------------------------------------------------------------------
Other 32,016
- -------------------------------------------------------------------------------------
Total expenses 4,720,156
- -------------------------------------------------------------------------------------
Expense reduction (Note 2) (134,965)
- -------------------------------------------------------------------------------------
Net expenses 4,585,191
- -------------------------------------------------------------------------------------
Net investment income 24,690,591
- -------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 3,452,870
- -------------------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (187,167)
- -------------------------------------------------------------------------------------
Net realized gain on foreign currency transactions (Note 1) 193,876
- -------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities
in foreign currencies during the year 551,460
- -------------------------------------------------------------------------------------
Net unrealized depreciation of investments futures,
and TBA sale commitments during the year (11,538,925)
- -------------------------------------------------------------------------------------
Net loss on investments (7,527,886)
- -------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $17,162,705
- -------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
---------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ---------------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------------
Net investment income $24,690,591 $26,899,845
- ---------------------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 3,459,579 14,450,612
- ---------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments
and assets and liabilities in foreign currencies (10,987,465) 22,754,337
- ---------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 17,162,705 64,104,794
- ---------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------------
From net investment income:
Class A (23,678,859) (26,249,604)
- ---------------------------------------------------------------------------------------------------------------------
Class B (243,839) (56,929)
- ---------------------------------------------------------------------------------------------------------------------
Class M (19,056) (2,393)
- ---------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (33,489,985) (59,501,922)
- ---------------------------------------------------------------------------------------------------------------------
Total decrease in net assets (40,269,034) (21,706,054)
- ---------------------------------------------------------------------------------------------------------------------
Net Assets
- ---------------------------------------------------------------------------------------------------------------------
Beginning of year 428,272,413 449,978,467
- ---------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income
of $3,815,033 and $3,489,733, respectively) $388,003,379 $428,272,413
- ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the period
April 12, 1995
Year (commencement
ended of operations) to Year ended
October 31 October 31 October 31
----------------------------------------------------
1996 1995 1996
----------------------------------------------------
Class M Class B
----------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.17 $9.57 $10.14
- ------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------
Net investment income .59(b) .29(b) .54(b)
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.18) .60 (.18)
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .41 .89 .36
- ------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ------------------------------------------------------------------------------------------------------------------------
From net investment income (.57) (.29) (.52)
- ------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions (.57) (.29) (.52)
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.01 $10.17 $9.98
- ------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 4.20 9.35* 3.74
- ------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $539 $186 $7,535
- ------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) 1.43 .71* 1.93
- ------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.90 3.15* 5.44
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 297.30 234.95 297.30
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
For the Period
June 6, 1994
(commencement
of operations) to
October 31
--------------------------------------------------------
1995 1994 1996
--------------------------------------------------------
Class B
--------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.30 $9.68 $10.17
- ----------------------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------------------
Net investment income .52 .18 .61(b)
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .84 (.32) (.18)
- ----------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.36 (.14) .43
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (.52) (.23) (.59)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Return of capital -- (.01) --
- ----------------------------------------------------------------------------------------------------------------------
Total distributions (.52) (.24) (.59)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.14 $9.30 $10.01
- ----------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 15.09 (1.42)* 4.45
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,835 $498 $379,929
- ----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) 1.85 .72* 1.16
- ----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.42 2.34* 6.12
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 234.95 317.91 297.30
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year ended October 31
--------------------------------------------------------
1995 1994 1993
--------------------------------------------------------
Class A
--------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.32 $10.47 $10.47
- ---------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------
Net investment income .60 .61 .83
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .84 (1.07) --
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.44 (.46) .83
- ---------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------------
From net investment income (.59) (.66) (.83)
- ---------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Return of capital -- (.03) --
- ---------------------------------------------------------------------------------------------------------------------
Total distributions (.59) (.69) (.83)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.17 $9.32 $10.47
- ---------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 15.97 (4.54) 8.17
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $426,252 $449,480 $600,181
- ---------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) 1.12 1.06 1.05
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.22 6.91 7.81
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 234.95 317.91 150.05
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year ended
October 31
------------------
1992
------------------
Class A
------------------
<S> <C>
- ---------------------------------------------------------------------------------------
Net asset value, beginning of period $10.52
- ---------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------
Net investment income .84
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.05)
- ---------------------------------------------------------------------------------------
Total from investment operations .79
- ---------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------
From net investment income (.72)
- ---------------------------------------------------------------------------------------
From net realized gain on investments (.12)
- ---------------------------------------------------------------------------------------
Return of capital --
- ---------------------------------------------------------------------------------------
Total distributions (.84)
- ---------------------------------------------------------------------------------------
Net asset value, end of period $10.47
- ---------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 7.75
- ---------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $655,656
- ---------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) 1.11
- ---------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.83
- ---------------------------------------------------------------------------------------
Portfolio turnover (%) 248.37
- ---------------------------------------------------------------------------------------
* Not annualized
(a) Total investment return assumes dividend reinvestment
and does not reflect the effect of sales charges.
(b) Per share net investment income has been determined on the basis
the weighted average number of shares outstanding during the period.
(c) The ratio of expenses to average net assets for periods ended October 31,
1995 and thereafter, includes amounts paid through expense offset
arrangements. Prior period ratios exclude these amounts. (Note 2).
</TABLE>
Notes to financial statements
October 31, 1996
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 current income, consistent with preservation of capital,
through investments primarily in U.S. government securities.
The fund offers class A, class B and class M shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares,
which convert to class A shares after approximately eight years, do not
pay a front-end sales charge, but pay a higher ongoing distribution fee
than class A shares, and are subject to a contingent deferred sales
charge, if those shares are redeemed within six years of purchase. Class
M shares are sold with a maximum front-end sales charge of 3.25% and pay
an ongoing distribution fee that is lower than class B shares and higher
than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sale price, or, if no sales are reported -- as in the
case of some securities traded over-the-counter -- the last reported bid
price. Securities quoted in foreign currencies are translated into U.S.
dollars at the current exchange rate. Short-term investments having
remaining maturities of 60 days or less are stated at amortized cost,
which approximates market value, and other investments, are stated at
fair value following procedures approved by the Trustees. Market
quotations are not considered to be readily available for long-term
corporate bonds and notes; such investments are stated at fair value on
the basis of valuations furnished by a pricing service, approved by the
Trustees, which determines valuations for normal, institutional-size
trading units of such securities using methods based on market
transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc.. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Putnam Management is responsible for determining that the value of these
underlying securities is at all times at least equal to the resale
price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed).
Interest income is recorded on the accrual basis. Discounts on original
issue bonds are accreted according to the effective yield method.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on
investments from fluctuations arising from changes in the market prices
of the securities. Such fluctuations are included with the net realized
and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign
currencies and the difference between the amount of investment income
and foreign withholding taxes recorded on the fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net unrealized
gains and losses on foreign currency transactions arise from changes in
the value of open forward currency contracts and assets and liabilities
other than investments at the period end, resulting from changes in the
exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term
investments). The U.S. dollar value of forward currency contracts is
determined using forward currency exchange rates supplied by a quotation
service. The market value of the contract will fluctuate with changes in
currency exchange rates. The contract is "marked to market" daily and
the change in market value is recorded as an unrealized gain or loss.
When the contract is closed, the fund records a realized gain or loss
equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed. The fund could be
exposed to risk if the value of the currency changes unfavorably, if the
counterparties to the contracts are unable to meet the terms of their
contracts or if the fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
H) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale
commitments are not received until the contractual settlement date.
During the time a TBA sale commitment is outstanding, equivalent
deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover"
for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures
described under "Security valuation" above. The contract is "marked-to-
market" daily and the change in market value is recorded by a fund as an
unrealized gain or loss. If the TBA sale commitment is closed through
the acquisition of an offsetting purchase commitment, the fund realizes
a gain or loss on the underlying security. If the fund delivers
securities under the commitment, the fund realizes a gain or a loss from
the sale of the securities based upon the unit price established at the
date the commitment was entered into.
I) 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 Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
At October 31, 1996, the fund had a capital loss carryover of
approximately $187,373,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- ------------------------------------------
$118,265,000 October 31, 1997
15,005,000 October 31, 1998
54,103,000 October 31, 2002
J) Distributions to shareholders Distributions to shareholders are
recorded by the fund on the ex-dividend date. At certain times, the fund
may pay distributions at a level rate even though, as a result of market
conditions or investment decisions, the fund may not achieve projected
investment results for a given period. 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 realized
and unrealized gains and losses on forward foreign currency contracts,
currency gains and losses on foreign bonds, losses on wash sale
transactions, expiration of a capital loss carryover, market discount
and paydown gains and losses on mortgage backed securities.
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 October 31,
1996, the fund reclassified $423,537 to decrease undistributed net
investment income and $47,588,085 to decrease paid-in-capital, with a
decrease to accumulated net realized loss on investments of $48,011,622.
The calculation of net investment income per share in the financial
highlights table 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 based on the average net assets of
the fund. 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 0.40% of any amount over $1 billion, subject, under current law, to
reduction in any year by the amount of certain brokerage commissions and
fees (less expenses) received by affiliates of Putnam Management on the
fund's portfolio transactions.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Trustees of the fund receive an annual Trustees fee of $900 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund
and are invested in the fund or in certain other Putnam funds until
distribution in accordance with the Plan.
The Fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the Fund who have
served as Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Compensation of trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended October 31, 1996, fund expenses were reduced by
$134,965 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 these assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of
Putnam Investments Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments by
the fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%,
1.00% and 1.00% of the average net assets attributable to class A, class
B and class M shares, respectively. The Trustees have approved payment
by the fund at an annual rate of 0.25%, 1.00% and 0.50% of the average
net assets attributable to class A, class B and class M shares
respectively.
For the year ended October 31, 1996, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $40,027 and $230 from the
sale of class A and class M shares, respectively and received $10,594 in
contingent deferred sales charges from redemptions of class B shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of
class A shares. For the year ended October 31, 1996, Putnam Mutual Funds
Corp., acting as underwriter received $26 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended October 31, 1996, purchases and sales of
investment securities other than U.S. government obligations and short-
term investments aggregated $255,834,218 and $245,049,242, respectively.
Purchases and sales of U.S. government obligations aggregated
$832,450,853 and $878,661,049 , respectively. In determining the net
gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Note 4
Capital shares
At October 31, 1996, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended
October 31, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 1,938,500 $19,364,523
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,266,547 12,588,121
- ----------------------------------------------------
3,205,047 31,952,664
Shares
repurchased (7,170,397) (71,497,032)
- ----------------------------------------------------
Net decrease (3,965,350) $(39,544,388)
- ----------------------------------------------------
Year ended
October 31, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 1,000,695 $9,647,859
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,396,135 13,441,981
- ----------------------------------------------------
2,396,830 23,089,840
Shares
repurchased (8,733,361) (84,013,840)
- ----------------------------------------------------
Net decrease (6,336,531) (60,924,000)
- ----------------------------------------------------
Year ended
October 31, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 884,580 $8,771,380
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 21,682 213,062
- ----------------------------------------------------
906,262 8,984,442
Shares
repurchased (332,561) (3,281,315)
- ----------------------------------------------------
Net increase 573,701 $5,703,127
- ----------------------------------------------------
Year ended
October 31, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 229,692 $2,219,468
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,496 43,550
- ----------------------------------------------------
234,188 2,263,018
Shares
repurchased (106,780) (1,019,887)
- ----------------------------------------------------
Net increase 127,408 $1,243,131
- ----------------------------------------------------
Year ended
October 31, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 39,320 $387,633
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 987 9,769
- ----------------------------------------------------
40,307 397,402
Shares
repurchased (4,704) (46,126)
- ----------------------------------------------------
Net increase 35,603 $351,276
- ----------------------------------------------------
April 12, 1995
(commencement of
operations) to
October 31, 1995
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 18,625 $182,753
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 155 1,550
- ----------------------------------------------------
18,780 184,303
Shares
repurchased (530) (5,356)
- ----------------------------------------------------
Net increase 18,250 $178,947
- ----------------------------------------------------
Federal tax information
(Unaudited)
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
Results of October 31, 1996 shareholder meeting
(Unaudited)
A meeting of shareholders of the fund was held on October 31, 1996. At
the meeting, each of the nominees for Trustees was elected, as follows:
Votes for Votes withheld
------------ ----------------
Jameson Adkins Baxter 24,371,034 978,546
Hans H. Estin 24,370,335 979,246
John A. Hill 24,368,753 980,828
R.J. Jackson 24,370,332 979,249
Elizabeth T. Kennan 24,365,711 983,870
Lawrence J. Lasser 24,371,035 978,546
Robert E. Patterson 24,371,035 978,546
Donald S. Perkins 24,365,777 983,804
William F. Pounds 24,368,423 981,158
George Putnam 24,370,335 979,246
George Putnam, III 24,370,275 979,306
Eli Shapiro 24,361,988 987,593
A.J.C. Smith 24,370,335 979,246
W. Nicholas Thorndike 24,364,293 985,288
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as
auditors for the fund was approved as follows: 24,308,866 votes for, and
234,288 votes against, with 806,427 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to diversification of investments was approved as follows:
21,901,318 votes for, and 957,331 votes against, with 2,490,932
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in the securities of a single issuer was approved
as follows: 20,889,396 votes for, and 1,620,552 votes against, with
2,839,633 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to making loans through purchases of debt obligations,
repurchase agreements and securities loans was approved as follows:
20,098,161 votes for, and 2,550,780 votes against, with 2,700,640
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in real estate was approved as follows:
21,082,327 votes for, and 1,747,317 votes against, with 2,519,937
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in senior securities was approved as follows:
21,229,403 votes for, and 1,532,554 votes against, with 2,587,624
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in commodities or commodity contracts was
approved as follows: 20,283,159 votes for, and 2,638,557 votes against,
with 2,427,865 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to concentration of its assets was approved as follows:
21,114,768 votes for, and 1,523,961 votes against, with 2,710,852
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in securities of issuers in which management
of the fund or Putnam Investment Management, Inc. owns securities was
approved as follows: 20,506,677 votes for, and 2,098,085 votes against,
with 2,744,819 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to margin transactions was approved as follows: 19,917,804
votes for, and 2,791,029 votes against, with 2,640,748 abstentions and
broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to short sales was approved as follows: 20,019,909 votes
for, and 2,623,463 votes against, with 2,616,209 abstentions and broker
non-votes.
A proposal to eliminate the fund's fundamental investment restriction
which limits the fund's ability to pledge assets was approved as
follows: 20,420,726 votes for, and 2,250,852 votes against, with
2,678,003 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in restricted securities was approved as
follows: 20,361,897 votes for, and 2,318,259 votes against, with
2,669,425 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in certain oil, gas an mineral interests was
approved as follows: 20,931,296 votes for, and 1,944,308 votes against,
with 2,473,977 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to invest to gain control of a company's management was
approved as follows: 20,884,262 votes for, and 1,849,504 votes against,
with 2,615,815 abstentions and broker non-votes.
All tabulations are rounded to nearest whole number.
Our commitment to quality service
* CHOOSE AWARD-WINNING SERVICE
Putnam Investor Services has won the DALBAR Quality Tested Service Seal
for the past six years. In 1995, over 146,000 tests of 56 shareholder
service components demonstrated that Putnam outperformed the industry
standard in every category.
* HELP YOUR INVESTMENT GROW
Set up a systematic program for investing with as little as $25 a month
from a Putnam money market fund or from your checking or savings
account.*
* SWITCH FUNDS EASILY
You can move money from one account to another with the same class of
shares without a service charge. (This privilege is subject to change or
termination.)
* ACCESS YOUR MONEY QUICKLY
You can get checks sent regularly or redeem shares any business day at
the then-current net asset value, which may be more or less than the
original cost of the shares.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a
helpful Putnam representative.
To make an additional investment in this or any other Putnam fund,
contact your financial advisor or call our toll-free number: 1-800-225-
1581.
*Regular investing of course, does not guarantee a profit or protect
against a loss in a declining market.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Alan J. Bankart
Vice President
Kenneth J. Taubes
Vice President and Fund Manager
Max S. Senter
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam 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 objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For more
information, or to request a prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' website:
http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution, are not insured by the
Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board
or any other agency, and involve risk, including the possible loss of
principal amount invested.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------------
29206-039/334/878 12/96
