Putnam
Income
Fund
[photo of ??? SEE PRINTED VERSION]
ANNUAL REPORT
October 31, 1995
[Putnam logo]
B O S T O N * L O N D O N * T O K Y O
<PAGE>
Fund highlights
[arrow] "[Putnam Income Fund's] diversity, foreign exposure, consistent
outperformance of its peers, moderate risk, and high yield make it
attractive to investors seeking a balanced income fund."
-- The Value Line Mutual Fund Survey, September 19, 1995
[arrow] "While the bond market's calm in recent months has been refreshing,
it won't stay this way forever. Investors who want broad exposure to
the market should seriously consider the corporate-general group, one
of the best-diversified bond objectives."
-- Morningstar Mutual Funds, September 15, 1995
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
21 Financial statements
2
<PAGE>
From the Chairman [photo of George Putnam]
(C)Karsh, Ottawa
Dear Shareholder:
Putnam Income Fund closed the books on an eventful 12-month period that began
at the tag end of one of the sharpest bond market declines on record and
ended in the midst of one of the market's strongest rallies. As your fund's
management team relates in the report that follows, results for the fiscal
year that ended October 31, 1995, were gratifying, especially in contrast to
last year's challenges.
Moreover, your fund's managers see evidence suggesting that the current
environment, which has been so amenable to fixed-income investments, will
continue in the months ahead. Among the favorable factors are prospects for a
sustainable pace of economic growth and continued low inflation.
Another cut in short-term interest rates by the Federal Reserve Board and
agreement by Congress and the president on a federal budget that reduces the
national deficit appear to be reasonable prospects. Both would be greeted
warmly by the bond market as your fund enters fiscal 1996.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
December 20, 1995
3
<PAGE>
Report from the Fund Managers
Kenneth J. Taubes, lead manager
Rosemary H. Thomsen
D. William Kohli
After beginning the fiscal year in the wake of a significant bond-market
decline, Putnam Income Fund rebounded dramatically as U.S. government
securities rallied throughout the remainder of the period. The fund's total
return of 16.23% for class A shares at net asset value (NAV) outpaced the
Lehman Brothers Aggregate Bond Index's 15.65% return over the 12-month period
ended October 31, 1995. The fund's class B shares posted a solid 15.46% total
return at NAV.
The bond market's surge was a large contributor to your fund's solid
performance, but equally important was the diversified investment strategy
that enabled your fund to take advantage of the market's more prosperous
sectors. Over the fiscal year, your fund employed this investment approach
effectively to derive benefit from U.S. Treasury securities, corporate bonds,
mortgage-backed securities, and international bonds.
[arrow] LONGER DURATION CAPITALIZES ON FALLING INTEREST RATES
The fund's diversified strategy adds an additional dimension to our ability
to manage the portfolio's duration. 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.
Early in the fund's fiscal year, we kept the portfolio's duration relatively
short to protect the fund's value as long-term interest rates continued to
climb. As the current bond-market rally picked up steam in response to
slowing economic growth and moderate inflation, investors' fears of inflation
gradually dissipated. This, in turn, pushed long-term interest rates lower.
At the same time, we extended the portfolio's duration--from approximately 5
years at the start of the fiscal year to just over 6 years on October 31,
1995--in order to capitalize on the interest-rate decline.
Such a strategy does not come without risk: if interest rates had risen, this
longer duration might have adversely affected the
4
<PAGE>
fund's performance. However, diversification of the portfolio among several
sectors--including international bonds--offered your fund a greater degree of
value protection in the event that domestic interest rates had turned upward.
[arrow] HIGH-YIELD CORPORATE BONDS BOOST PERFORMANCE
Despite a moderate slowdown in the economy's rate of growth, earnings of
American corporations were healthy over the fiscal year. During the period,
most companies worked to enhance productivity while effectively controlling
costs. As a result, demand for corporate bonds remained strong. For your
fund, high-yield holdings performed especially well, led by higher-rated
holdings. One security in particular that helped performance was OSI
Specialties Inc., a producer of specialty chemicals. Toward the end of the
fiscal year, OSI was acquired by Witco, an A-rated company that is tendering
for outstanding OSI bonds at a premium.
[arrow] LONGER-TERM TREASURIES GAIN AS INFLATION CONCERNS FADE
As economic growth slowed steadily over the past fiscal year, the Federal
Reserve Board reduced the federal funds rate only once. The federal funds
rate is the rate at which banks offer overnight loans to one another, and the
Fed typically reduces it to stimulate the U.S. economy when growth is
stagnating. During the same 12-month period, investors largely overcame their
fears of inflation, and, as a result, interest rates on longer-term
Treasuries declined considerably.
[typeset representation of bar chart]
CHANGES IN PORTFOLIO COMPOSITION*
10/31/94 10/31/95
Corporate bonds 46.60 29.30
U.S. government and agency obligations 42.60 55.40
Foreign bonds and notes 8.8 8.2
Asset-backed securities 2.3 0
Short-term investments 2.3 2.1
Collateralized mortgage obligations 1.1 5.1
Other 0.3 0.1
*Based on total net assets as of indicated date. Holdings will vary over
time.
5
<PAGE>
All of this compelled us to invest your fund's assets more aggressively in
Treasuries with maturities ranging between 10 and 30 years. Treasuries
typically perform well during bond-market rallies because their values rise
as interest rates drop. In the more recent stages of the current rally,
Treasuries with longer maturities fared particularly well as long-term
interest rates declined, and your portfolio's investments in these securities
aided the fund's overall performance substantially.
The fund also benefited from its small position in collateralized mortgage
obligations (CMOs). These bonds are backed by mortgage securities that split
the cash flows from pools of mortgage loans into various time frames and
payment structures. While CMOs may be more difficult to sell than other
mortgage-backed securities, they can be very effective in enhancing the
fund's dividend income.
[arrow] OUTLOOK: SLOW ECONOMIC GROWTH BODES WELL FOR BONDS
As the fund moves into fiscal 1996, both economic growth and inflation seem
to be headed downward. Congress appears increasingly likely to approve a
budget that reduces the national deficit, and short-term interest rates
remain relatively high--two factors that may constrain economic growth in the
coming months. In this environment, we believe the Fed may reduce short-term
interest rates in the near future to keep the economy expanding at a
productive pace. Although there can be no assurances, all of this suggests a
healthy environment for bonds over the short term.
If, as we anticipate, the Fed eases short-term interest rates and benign
inflation restrains long-term rates, we will likely maintain the portfolio's
longer duration to capitalize on the potential benefits. At the same time, we
will carefully monitor the level of prepayments in the mortgage-backed
securities market. Prepayments, which diminish the value of mortgage-backed
securities, can accelerate as mortgage holders rush to refinance in response
to falling long-term interest rates. In such a scenario, we may choose to
protect the portfolio's value by shifting to lower-coupon securities or by
reducing the fund's allocation to mortgage-backed securities.
6
<PAGE>
[typeset representation of line chart]
LENGTHENING DURATION AS INTEREST RATES FALL
[NEED PLOT POINTS FROM CLIENT]
This graph illustrates that the fund's managers lengthened the portfolio's
average duration as the yield on the benchmark 30-year Treasury bond
declined. Lengthening duration often entails purchasing longer-term bonds,
which typically appreciate more than shorter-term bonds as long-term yields
fall. Although this investment strategy was viewed favorably as of 10/31/95,
there is no guarantee that this strategy will be successful or that the fund
will respond to each long-term interest-rate shift in this fashion.
We believe that the current potency of the dollar relative to major foreign
currencies reflects its appropriate value, and that the dollar will continue
to strengthen in the near term. Consequently, we plan to maintain existing
currency hedges on the fund's international holdings to lock in attractive
exchange rates when converting these bonds back into dollars.
Going forward, we will keep abreast of changing market conditions to identify
the best value opportunities as we strive to maintain the fund's competitive
income and total return.
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 10/31/95, there is no guarantee the fund will continue to
hold these securities in the future.
7
<PAGE>
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, assuming you held the shares through the entire period and
reinvested all distributions in the fund.
Performance should always be considered in light of a fund's investment
strategy. Putnam Income Fund is designed for investors seeking high current
income consistent with prudent risk, mainly through fixed-income securities.
TOTAL RETURN FOR PERIODS ENDED 10/31/95
Class A Class B Class M
(11/1/54) (3/1/93) (12/14/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 16.23% 10.64% 15.46% 10.46% -- --
- ------------------------------------------------------------------------
5 years 68.22 60.15 -- -- -- --
Annual average 10.96 9.88 -- -- -- --
- ------------------------------------------------------------------------
10 years 152.72 140.58 -- -- -- --
Annual average 9.71 9.18 -- -- -- --
- ------------------------------------------------------------------------
Life of class -- -- 17.59 14.65 15.43% 11.66%
Annual average -- -- 6.26 5.25 -- --
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS
ENDED 10/31/95
Lehman Bros.
Aggregate Consumer
Bond Index Price Index
- -----------------------------------------------------------
1 year 15.65% 2.81%
- -----------------------------------------------------------
5 years 58.53 15.13
Annual average 9.65 2.86
- -----------------------------------------------------------
10 years 157.15 41.40
Annual average 9.91 3.52
- -----------------------------------------------------------
Life of class B 18.27 7.41
Annual average 6.49 2.71
- -----------------------------------------------------------
Life of class M 15.90 2.67
- -----------------------------------------------------------
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 5% maximum
contingent deferred sales charge.
8
<PAGE>
[typeset representation of line chart]
GROWTH OF $10,000 INVESTMENT
Fund's Class A Lehman Brothers Consumer
shares at POP Aggregate Bond Index Price Index
10/31/85 9525 10000 10000
10/31/86 10929 11952 10147
10/31/87 11004 12233 10607
10/31/88 12661 13636 11058
10/31/89 14015 15258 11555
10/31/90 14302 16221 12282
10/31/91 16883 18786 12640
10/31/92 18885 20633 13045
10/31/93 21597 23083 13404
10/31/94 20700 22235 13753
10/31/95 24058 25715 14140
Past performance is no assurance of future results. A $10,000 investment in
the fund's class B shares at inception on 3/1/93 would have been valued at
$11,759 on 10/31/95 ($11,465 with a redemption at the end of the period). A
$10,000 investment in the fund's class M shares at commencement of operations
on 12/14/94 would have been valued at $11,543 at net asset value on 10/31/95,
$11,166 at public offering price.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/95
Class A Class B Class M
- ----------------------------------------------------------------------------
Distributions:
Number 12 12 11
Income(1) $0.480 $0.431 $0.432
Capital gains
Long-term -- -- --
Short-term -- -- --
Total $0.480 $0.431 $0.432
Share value: NAV POP NAV NAV POP
10/31/94 $6.53 $6.86 $6.50 -- --
12/14/94 -- -- -- $6.50 $6.72
(commencement of operations of class M shares)
10/31/95 $7.07 $7.42 $7.04 $7.04 $7.28
Current return:
End of period
Current dividend rate(1) 6.79% 6.47% 6.14% 6.65% 6.43%
Current 30-day SEC yield(2) 6.05 5.76 5.18 5.77 5.56
(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.
9
<PAGE>
TOTAL RETURN FOR PERIODS ENDED 9/30/95
(most recent calendar quarter)
Class A Class B Class M
(11/1/54) (3/1/93) (12/14/94)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 14.30% 8.85% 13.52% 8.52% -- --
- -----------------------------------------------------------------------
5 years 66.03 58.11 -- -- -- --
Annual average 10.67 9.59 -- -- -- --
- -----------------------------------------------------------------------
10 years 152.92 141.01 -- -- -- --
Annual average 9.72 9.20 -- -- -- --
- -----------------------------------------------------------------------
Life of class -- -- 15.99 13.08 13.82% 10.10%
Annual average -- -- 5.92 4.88 -- --
- -----------------------------------------------------------------------
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.
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 Aggregate Bond Index is an unmanaged list of investment-grade
bonds. The index reflects changes in market prices, assumes reinvestment of
all interest payments and does not take into account brokerage commissions or
other costs. The index may include bonds different from those in the fund,
and may pose different risks than the fund. It is not possible to invest
directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
10
<PAGE>
Report of independent accountants
For the year ended October 31, 1995
To the Trustees and Shareholders of Putnam Income Fund
We have audited the accompanying statement of assets and liabilities of
Putnam Income Fund, including the portfolio of investments owned, as of
October 31, 1995, and 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 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, 1995, 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 Income Fund as of October 31, 1995, 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, 1995
11
<PAGE>
Portfolio of investments owned
October 31, 1995
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (55.4%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Federal National Mortgage Association 11s,
$ 568,780 11s, with various due dates to October 1, 2015 $ 637,210
17,642,959 7s, with various due dates to February 1, 2025 17,494,054
26,416,181 Dwarf 6s, with various due dates to October 1, 2010 25,779,504
3,949,156 Graduated Payment Mortgages (GPM) 8s, December 1, 2008 4,125,960
Government National Mortgage Association
643,678 11s, with various due dates to October 15, 2013 708,244
544,522 9s, with various due dates to May 15, 2009 580,084
69,350,527 7s, with various due dates to September 15, 2025 68,873,392
45,234,677 6-1/2s, with various due dates to October 15, 2025 43,990,723
12,689,232 Midgets 6-1/2s, with various due dates to June 15, 2009 12,645,584
13,156,997 Midgets 6s, with various due dates to June 15, 2009 12,881,488
13,130,000 TBA 6-1/2s, November 15, 2025+++ 13,039,666
51,555,000 U.S. Treasury Bonds 11-5/8s, November 15, 2004 71,323,249
1,550,000 U.S. Treasury Bonds 8-7/8s, August 15, 2017 1,991,998
40,395,000 U.S. Treasury Bonds 8-1/8s, August 15, 2019 48,625,481
74,685,000 U.S. Treasury Bonds 7-1/2s, November 15, 2024 85,327,613
20,879,000 U.S. Treasury Bonds 7-1/8s, February 15, 2023 22,732,011
106,795,000 U.S. Treasury Interest Strips zero %, February 15, 2003 69,510,730
60,250,000 U.S. Treasury Interest Strips zero %, May 15, 2003 38,585,305
4,122,000 U.S. Treasury Notes 7-3/4s, February 15, 2001 4,476,245
36,585,000 U.S. Treasury Notes 7-3/4s, January 31, 2000 39,208,876
57,105,000 U.S. Treasury Notes 7-1/4s, August 15, 2004 61,833,865
3,873,000 U.S. Treasury Notes 6-7/8s, March 31, 2000 4,031,561
98,845,000 U.S. Treasury Principal Strips zero %, November 15, 2000 73,942,979
- ------------------------------------------------------------------------------------------
Total U.S. Government and Agency Obligations
(cost $691,344,482) $722,345,822
- ------------------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES (29.3%)*
PRINCIPAL AMOUNT VALUE
Advertising (0.1%)
- ------------------------------------------------------------------------------------------
$ 725,000 Outdoor Systems, Inc. sr. notes 10-3/4s, 2003 $ 692,375
500,000 Universal Outdoor, Inc. sub. deb. 11s, 2003 485,000
-----------
1,177,375
-----------
Aerospace and Defense (0.2%)
- ------------------------------------------------------------------------------------------
750,000 Coltec Industries Inc. sr. notes 9-3/4s, 1999 765,000
750,000 K&F Industries Inc. sub. deb. 13-3/4s, 2001 780,000
1,000,000 Sequa Corp. sr. notes 9-5/8s, 1999 972,500
-----------
2,517,500
Agriculture (0.1%)
- ------------------------------------------------------------------------------------------
2,000,000 PSF Finance (L.P.) sr. exch. notes 12-1/4s, 2004 2,063,500
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
Automotive (0.3%)
----------------------------------------------------------------------------------------
$ 375,000 Aftermarket Technology Corp. sr. sub. notes 12s, 2004 $ 396,563
3,430,000 Ford Capital BV deb. 9s, 1998 3,674,936
450,000 Hayes Wheels International Inc. notes 9-1/4s, 2002 486,000
-----------
4,557,499
Basic Industrial Products (0.1%)
----------------------------------------------------------------------------------------
1,000,000 Inter-City Products sr. notes 9-3/4s, 2000 730,000
925,000 Owens Illinois, Inc. sr. sub. notes 9-3/4s, 2004 959,688
-----------
1,689,688
Broadcasting (0.3%)
----------------------------------------------------------------------------------------
200,000 Cablevision Systems Corp. sr. sub. deb. 9-7/8s, 2023 207,000
750,000 Cablevision Systems Corp. sr. sub. reset deb. 10-3/4s,
2004 783,750
750,000 Century Communications Corp. sr. notes 9-1/2s, 2005 755,625
500,000 CF Cable TV sr. notes 9-1/8s, 2007 (Canada) 507,500
950,000 Outlet Broadcasting, Inc. sr. sub. notes 10-7/8s, 2003 1,046,188
500,000 Paxson Communications Corp. 144A sr. sub. notes
11-5/8s, 2002 495,000
1,285,000 Telewest Communications PLC deb. stepped-coupon zero %,
(11s, 10/1/00), 2007 (United Kingdom)++ 759,756
-----------
4,554,819
Building and Construction (0.2%)
----------------------------------------------------------------------------------------
1,355,000 American Standard, Inc. deb. 9-1/4s, 2016 1,402,425
725,000 Scotsman Group, Inc. sr. notes 9-1/2s, 2000 728,625
-----------
2,131,050
Business Services (0.1%)
----------------------------------------------------------------------------------------
750,000 Corporate Express, Inc. Ser. B, sr. sub. notes 9-1/8s,
2004 746,250
Chemicals (0.6%)
----------------------------------------------------------------------------------------
750,000 Acetex Corp. 144A sr. notes 9-3/4s, 2003 770,625
1,000,000 G-I Holdings, Inc. Ser. B, sr. disc. notes zero %, 1998 745,000
500,000 Huntsman Corp. 1st mtge. 10-5/8s, 2001 545,000
3,335,000 Lyondell Petrochemical Co. notes 9-1/8s, 2002 3,741,203
2,000,000 OSI Specialties Inc. sr. sub. notes 9-1/4s, 2003 2,200,000
-----------
8,001,828
Computer Equipment (0.1%)
----------------------------------------------------------------------------------------
700,000 Computervision Corp. sr. notes 10-7/8s, 1997 728,000
750,000 Unisys Corp. deb. 13-1/2s, 1997 757,500
-----------
1,485,500
Conglomerates (0.1%)
----------------------------------------------------------------------------------------
1,000,000 ADT Ltd. sr. sub. notes 9-1/4s, 2003 1,057,500
750,000 MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s,
1999 750,938
-----------
1,808,438
Consumer Non Durables (0.1%)
----------------------------------------------------------------------------------------
1,000,000 Playtex Family Products Corp. sr. sub. notes 9s, 2003 895,000
Electronics and Electrical Equipment (0.1%)
----------------------------------------------------------------------------------------
1,500,000 Amphenol Corp. sr. notes 10.45s, 2001 1,650,000
13
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Entertainment (2.8%)
----------------------------------------------------------------------------------------
$ 750,000 AMC Entertainment, Inc. sr. sub. deb. 12-5/8s, 2002 $ 832,500
500,000 Arizona Charlies Corp. Ser. B, 1st mtge. 12s, 2000 405,000
500,000 Casino America, Inc. 1st mtge. deb. 11-1/2s, 2001 485,000
750,000 Cinemark USA sr. notes 12s, 2002 810,000
1,000,000 Harrahs Operation Inc. sr. sub. notes 10-7/8s, 2002 1,092,500
450,000 Lady Luck Gaming Corp. Ser. B, 1st mtge. 10-1/2s, 2001 346,500
750,000 Mohegan Tribal Gaming 144A sr. notes 13-1/2s, 2002 785,625
12,025,000 News America Holdings, Inc. sr. notes 12s, 2001 13,433,849
500,000 Premier Parks, Inc. sr. notes 12s, 2003 516,250
5,000,000 Tele-Communications, Inc. sr. deb. 9.8s, 2012 5,727,800
10,170,000 Time Warner Inc. deb. 9-1/8s, 2013 11,021,331
300,000 Time Warner, Inc. notes 8.18s, 2007 309,522
300,000 Time Warner, Inc. notes 8.11s, 2006 308,589
150,000 Time Warner, Inc. notes 7.975s, 2004 154,094
500,000 Viacom International, Inc. sub. deb. 8s, 2006 495,000
-----------
36,723,560
Food and Beverages (0.7%)
----------------------------------------------------------------------------------------
525,000 Canandaigua Wine sr. sub. notes 8-3/4s, 2003 527,625
2,000,000 Fresh Del Monte Produce Corp. NV Ser. B, sr. notes,
10s, 2003 (Netherland Antilles) 1,680,000
5,358,002 Secured Restaurants Trust deb. 10-1/4s, 2000 6,020,412
500,000 Stater Brothers sr. notes 11s, 2001 507,500
-----------
8,735,537
Forest Products (0.3%)
----------------------------------------------------------------------------------------
500,000 APP International Finance Co. company guaranty 11-3/4s,
2005 (Singapore) 512,500
750,000 Domtar, Inc. notes 12s, 2001 (Canada) 873,750
100,000 Repap New Brunswick sr. floating rate notes 9-1/4s,
2000 99,500
500,000 Riverwood International Corp. sr. notes 10-3/4s, 2000 528,750
375,000 Riverwood International Corp. sr. sub. notes 10-3/8s,
2004 399,375
1,000,000 Stone Container Corp. sr. sub. notes 9-7/8s, 2001 990,000
-----------
3,403,875
Health Care (1.0%)
----------------------------------------------------------------------------------------
4,660,000 Columbia Healthcare Corp. deb. 8.36s, 2024 5,244,783
425,000 Graphic Controls Corp. 144A sr. sub. notes 12s, 2005 433,500
1,000,000 Healthsouth Rehabilitaton sr. sub. notes 9-1/2s, 2001 1,060,000
1,150,000 Integrated Health Services sr. sub. notes 10-3/4s, 2004 1,219,000
1,500,000 McGaw, Inc. sr. notes 10-3/8s, 1999 1,556,250
2,200,000 Paracelsus Healthcare Corp. sr. sub. notes 9-7/8s, 2003 2,222,000
350,000 Tenet Healthcare Corp. sr. notes 8-5/8s, 2003 359,625
750,000 Total Renal Care Holdings sr. disc. notes
stepped-coupon zero %, (12s, 8/15/97), 2004++ 701,250
615,000 Universal Health Services sr. notes 8-3/4s, 2005 621,150
-----------
13,417,558
Insurance and Finance (7.1%)
----------------------------------------------------------------------------------------
750,000 AIM Management Group sr. secd. notes 9s, 2003 761,250
3,500,000 AMBAC Indemnity Corp. deb. 9-3/8s, 2011 4,214,630
1,420,000 American Annuity Group, Inc. sr. sub. notes 11-1/8s,
2003 1,526,500
7,000,000 American Financial Group sub. notes 10-7/8s, 2011 7,239,050
3,515,000 BAT Capital Corp. 144A med. term notes 6.19s, 2000 3,474,331
14
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Insurance and Finance (continued)
----------------------------------------------------------------------------------------
$ 1,000,000 Banco Rio De La Plata notes, 8-3/4s, 2003(Argentina) $ 767,500
450,000 Centerbank sub. notes 8-3/8s, 2002 456,390
750,000 Chevy Chase Savings Bank Inc. sub. deb. 9-1/4s, 2005 766,875
10,500,000 Citicorp sub. notes 7-1/8s, 2005 10,791,690
1,000,000 Comdata Network, Inc. sr. notes 12-1/2s, 1999 1,117,500
8,325,000 Den Danske Bank sub. notes 6.55s, 2003 8,100,392
10,000,000 Great Western Financial Corp. notes 6-1/8s, 1998 9,990,900
750,000 Keystone Group, Inc. sr. secd. notes 9-3/4s, 2003 727,500
6,300,000 Midlantic Banks deb., 9-7/8s, 1999 7,072,443
5,000,000 Orion Capital Corp. sr. notes 9-1/8s, 2002 5,537,700
7,700,000 Paine Webber Group Inc. notes 6-1/2s, 2005 7,261,100
750,000 Reliance Group Holdings, Inc. sr. notes 9s, 2000 759,375
8,500,000 Riggs National Corp. sub. deb. 8-1/2s, 2006 8,840,000
6,500,000 Scotland International Finance 144A sub. notes 8.85s,
2006 (United Kingdom) 7,418,125
5,000,000 Society Bank & Trust Toledo 12-1/2s, 1999 5,993,750
750,000 Terra Nova Insurance Holdings sr. notes 10-3/4s, 2005
(Bermuda) 810,000
-----------
93,627,001
Lodging (0.1%)
----------------------------------------------------------------------------------------
500,000 HMH Properties Inc. 144A sr. notes 9-1/2s, 2005 502,500
750,000 John Q. Hammons Hotels 1st mtge. notes 8-7/8s, 2004 731,250
-----------
1,233,750
Metals and Mining (0.6%)
----------------------------------------------------------------------------------------
575,000 Inland Steel Co. 1st mtge. 12s, 1998 632,500
1,000,000 Ispat Mexicana, SA 144A notes 10-3/8s, 2001 (Mexico) 880,000
6,770,000 Noranda Inc. notes 7s, 2005 (Canada) 6,801,345
-----------
8,313,845
Oil and Gas (3.5%)
----------------------------------------------------------------------------------------
500,000 Chesapeake Energy Corp. sr. notes 10-1/2s, 2002 505,000
750,000 Gulf Canada Resources Ltd. sr. sub. notes 9-5/8s, 2005
(Canada) 766,875
6,600,000 ONEOK Inc. deb. 9.7s, 2019 7,621,482
9,832,000 Parker & Parsley Petro Co. sr. notes 8-7/8s, 2005 10,796,618
12,500,000 Petro Canada deb. 9-1/4s, 2021 (Canada) 15,359,375
750,000 Trans Texas Gas Corp. sr. secd. notes 11-1/2s, 2002 783,750
500,000 Transcontinental Gas Pipe Line Corp. deb. 9s, 1996 513,875
750,000 Triton Energy sr. sub. disc. notes stepped-coupon zero
% (9-3/4s, 12/15/96), 2000++ 693,750
7,745,000 Union Texas Petroleum sr. note 8-3/8s, 2005 8,295,360
-----------
45,336,085
Publishing (0.2%)
----------------------------------------------------------------------------------------
425,000 General Media Corp. sr. secd. notes 10-5/8s, 2000 327,250
1,100,000 Marvel Parent Holdings, Inc. sr. secd. disc. notes zero
%, 1998 792,000
250,000 U.S. Banknote Corp. sr. notes 10.375s, 2002 195,000
1,000,000 World Color Press sr. sub. notes 9-1/8s, 2003 1,015,000
-----------
2,329,250
Railroad Supply (0.1%)
----------------------------------------------------------------------------------------
750,000 Westinghouse Air Brake sr. notes 9-3/8s, 2005 783,750
15
<PAGE>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
Retail (2.2%)
----------------------------------------------------------------------------------------
$ 1,650,000 County Seat Stores Inc. sr. sub. notes 12s, 2002 $ 1,485,000
8,719,000 K mart Corp. pass-thru certificate Ser. 95-K3, 8.54s,
2015 7,868,898
1,000,000 Loehmanns' Holdings, Inc. sr. notes 10-1/2s, 1997 1,000,000
5,000,000 May Department Stores Co. notes 9-1/2s, 2021 6,055,650
850,000 Revco D.S., Inc. sr. notes 9-1/8s, 2000 892,500
1,275,000 Sears, Roebuck & Co. med. term notes 5.91s, 1999 1,261,638
8,000,000 Sears, Roebuck & Co. med. term notes 9.1s, 2012 9,514,720
750,000 Waban, Inc. sr. sub. notes 11s, 2004 768,750
-----------
28,847,156
Specialty Consumer Products (--%)
----------------------------------------------------------------------------------------
500,000 Herff Jones, Inc. 144A sr. sub. notes 11s, 2005 517,500
Telecommunications (0.3%)
----------------------------------------------------------------------------------------
1,000,000 Centennial Cellular Corp. sr. notes 8-7/8s, 2001 972,500
1,500,000 Comcast Cellular Corp. sr. participating notes Ser. A,
zero %, 2000 1,147,500
2,310,000 Dial Call Communication, Inc. Ser. B, sr. disc. notes
stepped-coupon zero % (10-1/4s, 12/15/98), 2005++ 1,097,250
750,000 Metrocall, Inc. sr. sub. notes 10-3/8s, 2007 768,750
500,000 Rogers Cantel Mobile Inc. deb. 10-3/4s, 2001 522,500
-----------
4,508,500
Textiles (0.1%)
----------------------------------------------------------------------------------------
1,000,000 Reeves Industries Inc. bonds 11s, 2002 980,000
Transportation (1.6%)
----------------------------------------------------------------------------------------
12,350,000 AMR Corp. deb. 9.73s, 2014 14,003,295
300,000 Blue Bird Body Co. Ser. B, sub. deb. 11-3/4s, 2002 307,500
5,465,000 Southwest Airlines Co. deb. 7-7/8s, 2007 5,862,032
1,000,000 Viking Star Shipping sr. secd. notes 9-5/8s, 2003 1,027,500
-----------
21,200,327
Utilities (6.1%)
----------------------------------------------------------------------------------------
8,690,000 Arkla, Inc. notes 8-7/8s, 1999 9,218,960
6,100,000 British Columbia Hydro & Power Auth. deb. 15-1/2s, 2011
(Canada) 6,877,750
9,000,000 British Columbia Hydro & Power Auth. deb. 15s, 2011
(Canada) 9,810,000
5,240,000 Citizens Utilities Co. bonds 7.68s, 2034 6,002,630
500,000 Cleveland Electric Illuminating Co. 1st mtge. Ser. B,
9-1/2s, 2005 500,000
750,000 First PV Funding deb. 10.15s, 2016 759,375
4,175,000 Gulf States Utilities Co. 1st mtge. bonds 8.7s, 2024 4,369,555
5,460,799 Midland Cogeneration Ventures deb. 10.33s, 2002 5,733,839
8,180,000 Public Service Co. of New Hampshire deb. 15.23s, 2000 9,458,125
100,000 Texas New Mexico Pwr. deb. 12-1/2s, 1999 112,500
8,120,000 Texas New-Mexico Power Utilities 1st mtge. 9-1/4s, 2000 8,599,811
10,800,000 Texas Utilities Co. secd. lease fac. bonds 7.46s, 2015 11,104,344
7,500,000 Toledo Edison med. term notes 1st mtge. Ser. A, 7.82s,
2003 7,184,250
-----------
79,731,139
----------------------------------------------------------------------------------------
Total Corporate Bonds and Notes
(cost $380,406,537) $382,967,280
----------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
FOREIGN GOVERNMENT BONDS AND NOTES (8.2%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
AUD 2,415,000 Australia (Government of) notes 8-3/4s, 2001 $ 1,865,688
CAD 5,835,000 Canada (Government of) deb. 9s, 2004 4,761,847
CAD 6,935,000 Canada (Government of) deb. 8-3/4s, 2005 5,605,318
CAD 5,635,000 Canada (Government of) bonds, 6-1/2 2004 3,931,493
DKK 24,790,000 Denmark (Kingdom of) bonds 9s, 2000 4,912,189
FRF 42,628,000 France (Government of) OAT deb. 8-1/2s, 2002 9,472,889
FRF 42,860,000 France Treasury bill 7-3/4s, 2000 9,177,702
DEM 12,495,000 Germany (Republic of) bonds 7-3/8s, 2005 9,403,408
DEM 3,450,000 Germany (Republic of) bonds 6-7/8s, 2005 2,519,223
DEM 9,580,000 Germany (Republic of) bonds 6-1/4s, 2024 6,015,982
ITL 8,430,000,000 Italy (Government of) bonds 12s, 2003 5,433,706
ITL 6,145,000,000 Italy (Government of) bonds 10-1/2s, 2005 3,630,249
ITL 4,185,000,000 Italy (Government of) notes 8-1/2s, 1999 2,444,994
NLG 10,220,000 Netherlands (Government of) bonds 9s, 2000 7,366,116
USD 8,600,000 Quebec (Province of) Canada deb.13s, 2013 10,427,500
ESP 642,300,000 Spain (Government of) bonds 10.833s, 2000 5,570,706
GBP 2,735,000 United Kingdom Treasury bonds 7-1/2s, 2006 4,187,828
GBP 6,390,000 United Kingdom Treasury notes 7s, 2001 9,815,272
- -------------------------------------------------------------------------------------
Total Foreign Government Bonds and Notes (cost
$104,233,119) $106,542,110
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COLLATERALIZED MORTGAGE OBLIGATIONS (5.1%)*
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$ 4,014,436 Chase Mortgage Finance Corp. Interest Strip Ser. 93-3,
Class B13, 7.461s, 2024 $ 2,654,633
4,385,857 Housing Securities Inc. Ser. 91-B, Class B6, 9s, 2006 4,349,796
677,464 Housing Securities Inc. Ser. 93-J, Class J4, 6.66s, 2009 565,894
322,602 Housing Securities Inc. Ser. 93-J, Class J5, 6.66s, 2009 230,660
535,714 Housing Securities Inc. Ser. 94-1, Class AB1, 6-1/2s, 2009 436,607
8,761,526 Nationsbank of Texas N.A. 144A secd. notes, Ser. 1995-1,
7.7s, 1999 8,757,496
2,324,264 Prudential Home Loan Corp. Ser. 92-25, Class B3, 8s, 2022 1,860,138
456,341 Prudential Home Mortgage Securities 144A Ser. 94-31, Class
B4, 8s, 2009 320,152
7,665,108 Prudential Home Mortgage Securities 144A Ser. 94-A Class
4B, 6.8s, 2024 7,100,275
2,247,975 Prudential Home Mortgage Securities 144A Ser. 94-D Class
3B, 6.31s, 2009 2,055,036
2,675,569 Prudential Home Mortgage Securities 144A Ser. 94-D Class
B4, 6.312s, 2009 2,206,083
11,493,758 Prudential Home Mortgage Securities 144A Ser. 95-C, Class
B1, 7.84s, 2001 11,471,741
2,637,563 Prudential Home Mortgage Securities Ser. 92-13 Class B3,
7-1/2s, 2007 2,232,450
3,365,309 Prudential Home Mortgage Securities Ser. 93-31, Class B2,
6s, 2000 2,566,049
3,259,726 Prudential Home Mortgage Securities Ser. 93-36, Class M,
7-1/4s, 2023 3,206,246
6,980,106 Prudential Home Mortgage Securities Ser. 93-B, Class 5B,
7.8366s, 2023 4,284,040
7,930,801 Prudential Home Mortgage Securities Ser. 93-D, Class 2B,
7.1082s, 2023 7,222,736
3,978,722 Prudential Home Mortgage Securities Ser. 93-E, Class 5B,
7.3935s, 2023 2,282,792
712,431 Prudential Home Mortgage Securities Ser. 94-31, Class B3,
8s, 2009 608,906
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
$1,816,417 Travelers Mortgage Security Corp. coll. oblig. Ser. 84-1, 12s,
2014 $ 2,008,276
--------------------------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations
(cost $64,547,032) $66,420,006
--------------------------------------------------------------------------------------------------
UNITS (0.1%)*
NUMBER OF UNITS VALUE
40 Celcaribe S.A. 144A units stepped-coupon zero % (13-1/2s,
3/15/98), 2004++ $ 358,000
500 ICF Kaiser International, Inc. sr. sub. units 12s, 2003 470,000
--------------------------------------------------------------------------------------------------
Total Units (cost $860,000) $ 828,000
--------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS AND NOTES (COST $300,950)(--%)*
PRINCIPAL AMOUNT VALUE
$270,000 Riverwood International Corp. sub. notes 6-3/4s, 2003 $ 297,000
</TABLE>
<TABLE>
<CAPTION>
PURCHASED OPTIONS OUTSTANDING (--%)
CONTRACT EXPIRATION DATE/
AMOUNT STRIKE PRICE VALUE
<S> <C> <C> <C> <C>
ITL 12,943,300,000 Italian (Government of) deb. January 95/ITL
10-1/2s, 2005 94.25 $122,844
DEM 9,440,000 U.S. Dollar In Exchange December 95/DEM
For Deutschemarks 1.49 26,432
DEM 8,200,000 U.S. Dollars In Exchange December 95/DEM
for Japanese Yen 102.5 122,180
------------------------------------------------------------------------------------
Total Purchased Options (cost $392,689) $271,456
------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (COST $300,625)(--%)*
NUMBER OF SHARES VALUE
5,000 Granite Broadcasting $1.938 cv.
pfd. $ 257,500
WARRANTS (cost $1,150)(--%)*+
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
115 General Media
Corp. 12/31/00 $ 1,150
--------------------------------------------------------
SHORT-TERM INVESTMENTS (2.1%)*
PRINCIPAL AMOUNT VALUE
$ 25,000,000 Federal Home Loan Bank 5.6s, January 22, 1996 $ 24,864,132
3,002,000 Interest in $357,916,000 joint repurchase
agreement dated October 31, 1995 with Lehman
Brothers, Inc. due November 1, 1995 with
respect to various U.S Treasury
Bonds--maturity value of $3,002,489 for an
effective yield of 5.86% 3,002,489
---------------------------------------------------------------------------------
Total Short-Term Investments (cost $27,866,621) $ 27,866,621
---------------------------------------------------------------------------------
Total Investments (cost $1,267,253,195)*** $1,307,796,945
---------------------------------------------------------------------------------
</TABLE>
* Percentages indicated are based on net assets of $1,304,850,227.
++ The interest rate and date shown parenthetically represent the new
interest rate to be paid and the date the fund will begin receiving
interest at this rate.
+++ TBA's are mortgage backed securities traded under delayed delivery
commitments, settling after October 31, 1995. Although the unit price for
the trades has been established, the principal value has not been
finalized. However, the amount of the commitments will not fluctuate more
than 2.0% from the principal amount. Income on the securities will not be
earned until settlement date. The cost of TBA purchases held at October
31, 1995 was $13,064,350.
18
<PAGE>
*** The aggregate identified cost for federal income tax purposes is
$1,267,502,447, resulting in gross unrealized appreciation and
depreciation of $52,235,334 and $11,940,836, respectively, or net
unrealized appreciation of $40,294,498.
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.
Forward Cross Currency Contracts Outstanding at October 31, 1995
(aggregate face value $20,942,508)
<TABLE>
<CAPTION>
Unrealized
Market Currency Market Delivery Appreciation/
Currency Purchased Value Sold Value Date (Depreciation)
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------
British Pounds $ 3,625,644 Deutschemarks $ 3,606,761 12/13/95 $ 18,883
British Pounds 5,092,412 Deutschemarks 5,199,809 12/5/95 (107,397)
Danish Krona 3,056,017 Deutschemarks 3,057,771 12/13/95 (1,754)
Swedish Krona 2,814,292 Deutschemarks 2,783,029 12/13/95 31,263
Deutschemarks 4,696,997 French Francs 4,696,997 12/13/95 --
-----------------------------------------------------------------------------------------------
Total Cross
Forward Currency
Contracts
Outstanding $19,255,853 $19,373,877 $ (59,005)
-----------------------------------------------------------------------------------------------
</TABLE>
Forward Currency Contracts To Buy Outstanding at October 31,1995
Unrealized
Market Aggregate Delivery Appreciation
Value Face Value Date (Depreciation)
- ----------------------------------------------------------------------------
Australian Dollar $ 5,890,202 $ 5,857,856 12/13/95 $ 32,346
Canadian Dollars 7,898,944 7,890,166 12/13/95 8,778
Deutschmarks 20,710,135 20,224,903 12/13/95 485,232
Japanese Yen 18,273,343 18,701,780 12/14/95 (428,437)
Japanese Yen 1,476,693 1,493,340 12/13/95 (16,647)
New Zealand Dollars 1,998,467 1,994,019 12/13/95 4,448
Spanish Peseta 3,093,334 2,986,463 12/13/95 106,871
Swedish Krona 3,034,838 2,794,050 12/13/95 240,788
- ----------------------------------------------------------------------------
Total Forward
Currency Contracts
To Buy $62,375,956 $61,942,577 $ 433,379
- ----------------------------------------------------------------------------
19
<PAGE>
Forward Currency Contracts To Sell Outstanding at October 31,1995
<TABLE>
<CAPTION>
Unrealized
Market Aggregate Delivery Appreciation
Value Face Value Date (Depreciation)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
British Pounds $ 5,022,777 $ 5,023,090 12/13/95 $ 313
Canadian Dollars 7,042,789 6,955,927 12/13/95 (86,862)
Danish Krona 1,775,568 1,752,168 12/13/95 (23,400)
Deutschemarks 20,884,423 20,107,457 12/13/95 (776,966)
French Francs 6,840,185 6,591,828 12/13/95 (248,357)
Italian Lira 4,380,120 4,287,491 12/13/95 (92,629)
Japanese Yen 19,056,864 19,250,003 12/13/95 193,139
Netherland Guilders 7,509,900 7,169,394 12/13/95 (340,506)
Spanish Peseta 4,733,861 4,544,208 12/13/95 (189,653)
Swiss Francs 5,306,086 5,237,176 12/13/95 (68,910)
- ----------------------------------------------------------------------------------------
Total Forward
Currency
Contracts
To Sell $82,552,573 $80,918,742 $(1,633,831)
- ----------------------------------------------------------------------------------------
</TABLE>
Written Options Outstanding (Premium received $40,592)
Contract Expiration Date/
Amount Strike Price Value
---------------------------------------------------------------------------
$9,440,000 U.S. Dollars In Exchange
For Deutschemarks December 95/1.565 $4,248
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Statement of assets and liabilities
October 31, 1995
<TABLE>
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $1,267,253,195) (Note 1) $1,307,796,945
- ----------------------------------------------------------------------------------------------
Cash 1,550,254
- ----------------------------------------------------------------------------------------------
Interest and other receivables 21,833,430
- ----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 3,210,032
- ----------------------------------------------------------------------------------------------
Receivable for securities sold 550,015
- ----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 1,134,958
- ----------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 866,093
- ----------------------------------------------------------------------------------------------
Total assets 1,336,941,727
- ----------------------------------------------------------------------------------------------
Liabilities
- ----------------------------------------------------------------------------------------------
Distributions payable to shareholders 18,731
- ----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,320,468
- ----------------------------------------------------------------------------------------------
Payable for securities purchased 23,048,841
- ----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,830,611
- ----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 835,351
- ----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,120
- ----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 765
- ----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 415,048
- ----------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 1,757,843
- ----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 2,394,415
- ----------------------------------------------------------------------------------------------
Payable for written options outstanding at value (premium received $40,592) 4,248
- ----------------------------------------------------------------------------------------------
Other accrued expenses 463,059
- ----------------------------------------------------------------------------------------------
Total liabilities 32,091,500
- ----------------------------------------------------------------------------------------------
Net assets 1,304,850,227
- ----------------------------------------------------------------------------------------------
Represented by
- ----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) 1,274,797,689
- ----------------------------------------------------------------------------------------------
Undistributed net investment income 480,823
- ----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (9,773,989)
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and liabilities in
foreign currencies 39,345,704
- ----------------------------------------------------------------------------------------------
Total--Representing net assets applicable to capital shares outstanding 1,304,850,227
- ----------------------------------------------------------------------------------------------
Computation of net asset value and offering price
- ----------------------------------------------------------------------------------------------
Net asset value and redemption price of class A shares ($928,995,099 divided
by 131,441,436 shares) $7.07
- ----------------------------------------------------------------------------------------------
Offering price per share (100/95.25 of $7.07)* $7.42
- ----------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares ($260,768,842 divided by
37,033,317 shares)+ $7.04
- ----------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares ($7,672,724 divided by
1,090,119 shares) $7.04
- ----------------------------------------------------------------------------------------------
Offering price per share (100/96.75 of $7.04)* $7.28
- ----------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price of class Y shares
($107,413,562 divided by 15,203,548) $7.07
- ----------------------------------------------------------------------------------------------
</TABLE>
* 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.
21
<PAGE>
Statement of operations
Year ended October 31, 1995
Investment income:
- ---------------------------------------------------------------------------
Interest income (net of foreign tax of $157,100) $ 87,961,594
- ---------------------------------------------------------------------------
Dividend income 23,054
- ---------------------------------------------------------------------------
Total investment income 87,984,648
- ---------------------------------------------------------------------------
Expenses:
--------------------------------------------------------------------------
Compensation of Manager (Note 2) 5,587,152
- ---------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,706,237
- ---------------------------------------------------------------------------
Compensation of Trustees (Note 2) 30,136
- ---------------------------------------------------------------------------
Reports to shareholders 285,807
- ---------------------------------------------------------------------------
Auditing 80,052
- ---------------------------------------------------------------------------
Legal 23,662
- ---------------------------------------------------------------------------
Postage 160,183
- ---------------------------------------------------------------------------
Registration fees 36,470
- ---------------------------------------------------------------------------
Administrative services (Note 2) 24,934
- ---------------------------------------------------------------------------
Distribution fees--Class A (Note 2) 2,102,131
- ---------------------------------------------------------------------------
Distribution fees--Class B (Note 2) 2,070,629
- ---------------------------------------------------------------------------
Distribution fees--Class M (Note 2) 11,718
- ---------------------------------------------------------------------------
Total expenses 13,119,111
- ---------------------------------------------------------------------------
Expense reduction (Note 2) (335,771)
- ---------------------------------------------------------------------------
Net expenses 12,783,340
- ---------------------------------------------------------------------------
Net investment income 75,201,308
- ---------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 8,548,250
- ---------------------------------------------------------------------------
Net realized gain on options written (Notes 1 and 3) 6,979
- ---------------------------------------------------------------------------
Net realized loss on forward currency contracts and foreign
currency translation (Notes 1 and 3) (3,870,813)
- ---------------------------------------------------------------------------
Net unrealized depreciation on forward currency contracts
and foreign currency translation during the year (1,348,570)
- ---------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 88,559,036
- ---------------------------------------------------------------------------
Net gain on investments 91,894,882
- ---------------------------------------------------------------------------
Net increase in net assets resulting from operations $167,096,190
- ---------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Year ended October 31
----------------------------
1995 1994
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------
Net investment income $ 75,201,308 $ 66,072,568
- ---------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign currency
transactions 4,684,416 (25,806,780)
- ---------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments and
assets and liabilities in foreign currencies 87,210,466 (82,289,716)
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 167,096,190 (42,023,928)
- ---------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------
From net investment income:
- ---------------------------------------------------------------------------------------------
Class A (59,477,655) (47,375,900)
- ---------------------------------------------------------------------------------------------
Class B (13,155,239) (7,956,796)
- ---------------------------------------------------------------------------------------------
Class M (154,150)
- ---------------------------------------------------------------------------------------------
Class Y (4,389,552) (102,586)
- ---------------------------------------------------------------------------------------------
From net realized gain on investments
- ---------------------------------------------------------------------------------------------
Class A -- (4,676,705)
- ---------------------------------------------------------------------------------------------
Class B -- (769,008)
- ---------------------------------------------------------------------------------------------
Class Y -- (9,159)
- ---------------------------------------------------------------------------------------------
From paid-in capital
- ---------------------------------------------------------------------------------------------
Class A -- (9,350,410)
- ---------------------------------------------------------------------------------------------
Class B -- (1,570,072)
- ---------------------------------------------------------------------------------------------
Class Y -- (20,789)
- ---------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 256,127,530 165,536,853
- ---------------------------------------------------------------------------------------------
Total increase in net assets 346,047,124 51,681,500
Net assets
- ---------------------------------------------------------------------------------------------
Beginning of year 958,803,103 907,121,603
- ---------------------------------------------------------------------------------------------
End of year (including undistributed net investment income
and distributions in excess of net investment income of
$480,823 and $153,320, respectively) $1,304,850,227 $958,803,103
- ---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
Financial highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
June 16,
1994 December 14,
(commencement 1994
Year of (commencement Year
ended operations) of ended Year
October to October operations) October ended
31 31 to October 31 31 October 31
- -----------------------------------------------------------------------------------------------------------
1995 1994+ 1995 1995 1994
- -----------------------------------------------------------------------------------------------------------
Class Y Class M Class B
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $6.52 $6.72 $6.50 $6.50 $7.34
- -----------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------
Net investment income .47 .19 .43 .42 .48
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments .57 (.21) .54 .55 (.83)
- -----------------------------------------------------------------------------------------------------------
Total from investment operations 1.04 (.02) .97 .97 (.35)
- -----------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------
From net investment income (.49) (.16) (.43) (.43) (.38)
- -----------------------------------------------------------------------------------------------------------
In excess of net investment
income -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------
From net realized gain on
investments -- (.02) -- -- (.04)
- -----------------------------------------------------------------------------------------------------------
From paid-in capital -- -- -- -- (.07)
- -----------------------------------------------------------------------------------------------------------
Total distributions (.49) (.18) (.43) (.43) (.49)
- -----------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.07 $6.52 $7.04 $7.04 $6.50
- -----------------------------------------------------------------------------------------------------------
Total investment return at net
asset value (%)(a) 16.65 (.35)(b) 15.43(b) 15.46 (4.98)
- -----------------------------------------------------------------------------------------------------------
Net assets, end of period (in
thousands) $107,414 $7,517 $7,673 $260,769 $169,501
- -----------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets (%)(c) .86 .24(b) 1.19(b) 1.80 1.59
- -----------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 7.14 2.91(b) 5.17(b) 6.14 6.40
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 169.29 128.82 169.29 169.29 128.82
- -----------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
March 1,
1993
(commencement
of
operations
to October
31 Year ended October 31
- ---------------------------------------------------------------------------
1993* 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------
Class B Class A
- ---------------------------------------------------------------------------
$7.19 $6.53 $7.36 $6.97 $6.80 $6.35
- ---------------------------------------------------------------------------
.28 .47 .54 .56 .60 .64
- ---------------------------------------------------------------------------
.22 .55 (.84) .40 .18 .45
- ---------------------------------------------------------------------------
.50 1.02 (.30) .96 .78 1.09
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
(.35) (.48) (.41) (.56) (.61) (.64)
- ---------------------------------------------------------------------------
-- -- -- (.01) -- --
- ---------------------------------------------------------------------------
-- -- (.04) -- -- --
- ---------------------------------------------------------------------------
-- -- (.08) -- -- --
- ---------------------------------------------------------------------------
(.35) (.48) (.53) (.57) (.61) (.64)
- ---------------------------------------------------------------------------
$7.34 $7.07 $6.53 $7.36 $6.97 $6.80
- ---------------------------------------------------------------------------
7.18(b) 16.23 (4.16) 14.36 11.86 18.05
- ---------------------------------------------------------------------------
$92,832 $928,995 $781,784 $814,289 $633,135 $504,708
- ---------------------------------------------------------------------------
1.03(b) 1.05 .83 .77 .97 .91
- ---------------------------------------------------------------------------
4.37(b) 6.91 7.10 7.71 8.62 9.66
- ---------------------------------------------------------------------------
129.95 169.29 128.82 129.95 146.66 84.39
- ---------------------------------------------------------------------------
* Per share net investment income has been determined on the basis of the
weighted average number of shares outstanding during the period.
(a) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(b) Not annualized.
(c) The ratio of expenses to average net assets for the year ended October
31, 1995 includes amounts paid through expense offset arrangements. Prior
period ratios exclude these amounts (See Note 2).
25
<PAGE>
Notes to financial statements
October 31, 1995
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. Putnam Income Fund
seeks high current income consistent with what Putnam Management believes to
be prudent risk. The fund invests in a portfolio of debt securities, both
government and corporate obligations, preferred stocks and dividend-paying
common stocks.
The fund offers class A, class B, class M and class Y shares. The fund
commenced its public offering of class M shares on December 14, 1994. Class A
shares are sold with a maximum front-end sales charge of 4.75%. Class B
shares do not pay a front-end sales charge, but pay a higher ongoing
distribution fee than class A shares, and may be 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 an ongoing distribution fee that is higher than class A shares and
lower than class B shares. Class Y shares, which are sold at net asset value,
are generally subject to the same expenses as class A and class B shares, but
do not bear a distribution fee. Class Y shares are sold only to defined
contribution plans with an initial investment of $250 million in a
combination of Putnam funds and other investments managed by Putnam. 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 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
policies are in conformity with generally accepted accounting principles.
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, except that
certain U.S. government obligations are stated at the mean between the last
reported bid and asked prices. 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 market value following procedures approved by the Trustees.
Market quotations are not considered to be readily available for certain
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
26
<PAGE>
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 managed by Putnam Investment Management, Inc.
(Putnam Management), the fund's Manager, a wholly-owned subsidiary of Putnam
Investments, Inc., and certain other accounts. These balances may be invested
in one or more repurchase agreements and/or short-term money market
instruments.
C) 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 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. Discount on
zero-coupon, original issue and stepped-coupon bonds is 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 and 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) Futures and options contracts The fund may use futures and option
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 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
27
<PAGE>
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) 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 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 maximum potential loss from forward currency contracts is the aggregate
face value in U.S. dollars at the time the contract was opened. 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.
I) TBA purchase commitments The fund may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a
future date beyond customary settlement time. Although the unit price has
been established, the principal value has not been finalized. However, the
amount of the commitment will not fluctuate more than 2% from the principal
amount. The fund holds and maintains until the settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the fund enters into offsetting contracts for the forward sale of
other securities it owns. TBA purchase commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is
in addition to the risk of decline in the value of the fund's other assets.
Unsettled TBA purchase commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with the
intention of acquiring securities for its portfolio or for delivery pursuant
to options contracts it has entered into, the fund may dispose of a
commitment prior to settlement if Putnam Management deems it appropriate to
do so.
J) 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 of securities held and for excise
tax on income and capital gains.
At October 31, 1995, the fund had a capital loss carryover of approximately
$9,954,000, available to offset future realized capital gains, if any. This
amount will expire October 31, 2002.
28
<PAGE>
K) Distributions to shareholders Distributions to shareholders are recorded
by the fund on the ex-dividend date. At certain times, the fund may pay a
distribution 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
currency contracts and certain options contracts, losses on wash sale
transactions, market discount, amortization of bond premium 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, 1995 the fund reclassified $2,609,431 to
increase undistributed net investment income, $2,029,372 to decrease
accumulated net realized loss and $4,638,803 to decrease paid-in-capital. 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 for
the quarter. Up until April 6, 1995 the fund accrued its expenses at the
following rates: 0.50% of the first $100 million of average net assets, 0.40%
of the next $100 million, and 0.35% of any amount over $200 million.
Effective April 6, 1995 the shareholders of the fund approved the new rates
as follows: 0.65% of the first $500 million of average net assets, 0.55% of
the next $500 million, 0.50% of the next $500 million and 0.45% on the next
$5 billion, subject, under current law, to reduction in any year to the
extent that expenses (exclusive of brokerage, interest and taxes) 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 amount over $100 million and 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 Trustee's fee of $2,310, and an
additional 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.
During the year ended October 31, 1995, 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 other
Putnam funds until distribution in accordance with the Plan.
Custodial functions for the fund are provided by Putnam Fiduciary Trust
Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing
agent functions are provided by Putnam Investor Services, a division of PFTC.
29
<PAGE>
For the year ended October 31, 1995, fund expenses were reduced by $335,771
under expense offset arrangements with PFTC. Investor servicing and custodian
fees reported in the Statement of operations exclude these credits. The fund
could have invested a portion of the assets utilized in connection with the
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, 1995, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $224,218 and $6,200 from the sale of
class A and class M shares, respectively, and there was $527,897 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, 1995, Putnam Mutual Funds Corp.,
acting as underwriter received $35,691 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended October 31, 1995, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $769,162,004 and $506,621,723, respectively. Purchases and sales
of U.S. government obligations aggregated $ 1,265,126,692 and $1,279,120,859,
respectively. In determining the net gain or loss on securities sold, the
cost of securities has been determined on the identified cost basis.
Written option transactions during the year are summarized as follows:
Contract Premiums
Amount Received
- -------------------------------------------------------------------------------
Contracts outstanding at the beginning of the year $ -- $ --
- -------------------------------------------------------------------------------
Options written 42,083,000 476,526
- -------------------------------------------------------------------------------
Options expired (11,675,000) (159,167)
- -------------------------------------------------------------------------------
Options closed (20,968,000) (276,767)
- -------------------------------------------------------------------------------
Open at end of year $ 9,440,000 $ 40,592
- -------------------------------------------------------------------------------
30
<PAGE>
Note 4
Capital shares
At October 31, 1995, there was an unlimited number of shares of beneficial
interest authorized, divided into four classes, Class A, Class B, Class M and
Class Y capital shares. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Year ended October 31
------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------------
Class A Shares Amount Shares Amount
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 39,283,827 $ 266,565,707 31,071,956 $ 214,853,509
Shares issued in
connection with
reinvestment of
distributions 5,503,114 37,189,815 5,167,159 35,507,760
- -------------------------------------------------------------------------------------
44,786,941 303,755,522 36,239,115 250,361,269
Shares repurchased (33,147,718) (224,093,082) (27,111,480) (186,902,217)
- -------------------------------------------------------------------------------------
Net increase 11,639,223 $ 79,662,440 9,127,635 $ 63,459,052
- -------------------------------------------------------------------------------------
</TABLE>
Year ended October 31
--------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------
Class B Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 16,956,756 $114,910,859 18,515,636 $129,108,330
Shares issued in
connection with
reinvestment of
distributions 1,224,911 8,266,102 933,338 6,364,405
- ------------------------------------------------------------------------------
18,181,667 123,176,961 19,448,974 135,472,735
Shares repurchased (7,208,649) (48,605,023) (6,037,739) (41,087,937)
- ------------------------------------------------------------------------------
Net increase 10,973,018 $ 74,571,938 13,411,235 $ 94,384,798
- ------------------------------------------------------------------------------
December 14, 1995
(commencement
of operations)
to October 31
-----------------------
1995
- ----------------------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------------------
Shares sold 1,145,112 $7,921,807
Shares issued in
connection
with reinvestment of
distributions 18,171 125,903
- ----------------------------------------------------------------------------
1,163,283 8,047,710
Shares repurchased (73,164) (509,587)
- ----------------------------------------------------------------------------
Net increase 1,090,119 $7,538,123
- ----------------------------------------------------------------------------
31
<PAGE>
June 16, 1994
(commencement
of operations)
Year ended October 31 October 31
------------------------- -----------------------
1995 1994
- --------------------------------------------------------------------------
Class Y Shares Amount Shares Amount
- --------------------------------------------------------------------------
Shares sold 16,554,420 $111,509,264 1,200,448 $8,010,460
Shares issued in
connection with
reinvestment of
distributions 637,485 4,389,491 20,094 132,534
- --------------------------------------------------------------------------
17,191,905 115,898,755 1,220,542 8,142,994
Shares repurchased (3,140,797) (21,543,726) (68,102) (449,991)
- --------------------------------------------------------------------------
Net increase 14,051,108 $ 94,355,029 1,152,440 $7,693,003
- --------------------------------------------------------------------------
32
<PAGE>
Federal tax information
The Form 1099 you receive in January 1996 will show the tax status of all
distributions paid to your account in calendar 1995.
33
<PAGE>
Our commitment to quality service
[arrow] CHOOSE AWARD-WINNING SERVICE
Putnam Investor Services has won the DALBAR Quality Tested Service Seal for
the past five years. In 1994, over 80,000 tests of 55 shareholder service
components demonstrated that Putnam outperformed the industry standard in
every category.
[arrow] 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.*
[arrow] 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.)
[arrow] 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.
34
<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
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
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Alan J. Bankart
Vice President
Kenneth J. Taubes
Vice President and Fund Manager
Rosemary H. Thomsen
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Income Fund. It
may also be used as sales literature when preceded or accompanied by the
current prospectus, which gives details of sales charges, investment
objectives, and operating policies of the fund, and the most recent copy of
Putnam's Quarterly Performance Summary. For more information, or to request a
prospectus, call toll free: 1-800-225-1581.
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.
35
<PAGE>
PUTNAM INVESTMENTS Bulk Rate
The Putnam Funds U.S. Postage
One Post Office Square PAID
Boston, Massachusetts 02109 Putnam
Investments
21698-004/312/510 12/95
