-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G9NzUQmRAo4Cn16Le0IGJNW+CaBl2W7epkTqDddMZZU8zv2tnQxAlwyEk5RxjnL9 BPAplfgVyaCUs8i4ddNE2Q== 0000928816-97-000237.txt : 19970728 0000928816-97-000237.hdr.sgml : 19970728 ACCESSION NUMBER: 0000928816-97-000237 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970725 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUTNAM PREFERRED INCOME FUND CENTRAL INDEX KEY: 0000730178 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 042811116 STATE OF INCORPORATION: MA FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-03873 FILM NUMBER: 97645402 BUSINESS ADDRESS: STREET 1: ONE POST OFFICE SQ CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 617-292-11 FORMER COMPANY: FORMER CONFORMED NAME: PUTNAM CORPORATE ASSET TRUST /MA DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: PUTNAM CORPORATE CASH TRUST /MA DATE OF NAME CHANGE: 19910324 FORMER COMPANY: FORMER CONFORMED NAME: PUTNAM CORPORATE CASH TRUST DIVERSIFIED STRATEGIES PORTFOLIO DATE OF NAME CHANGE: 19900712 N-30D 1 PUTNAM PREFERRED INCOME FUND Putnam Preferred Income Fund SEMIANNUAL REPORT May 31, 1997 [LOGO: BOSTON * LONDON * TOKYO] Fund highlights * "We believe the fund's adjustable-rate preferreds and sinking-fund preferreds will continue to help dampen volatility. Looking ahead, we will continue to look for mispriced securities and those that enhance the fund's call protection." -- Jeanne L. Mockard, manager Putnam Preferred Income Fund CONTENTS 4 Report from Putnam Management 9 Fund performance summary 13 Portfolio holdings 17 Financial statements From the Chairman [GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM] (copyright) Karsh, Ottawa Dear Shareholder: Timely portfolio weighting shifts and thoughtful security selection made significant contributions to Putnam Preferred Income Fund's positive performance during the six months ended May 31, 1997. Fund Manager Jeanne Mockard's timely strategy moves clearly took the edge off a challenging period in the preferred securities markets. Although the Federal Reserve Board has raised short-term rates at its March meeting it did not take any additional action in May or July. Investors, however, have been far from reassured and generally consider that with regard to further increases, it is a matter of "when" rather than "if." In anticipation of future increases, Jeanne stepped up the weighting of adjustable-rate preferred stocks because of their tendency toward stability in a rising rate environment. In the following report, Jeanne explains the rationale behind her portfolio moves during the first half of fiscal 1997 and takes a look at prospects during the second half. Respectfully yours, /S/GEORGE PUTNAM George Putnam Chairman of the Trustees July 16, 1997 Report from the Fund Manager Jeanne L. Mockard The winds of change provided some blustery moments during the first half of Putnam Preferred Income Fund's 1997 fiscal year. For the six months ended May 31, 1997, those gusts included federal budget proposals that could affect the types of securities held by the fund, the first increase in short-term interest rates in more than two years, and increasing controversy about a new type of security sold in the perpetual-preferred market. However, as is often the case, change can bring opportunity. Your fund's total returns of 3.86% and 3.74% at net asset value for class A and class M shares, respectively, reflect our ability to navigate those winds. The fund's returns at public offering price were 0.52% and 1.64% for class A and class M shares, respectively. For complete performance information, please see pages 9 and 10. * ADJUSTABLE-RATE PREFERREDS CUSHION FUND AS RATES RISE After leaving interest rates unchanged for more than two years, the Federal Reserve Board raised short-term interest rates by a quarter of a percentage point on March 25, 1997. A rising interest-rate environment can be challenging for preferred stocks, which, although classified as equities on corporate balance sheets, function more like bonds in the marketplace. In such an environment, the prices of adjustable-rate preferred stocks (ARPs) tend to be relatively stable. Because their dividends are adjusted to reflect changes in interest rates, their price movements are comparable with those of shorter- maturity bonds. Consequently, in anticipation of additional interest-rate increases, we have built up the ARPs in the fund's portfolio. At period's end, approximately 21.9% of the fund's net assets was invested in these securities. * BUDGET PROPOSALS CAST UNCERTAINTY OVER THE PREFERRED MARKET In his budget plan, President Clinton has reintroduced proposals that would eliminate the deductibility of interest on some of the securities industry's more exotic products. In doing so, he is bringing back to the table a set of restrictions he had hoped would pass through Congress more than a year ago, and raising general ire across Wall Street as some firms' products face the prospect of extinction. Among the proposals is one that would eliminate the deductibility of interest on hybrid debt/equity securities, such as trust-preferred stocks. These securities are subordinated debt issued to trusts, which in turn issue preferred stock to investors. As we discussed in your fund's last annual report, the fund benefited in 1996 from the issuance of these new securities by banks and insurance companies. Last October, the Fed instituted regulatory changes indicating that the capital from these stocks should be classified as equity on banks' balance sheets. This is consistent with the Fed's treatment of other types of preferred stock. Meanwhile, the Internal Revenue Service, in effect, treats trust-preferred stock as debt, allowing issuers to account for the dividends paid on the securities as a tax-deductible cost. Other types of preferred stock are typically viewed as equity by the IRS, which prevents dividends paid from being treated as tax-deductible interest. As a result, an issuer's after-tax costs for trust-preferred stock can be significantly lower than those for other types of preferred stock. [GRAPHIC HORIZONTAL BAR CHART OMITTED: COMPARATIVE PORTFOLIO COMPOSITION] COMPARATIVE PORTFOLIO COMPOSITION* Perpetual 66.2% 11/30/96 preferreds 64.8% 5/31/97 Adjustable-rate 21.1% 11/30/96 preferreds 21.9% 5/31/97 Sinking-fund 8.1% 11/30/96 preferreds 8.4% 5/31/97 Common 1.8% 11/30/96 stocks 0.3% 5/31/97 Convertible 0.0% 11/30/96 securities 0.5% 5/31/97 Cash and short-term 4.1% 11/30/96 securities 4.1% 5/31/97 Footnote reads: * Based on net assets as of 5/31/97. Composition will vary over time. Bond and specialty product professionals have voiced opposition to budget measures outlawing the tax-deductibility of trust-preferred stock. Many have argued that trust-preferreds are a source of valuable long-term debt capital for companies. If this mode of financing is taken away and the cost of capital increases, companies may not take on new projects that lead to creation of jobs. On the upside, bank issuance of trust-preferred stock during this window of opportunity bolstered the prices of other types of preferreds, giving them a degree of scarcity value in the face of no new issuance by banks. At the midpoint of your fund's fiscal year, more than 20% of the portfolio was committed to bank preferreds, allowing the fund to take full advantage of the rally. Another proposal that may affect the type of securities held by your fund is a measure to reduce the dividends-received deduction from 70% to 50%. Although the probability that the dividends-received deduction will be lowered remains uncertain, it has caused a slowdown in the overall issuance of preferreds. We believe, therefore, that it is perhaps more advantageous than ever to maintain a portfolio of high-coupon securities and to hold these securities for as long as possible. Consequently, portfolio turnover has been quite low relative to the fund's history. We will continue to monitor the status of these proposals and any effects they may have on the securities in which your fund invests. * SIGNIFICANT WEIGHTINGS IN FINANCIALS, INDUSTRIALS, AND UTILITIES Companies in the financial, industrial, and public utilities sectors are the dominant issuers in the preferred stock market. At period's end, roughly 34% of the fund's portfolio was devoted to utilities, with large percentages also invested in industrials and financial companies. [GRAPHIC OMITTED: TOP TEN HOLDINGS] TOP 10 HOLDINGS El Paso Tennessee Pipeline Co. Series A, $4.125 preferred Gas pipelines BankAmerica Corp. Series B, $6.00 adjustable-rate preferred Banking and financial services McDermott Inc. Series B, $2.60 sinking-fund preferred Oil services Ford Motor Co. Series B, $2.063, preferred Automobile manufacturing Merrill Lynch & Co., Inc. Series A, $2.25 preferred Securities brokerage and investment management services BankBoston Corp. Series E, $2.15, preferred Banking and financial services Boise Cascade Corp. Series F, $2.25 preferred Forest products and paper manufacturing General Motors Corp. Series B, $2.063 preferred World leader in automobile manufacturing Lasalle National Corp. Series 144A K, $4.375 preferred Banking and financial services Baltimore Gas & Electric Co. Series 93, $7.125 preferred Gas and electric utilities Footnote reads: These holdings represent 28.8% of the fund's assets as of 5/31/97. Portfolio holdings will vary over time. BankAmerica Corporation, one of the fund's largest holdings and the nation's third largest bank, is focusing on the growth of its investment products and mortgage lending. Strong financial performance in 1996 and the first quarter of this year have resulted from the bank's effective operating leverage, prudent risk management, and disciplined capital management. The bank's shareholder return was the highest of the 15 largest U.S. banking companies in 1996. While this portfolio holding and others discussed in this report, were viewed favorably at the end of the period, all holdings are subject to review and adjustment in accordance with the fund's investment strategy and may well vary in the future. Baltimore Gas and Electric Company, one of your fund's utility holdings, exemplifies the recent increase in mergers and acquisitions among electric and natural gas providers. Deregulation in the electric utility industry is causing major operators to attempt to consolidate their control over exploration, generation, and distribution of electric power. Numerous electric utilities have merged with natural gas providers, believing they will compete more effectively as combined rather than as separate entities. Baltimore Gas and Electric (BGE) provides electricity to more than one million customers in central Maryland. The company also serves natural gas to nearly 550,000 customers. BGE and electrical utility Potomac Electric plan to merge to form the Constellation Energy Corp. The merger, which would create the 10th largest U.S. utility, should allow the combined company to provide service more efficiently and effectively. Ford Motor Company, the world's second largest auto maker, is one of your fund's largest industrial holdings. Ford is the world's leading provider of auto financing. It also owns the Hertz car rental operation (#1 in the United States) and has stakes in several foreign-based automakers, including an interest giving it effective control of Japanese auto maker Mazda. Sales outside the United States account for 30% of the total. There is definitely a sense of urgency at Ford management to reduce structural costs. Equally important, the company is focusing resources and capital on where it can make money. * OUTLOOK: PRUDENT SECURITY SELECTION FOR AN UNCERTAIN MARKET Putnam Management believes the fund's adjustable-rate preferreds and sinking-fund preferreds will continue to help dampen volatility. The preferred market's activity remains slow because of uncertainty about President Clinton's proposals to lower the dividends-received deduction. During the second half of your fund's fiscal year, we will continue to look for mispriced securities and those that enhance the fund's call protection. 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 5/31/97, there is no guarantee the fund will continue to hold these securities in the future. Performance summary This section provides information about your fund's performance, which should always be considered in light of its investment strategy. Putnam Preferred Income Fund seeks a high level of income that qualifies for the 70% corporate dividends-received deduction for federal income-tax purposes. The dividends-received deduction is not available to noncorporate investors. TOTAL RETURN FOR PERIODS ENDED 5/31/97 Class A Class M (inception date) (1/4/84) (4/20/95) NAV POP NAV POP - ------------------------------------------------------------------------------ 6 months 3.86% 0.52% 3.74% 1.64% - ------------------------------------------------------------------------------ 1 year 11.17 7.60 10.93 8.73 - ------------------------------------------------------------------------------ 5 years 48.25 43.44 45.60 42.72 Annual average 8.19 7.48 7.8 7.37 - ------------------------------------------------------------------------------ 10 years 115.81 108.77 109.19 105.05 Annual average 8.00 7.64 7.66 7.44 - ------------------------------------------------------------------------------ COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/97 Merrill Lynch Perpetual Standard & Preferred Poor's Consumer Index* 500 Index Price Index - ------------------------------------------------------------------------------ 6 months 3.77% 13.14% 0.95% - ------------------------------------------------------------------------------ 1 year 9.13 29.40 2.23 - ------------------------------------------------------------------------------ 5 years 45.42 132.32 14.60 Annual average 7.78 18.37 2.76 - ------------------------------------------------------------------------------ 10 years -- 293.98 41.56 Annual average -- 14.69 3.54 - ------------------------------------------------------------------------------ Returns for class A and class M shares reflect the current maximum initial sales charges of 3.25% and 2.00%, respectively. Returns shown for class M for periods prior to inception are derived from the historical performance of class A shares, adjusted to reflect the initial sales charge currently applicable and the higher operating expenses applicable to class M shares. Returns shown for class A shares have not been adjusted to reflect payments under the class A distribution plan prior to its implementation. All returns assume reinvestment of distributions at NAV and represent past performance; they do not guarantee future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. * The Merrill Lynch Perpetual Preferred Index was introduced on 2/28/89. PRICE AND DISTRIBUTION INFORMATION 6 months ended 5/31/97 Class A Class M - ------------------------------------------------------------------------------ Distributions (number) 6 6 - ------------------------------------------------------------------------------ Income $0.29118 $0.280304 - ------------------------------------------------------------------------------ Capital gains -- -- - ------------------------------------------------------------------------------ Total $0.29118 $0.280304 - ------------------------------------------------------------------------------ Share value: NAV POP NAV POP - ------------------------------------------------------------------------------ 11/30/96 $8.71 $9.00 $8.69 $8.87 - ------------------------------------------------------------------------------ 5/31/97 8.75 9.04 8.73 8.91 - ------------------------------------------------------------------------------ Current return (end of period) - ------------------------------------------------------------------------------ Current dividend rate1 6.40% 6.19% 6.16% 6.03% - ------------------------------------------------------------------------------ Taxable equivalent3 8.81 8.52 8.48 8.30 - ------------------------------------------------------------------------------ Current 30-day SEC yield2 6.68 6.46 6.41 6.28 - ------------------------------------------------------------------------------ Taxable equivalent3 9.20 8.89 8.83 8.65 - ------------------------------------------------------------------------------ 1Income portion of most recent distribution, annualized and divided by NAV or POP at end of period. 2Based on investment income, calculated using SEC guidelines. 3The taxable equivalent examples in this table show the return that a corporation taxed at the 35% Federal corporate tax rate would have to earn from a non tax-advantaged investment to produce an after-tax return equal to that of the Fund's, assuming 100% of distributions qualify for the dividend-received deduction. TOTAL RETURN FOR PERIODS ENDED 6/30/97 (most recent calendar quarter) Class A Class M NAV POP NAV POP - ------------------------------------------------------------------------------ 6 months 5.11% 1.70% 4.99% 2.85% - ------------------------------------------------------------------------------ 1 year 12.01 8.40 11.77 9.55 - ------------------------------------------------------------------------------ 5 years 49.47 44.62 46.78 43.86 Annual average 8.37 7.66 7.98 7.54 - ------------------------------------------------------------------------------ 10 years 113.21 106.16 106.71 102.70 Annual average 7.87 7.50 7.53 7.32 - ------------------------------------------------------------------------------ Performance data represent past results, do not reflect future performance, and will differ for each share class. Investment returns and principal value will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. Please see the preceding page for the method of performance calculation. TERMS AND DEFINITIONS Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Class A shares are generally subject to an initial sales charge but carry no 12b-1 fee. Class M shares have a lower initial sales charge than class A shares and carry a 12b-1 fee. 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 3.25% sales charge for class A shares and 2.00% for class M shares. COMPARATIVE BENCHMARKS Merrill Lynch Perpetual Preferred Index* is an unmanaged list of perpetual preferred stocks that is commonly used as a general measure of performance for the preferred-stock market. Standard & Poor's 500 Index* is an unmanaged list of common stocks that is frequently used as a general measure of stock-market performance. Consumer Price Index (CPI) is a commonly used measure of inflation; it does not represent an investment return. * Securities indexes assume reinvestment of all distributions and interest payments and do not take into 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. WELCOME TO www.putnaminv.com Now you can get up-to-date information about your funds, learn more about investing and retirement planning, and access market news and an economic outlook from Putnam experts -- with just a few clicks of the mouse! VISIT PUTNAM'S NEW SITE ON THE WORLD WIDE WEB TO FIND OUT: * the benefits of investing with Putnam * Putnam's money management philosophy * daily fund pricing and long-term fund performance * how to tell if your retirement savings plan is on track * how quickly money can accumulate in a tax-deferred investment You can also read Dr. Robert Goodman's economic commentary and Putnam's Capital Markets Forum outlook, search for a particular Putnam fund by name or objective . . . and much more. The site can be accessed through any of the major online services (America Online, CompuServe, Prodigy) that offer web access. Of course, you can also access it via Netscape and an independent Internet service provider. New features will be added to the site on an ongoing basis. So, visit us at http://www.putnaminv.com -- often! Portfolio of investments owned May 31, 1997 (Unaudited)
PREFERRED STOCKS (95.1%) * NUMBER OF SHARES VALUE Automobiles (6.8%) - ------------------------------------------------------------------------------------------------------------ 131,079 Ford Motor Co. Ser. B, $2.063, dep. shs. cum. preferred (pfd) $ 3,604,670 115,000 General Motors Corp. Ser. B, $2.281, dep. shs. cum. pfd. 3,047,500 54,000 General Motors Corp. Ser. G, $2.28, cum. pfd. 1,525,500 -------------- 8,177,670 Banks (20.1%) - ------------------------------------------------------------------------------------------------------------ 43,662 BankAmerica Corp. Ser. B, $6.00, cum. Adjustable Rate Preferred (ARP) 3,978,700 25,000 BankBoston Corp. Ser. C, $5.50, cum. ARP 1,965,625 135,000 BankBoston Corp. Ser. E, $2.15, dep. shs. cum. pfd. 3,391,875 16,000 Bankers Trust New York Corp. Ser. P, $1.875, cum. pfd. 408,000 70,000 Bankers Trust New York Corp. Ser. Q, $1.423, cum. ARP 1,653,750 20,239 Bankers Trust New York Corp. Ser. S, $1.938, cum. pfd. 531,274 50,000 Chase Manhattan Corp. Ser. B, $2.44, cum. pfd. 1,412,500 17,400 Chase Manhattan Corp. Ser. C, $2.71, cum. pfd. 530,700 17,400 Citicorp Ser. 3, $7.00, cum. ARP 1,718,250 22,510 Citicorp Ser. 18, $1.449, cum. ARP 565,564 10,000 Fleet Financial Group, Inc. Ser. D, $2.325, dep. shs. cum. pfd. 257,500 66,766 Fleet Financial Group, Inc. Ser. E, $2.338, dep. shs. cum. pfd. 1,877,794 52,000 Fleet Financial Group, Inc. Ser. V, $1.813, dep. shs. cum. pfd. 1,358,500 15,000 Indosuez Holdings 144A, ADS, $2.594, pfd. (Mexico) 410,625 60,000 Lasalle National Corp. Ser. 144A K, $4.375, pfd. 3,037,500 40,000 UnionBanCal Corp. Ser. A, $2.094, cum. pfd. 1,015,000 -------------- 24,113,157 Combined Utilities (13.1%) - ------------------------------------------------------------------------------------------------------------ 28,000 Baltimore Gas & Electric Co. Ser. 93, $7.125, cum. pfd. 2,975,000 15,000 Baltimore Gas & Electric Co. Ser. 95 $6.99, cum. pfd. 1,563,750 14,485 Baltimore Gas & Electric Co. Ser. 87, $6.75, cum. pfd. 1,506,440 9,000 Jersey Central Power & Light Co. Ser. E, $7.88, cum. pfd. 909,000 80,000 Long Island Lighting Co. Sinking Fund Ser. NN, $1.95, cum. pfd. 1,980,000 116,000 New York State Electric & Gas Corp. Ser. B, $1.425, cum. ARP 2,726,000 20,000 Pacific Gas & Electric Co. Ser. U, $1.76, cum. pfd. 527,500 11,750 Public Service Electric & Gas Co. $6.92, cum. pfd. 1,224,938 23,200 Western Resources, Inc. Sinking Fund $ 7.58, cum. pfd. 2,296,800 -------------- 15,709,428 Computer Software (0.5%) - ------------------------------------------------------------------------------------------------------------ 24,033 IBM Corp. Ser. A, $1.875, dep. shs. pfd. 648,891 Electric Utilities (19.7%) - ------------------------------------------------------------------------------------------------------------ 100,000 Alabama Power Co. Ser. 93-A, $1.365, cum. ARP 2,375,000 50,000 Arizona Public Service Co. Ser. W, $1.813, pfd. 1,262,500 20,000 Central Maine Power Co. Ser. A, $7.999, cum. pfd. 2,010,000 7,070 Commonwealth Edison Co. Ser. A, $8.40, cum. pfd. 712,303 15,000 Florida Power & Light Co. Ser. S, $6.98, cum. pfd. 1,561,875 100,000 Georgia Power Co. Ser. 93, $1.495, cum. ARP 2,525,000 80,941 Georgia Power Co. Ser. 93-2, $1.375, cum. ARP 1,993,172 39,800 Niagara Mohawk Power Corp. Ser. A, $1.625, cum. ARP 766,150 40,000 Niagara Mohawk Power Corp. Ser. C, $1.75, cum. ARP 895,000 50,000 Niagara Mohawk Power Corp. $2.375, cum. pfd. 1,300,000 8,120 Northern States Power Co. Ser. B, $5.52, cum. ARP 801,850 15,000 Peco Energy $7.48, cum. pfd. 1,518,750 10,000 Pennsylvania Power & Light Co. Sinking Fund $6.33, cum. pfd. 1,030,000 10,000 Pennsylvania Power & Light Co. Sinking Fund $6.125, cum. pfd. 1,020,000 18,700 Puget Sound Energy, Inc. Ser. III, $2.125, cum. pfd. 488,538 18,000 PSI Energy, Inc. $1.86, cum. pfd. 456,750 60,000 Texas Utilities Electric Co. Ser. A, $1.875, dep. shs. cum. pfd. 1,575,000 50,000 Texas Utilities Electric Co. Ser. B, $1.805, dep. shs. cum. pfd. 1,337,500 -------------- 23,629,388 Finance (9.4%) - ------------------------------------------------------------------------------------------------------------ 10,000 Bear Stearns & Co. Ser. A, $2.75, cum. ARP 447,500 28,300 Bear Stearns & Co. Ser. B, $1.97, dep. shs. cum. pfd. 721,650 95,000 Heller Financial Inc. Ser. A, $2.031, cum. pfd. 2,481,875 40,000 MBNA Corp. Ser. B, $1.745, cum. ARP 1,085,000 36,500 MBNA Corp. Ser. A, $1.875, cum. pfd. 958,125 116,324 Merrill Lynch & Co., Inc. Ser. A, $2.25, dep. shs. cum. pfd. 3,431,558 30,000 Morgan Stanley $3.875, dep. shs. cum. pfd. 1,582,500 24,000 Morgan Stanley $1.844, dep. shs. cum. pfd. 615,000 -------------- 11,323,208 Financial Services (1.8%) - ------------------------------------------------------------------------------------------------------------ 38,350 Household International, Inc. Ser. 92-A, $2.063, dep. shs. cum. pfd. 1,054,625 20,000 J.P. Morgan & Co. Inc. Ser. H, $3.313, dep. shs. cum. pfd. 1,042,500 -------------- 2,097,125 Food Chains (2.2%) - ------------------------------------------------------------------------------------------------------------ 102,569 McDonalds Corp. Ser. E, $1.93, dep. shs. pfd. 2,602,688 Gas Pipelines (5.8%) - ------------------------------------------------------------------------------------------------------------ 80,000 El Paso Tennessee Pipeline Co. Ser. A, $4.125, cum. pfd. 4,230,000 28,000 Enserch Corp. Ser. E, $7.00, cum. ARP 2,789,500 -------------- 7,019,500 Insurance (2.5%) - ------------------------------------------------------------------------------------------------------------ 52,500 AON Corp. $2.00, cum. pfd. 1,332,188 37,000 Berkley (W.R.) Corp. Ser. A, $1.844, cum. pfd. 948,125 27,735 Provident Cos., Inc. $2.025, dep shs. cum. pfd. 710,709 -------------- 2,991,022 Natural Gas (1.4%) - ------------------------------------------------------------------------------------------------------------ 66,000 Phillips Gas Co. Ser. A, $2.33, cum. pfd. 1,691,250 Oil Services (4.4%) - ------------------------------------------------------------------------------------------------------------ 57,500 LASMO PLC ADS Ser. A,$2.50, cum. pfd. (United Kingdom) 1,466,250 129,051 McDermott Inc. Sinking Fund Ser. B, $2.60, cum. pfd. 3,758,610 -------------- 5,224,860 Paper (3.9%) - ------------------------------------------------------------------------------------------------------------ 60,000 Bowater, Inc. Ser. C, $2.10, dep. shs. cum. pfd. 1,567,500 120,000 Boise Cascade Corp. Ser. F, $2.35, dep. shs. cum. pfd. 3,120,000 -------------- 4,687,500 Publishing (1.0%) - ------------------------------------------------------------------------------------------------------------ 49,500 Newscorp Overseas Corp. Ser. A, $2.156, cum. pfd. 1,231,313 Tobacco (1.4%) - ------------------------------------------------------------------------------------------------------------ 67,300 RJR Nabisco Holding Ser. B, $2.313, dep. shs. cum. pfd. 1,699,325 Water Utilities (1.1%) - ------------------------------------------------------------------------------------------------------------ 13,500 United Water Resources, Inc. Ser. B, $7.625, cum. pfd. 1,336,500 -------------- Total Preferred Stocks (cost $111,723,529) $ 114,182,825 CONVERTIBLE PREFERRED STOCKS (0.5%) * (cost $530,000) NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------------------------------------ 20,000 Lehman Brothers Holding Inc. $5.00, cv. pfd. $ 562,500 COMMON STOCKS (0.3%) * (cost $479,754) NUMBER OF SHARES VALUE - ------------------------------------------------------------------------------------------------------------ 18,000 Pacific Gas & Electric Co. $ 416,250 SHORT-TERM INVESTMENTS (4.1%) * (cost $4,952,516) PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------ 4,951,000 Interest in $580,717,000 joint repurchase agreement May 30, 1997 with SBC Warburg Inc. due June 2, 1997 with respect to various U.S. Treasury obligations -- maturity value of $4,953,273 for an effective yield of 5.51% $ 4,952,516 - ------------------------------------------------------------------------------------------------------------ Total Investments (cost $117,685,799) *** $ 120,114,091 - ------------------------------------------------------------------------------------------------------------ * Percentages indicated are based on net assets of $120,101,909. *** The aggregate identified cost on a tax basis is $117,694,498, resulting in gross unrealized appreciation and depreciation of $4,062,937 and $1,643,344, respectively, or net unrealized appreciation of $2,419,593. 144A after the name of a security represents those exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. ADS after the name of a foreign holding American Depository Shares, representing ownership of foreign securities on deposit with a custodian bank. The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities May 31,1997 (Unaudited) Assets - --------------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $117,685,799) (Note 1) $ 120,114,091 - --------------------------------------------------------------------------------------------------- Cash 946 - --------------------------------------------------------------------------------------------------- Dividends receivable 497,776 - --------------------------------------------------------------------------------------------------- Receivable for shares of the fund sold 19,038 - --------------------------------------------------------------------------------------------------- Total assets 120,631,851 Liabilities - --------------------------------------------------------------------------------------------------- Distributions payable to shareholders 222,115 - --------------------------------------------------------------------------------------------------- Payable for shares of the fund repurchased 79,568 - --------------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 192,291 - --------------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 6,275 - --------------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 1,195 - --------------------------------------------------------------------------------------------------- Payable for distribution fees (Note 2) 2,441 - --------------------------------------------------------------------------------------------------- Other accrued expenses 26,057 - --------------------------------------------------------------------------------------------------- Total liabilities 529,942 - --------------------------------------------------------------------------------------------------- Net assets $ 120,101,909 Represented by - --------------------------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $ 149,931,037 - --------------------------------------------------------------------------------------------------- Distributions in excess of net investment income (Note 1) (235,290) - --------------------------------------------------------------------------------------------------- Accumulated net realized loss on investments (32,022,130) - --------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments 2,428,292 - --------------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $ 120,101,909 Computation of net asset value and offering price - --------------------------------------------------------------------------------------------------- Net asset value and redemption price per class A share ($112,830,983 divided by 12,896,637 shares) $8.75 - --------------------------------------------------------------------------------------------------- Offering price per class A share (100/96.75 of $8.75)* $9.04 - --------------------------------------------------------------------------------------------------- Net asset value and redemption price per class M share ($7,270,926 divided by 833,074 shares) $8.73 - --------------------------------------------------------------------------------------------------- Offering price per class M share (100/98.00 of $8.73)* $8.91 - --------------------------------------------------------------------------------------------------- * On single retail sales of less than $100,000. On sales of $100,000 or more and group sales the offering price is reduced. The accompanying notes are an integral part of these financial statements.
Statement of operations Six months ended May 31,1997 (Unaudited) Investment income: - -------------------------------------------------------------------------------------------------- Dividends (net of foreign tax of $10,781) $ 4,239,068 - -------------------------------------------------------------------------------------------------- Interest 32,069 - -------------------------------------------------------------------------------------------------- Total investment income 4,271,137 Expenses: Compensation of Manager (Note 2) 388,206 - -------------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 89,452 - -------------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 5,817 - -------------------------------------------------------------------------------------------------- Administrative services (Note 2) 3,542 - -------------------------------------------------------------------------------------------------- Distribution fees -- Class M (Note 2) 7,117 - -------------------------------------------------------------------------------------------------- Reports to shareholders 7,425 - -------------------------------------------------------------------------------------------------- Registration fees 175 - -------------------------------------------------------------------------------------------------- Auditing 14,166 - -------------------------------------------------------------------------------------------------- Legal 3,490 - -------------------------------------------------------------------------------------------------- Other 516 - -------------------------------------------------------------------------------------------------- Total expenses 519,906 - -------------------------------------------------------------------------------------------------- Expense reduction (Note 2) (52,332) - -------------------------------------------------------------------------------------------------- Net expenses 467,574 - -------------------------------------------------------------------------------------------------- Net investment income 3,803,563 - -------------------------------------------------------------------------------------------------- Net realized gain on investments (Notes 1 and 3) 480,955 - -------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments during the period 149,489 - -------------------------------------------------------------------------------------------------- Net gain on investments 630,444 - -------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $ 4,434,007 - -------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets Six months ended Year ended May 31 November 30 1997* 1996 - ---------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets - ---------------------------------------------------------------------------------------------------------------------- Operations: - ---------------------------------------------------------------------------------------------------------------------- Net investment income $ 3,803,563 $ 8,169,853 - ---------------------------------------------------------------------------------------------------------------------- Net realized gain on investments 480,955 613,554 - ---------------------------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments 149,489 1,099,640 - ---------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 4,434,007 9,883,047 - ---------------------------------------------------------------------------------------------------------------------- Distributions to shareholders: - ---------------------------------------------------------------------------------------------------------------------- From net investment income Class A (3,795,540) (7,929,910) - ---------------------------------------------------------------------------------------------------------------------- Class M (183,217) (187,209) - ---------------------------------------------------------------------------------------------------------------------- In excess of net investment income Class A -- (58,710) - ---------------------------------------------------------------------------------------------------------------------- Class M -- (1,386) - ---------------------------------------------------------------------------------------------------------------------- Decrease from capital share transactions (Note 4) (3,188,557) (191,510) - ---------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (2,733,307) 1,514,322 Net assets - ---------------------------------------------------------------------------------------------------------------------- Beginning of period 122,835,216 121,320,894 - ---------------------------------------------------------------------------------------------------------------------- End of period (including distributions in excess of net investment income $235,290 and $60,096, respectively) $ 120,101,909 $ 122,835,216 - ---------------------------------------------------------------------------------------------------------------------- * Unaudited The accompanying notes are an integral part of these financial statements.
Financial highlights ** (For a share outstanding throughout the period) CLASS A - ------------------------------------------------------------------------------------------------------------------------------------ Six months ended Per-share May 31 operating performance (Unaudited) Year ended November 30 - ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $8.71 $8.59 $7.88 $8.81 $8.34 $8.00 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income .28 .58 .57 .56 .60 .68 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments .05 .12 .73 (.93) .47 .34 - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations .33 .70 1.30 (.37) 1.07 1.02 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.29) (.58) (.59) (.56) (.60) (.68) - ------------------------------------------------------------------------------------------------------------------------------------ In excess of net investment income -- -- (d) -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (.29) (.58) (.59) (.56) (.60) (.68) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $8.75 $8.71 $8.59 $7.88 $8.81 $8.34 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at net asset value (%)(a) 3.86 * 8.61 17.05 (4.41) 13.07 13.08 - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $112,831 $117,502 $120,591 $119,822 $144,185 $142,378 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) .43 * .89 .90 .81 .83 .83 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 3.18 * 6.90 6.91 6.64 6.83 8.23 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 9.25 * 29.51 34.76 32.84 114.53 188.68 - ------------------------------------------------------------------------------------------------------------------------------------ Average commission rate paid (c) $.0491 $.0564 - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. ** The table has been restated to reflect a 5-for-1 share split declared by the fund to shareholders of record on November 29, 1994. (a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets for the period ended November 30, 1995 and thereafter, includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2) (c) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995. (d) Distributions in excess of net investment income amounted to less than $0.01 per share for each class.
Financial highlights ** (For a share outstanding throughout the period) CLASS M - ------------------------------------------------------------------------------------------------------------------------------------ Six months ended For the period Per-share May 31 Year ended Apr. 20, 1995+ operating performance (Unaudited) Nov. 30 to Nov. 30 - ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $8.69 $8.58 $8.12 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income .27 .56 .33 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments .05 .11 .46 - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations .32 .67 .79 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.28) (.56) (.33) - ------------------------------------------------------------------------------------------------------------------------------------ In excess of net investment income -- -- (d) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (.28) (.56) (.33) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $8.73 $8.69 $8.58 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at net asset value (%)(a) 3.74 * 8.22 9.88 * - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $7,271 $5,333 $729 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) .55 * 1.14 .67 * - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 2.99 * 6.41 3.73 * - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 9.25 * 29.51 34.76 - ------------------------------------------------------------------------------------------------------------------------------------ Average commission rate paid (c) $.0491 $.0564 - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. ** The table has been restated to reflect a 5-for-1 share split declared by the fund to shareholders of record on November 29, 1994. (a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets for the period ended November 30, 1995 and thereafter, includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2) (c) Average commission rate paid on security trades is required for fiscal periods beginning on or after September 1, 1995. (d) Distributions in excess of net investment income amounted to less than $0.01 per share for each class.
Notes to financial statements May 31, 1997 (Unaudited) Note 1 Significant accounting policies Putnam Preferred Income Fund (the "fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The fund seeks high after-tax income for corporate shareholders and current income for all investors with minimum fluctuations in principal. The fund offers class A and class M shares. Class A shares are sold with a maximum front-end sales charge of 3.25%. Class M shares are sold with a maximum front-end sales charge of 2.00% and pay an ongoing distribution fee. Expenses of the fund are borne pro-rata by the holders of both classes 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. Certain preferred stocks, for which reliable market quotations are not readily available are stated at fair value on the basis of valuations furnished by pricing services approved by the Trustees, which determine valuations for normal, institutional-size trading units of such securities using methods based on market transactions for comparable securities and various relationships between securities that are generally recognized by institutional traders. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value, and other investments are stated at fair value following procedures approved by the Trustees. B) Joint trading account Pursuant to an exemptive order issued by the Securities and Exchange Commission, the fund may transfer uninvested cash balances into a joint trading account along with the cash of other registered investment companies and certain other accounts managed by Putnam Investment Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc.. These balances may be invested in one or more repurchase agreements and/or short-term money market instruments. C) Repurchase agreements The fund, or any joint trading account, through its custodian, receives delivery of the underlying securities, the market value of which at the time of purchase is required to be in an amount at least equal to the resale price, including accrued interest. Putnam Management is responsible for determining that the value of these underlying securities is at all times at least equal to the resale price, including accrued interest. D) Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recorded as soon as the fund is informed of the ex-dividend date. E) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986 as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. At November 30, 1996, the fund had a capital loss carryover of approximately $51,330,000 available to offset future capital gains, if any. This amount includes approximately $18,836,000 of capital loss carryovers acquired in connection with the fund's acquisition of net assets of Putnam Corporate Cash Fund-Adjustable Rate Preferred Portfolio in 1990. The amount of capital loss carryover that can be used to offset realized capital gains by the fund in any one year may be limited by the Internal Revenue Code and Regulations. To the extent that capital loss carryovers are used to offset realized capital gains, it is unlikely that gains so offset would be distributed to shareholders since any such distribution might be taxable as ordinary income. The amount of the carryover and the expiration dates are: Loss Carryover Expiration - ------------------ ------------------ 29,523,000 November 30, 1997 14,805,000 November 30, 1998 5,261,000 November 30, 1999 208,000 November 30, 2000 1,533,000 November 30, 2003 F) Distributions to shareholders The fund declares a distribution each day based upon the projected net investment income, for a specified period, calculated as if earned prorata throughout the period on a daily basis. Such distributions are recorded daily and paid monthly. Capital gain distributions, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. 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. 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: 0.65% of the average net assets, 0.55% of the next $500 million, 0.50% of the next $500 million, 0.45% of the next $5 billion, 0.425% of the next $5 billion, 0.405% of the next $5 billion, 0.39% of the next $5 billion, and 0.38% thereafter. Prior to March 20, 1997, any amount over $1.5 billion was based on a rate of 0.45%. The fund reimburses Putnam Management for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. For the six months ended May 31, 1997, fund expenses were reduced by $52,332 under expense offset arrangements with PFTC and brokerage service arrangements. Investor servicing and custodian fees reported in the Statement of operations exclude these credits. The fund could have invested a portion of the assets utilized in connection with the expense offset arrangements in an income producing asset if it had not entered into such arrangements. Trustees of the fund receive an annual Trustees fee of $500 and an additional fee for each Trustee's meeting attended. Trustees who are not interested persons of Putnam Management and who serve on committees of the Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees Fees payable on or after July 1, 1995. The deferred fees remain in the fund and are invested in certain Putnam funds until distribution in accordance with the Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Compensation of trustees in the Statement of operations. Accrued pension liability is included in Payable for compensation of Trustees in the Statement of assets and liabilities. The fund has adopted a distribution plan (the "Plan") with respect to Class M shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plan is to compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments, Inc., for services provided and expenses incurred by it in distributing Class M shares of the fund. The Class M Plan provides for payment by the fund to Putnam Mutual Funds Corp. at an annual rate of up to 1.00% of the average net assets attributable to Class M shares. The Trustees have approved payment by the fund at an annual rate of 0.25% of the average net assets attributable to Class M shares. For the six months ended May 31, 1997, Putnam Mutual Funds Corp., acting as underwriter received net commissions of $10,345 and $1,326 from the sale of class A shares and class M shares respectively. A deferred sales charge of up to 1% is assessed on certain redemptions of class A shares. For the six months ended May 31, 1997, Putnam Mutual Funds Corp., acting as underwriter received no monies on class A redemptions. Note 3 Purchase and sales of securities During the six month ended May 31, 1997, purchases and sales of investment securities other than short-term investments aggregated $10,816,290 and $15,735,976, respectively. There were no purchases and sales of U.S. government obligations. In determining the net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. Note 4 Capital shares At May 31, 1997, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Six months ended May 31, 1997 - ------------------------------------------------------------ Class A Shares Amount - ------------------------------------------------------------ Shares sold 1,024,569 $ 8,929,411 - ------------------------------------------------------------ Shares issued in connection with reinvestment of distributions 293,018 2,552,978 - ------------------------------------------------------------ 1,317,587 11,482,389 Shares repurchased (1,905,641) (16,586,936) - ------------------------------------------------------------ Net decrease (588,054) $(5,104,547) - ------------------------------------------------------------ Year ended November 30, 1996 - ------------------------------------------------------------ Class A Shares Amount - ------------------------------------------------------------ Shares sold 2,600,524 $22,095,872 - ------------------------------------------------------------ Shares issued in connection with reinvestment of distributions 606,063 5,145,980 - ------------------------------------------------------------ 3,206,587 27,241,852 Shares repurchased (3,757,062) (31,934,220) - ------------------------------------------------------------ Net decrease (550,475) $(4,692,368) - ------------------------------------------------------------ Six months ended May 31, 1997 - ------------------------------------------------------------ Class M Shares Amount - ------------------------------------------------------------ Shares sold 295,501 2,574,928 - ------------------------------------------------------------ Shares issued in connection with reinvestment of distributions 17,245 149,936 - ------------------------------------------------------------ 312,746 2,724,864 - ------------------------------------------------------------ Shares repurchased (93,111) (808,874) - ------------------------------------------------------------ Net increase 219,635 $1,915,990 - ------------------------------------------------------------ Year ended November 30, 1996 - ------------------------------------------------------------ Class M Shares Amount - ------------------------------------------------------------ Shares sold 659,164 $5,596,724 - ------------------------------------------------------------ Shares issued in connection with reinvestment of distributions 19,994 169,452 - ------------------------------------------------------------ 679,158 5,766,176 - ------------------------------------------------------------ Shares repurchased (150,701) (1,265,318) - ------------------------------------------------------------ Net increase 528,457 $4,500,858 - ------------------------------------------------------------ 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. 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 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 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 Ian C. Ferguson Vice President Thomas V. Reilly Vice President Jeanne L. Mockard 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 Preferred Income Fund. It may also be used as sales literature when preceded or accompanied by the current prospectus, which gives details of sales charges, investment objectives, and operating policies of the fund, and the most recent copy of Putnam's Quarterly Performance Summary. For more information, or to request a prospectus, call toll free: 1-800-225-1581. You can also learn more at Putnam Investments' 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. [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 - -------------------- Bulk Rate U.S. Postage PAID Putnam Investments - -------------------- 34403-029/867 7/97 -----END PRIVACY-ENHANCED MESSAGE-----