Putnam
Intermediate
Government
Income Trust
ANNUAL REPORT
November 30, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "The fund has kept pace with the Lehman Brothers Aggregate Bond Index
over the long term, largely owing to the moves its managers have made
within each part of the portfolio."
-- Morningstar Mutual Funds, September 6, 1996
* According to Lipper Analytical Services, Putnam Intermediate
Government Income Trust ranked 1 out of 4 intermediate U.S. government
funds for the 5-year period ended November 30, 1996.*
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
15 Financial statements
Footnote reads:
* Lipper Analytical Services, an independent research organization,
ranks funds according to total return performance. Rankings vary over
time and do not reflect the effects of sales charges. For periods ended
11/30/96, the fund ranked 3 and 1 out of 4 intermediate U.S. government
funds for 1- and 3-year performance, respectively. Past performance is
not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
A portfolio invested in U.S. government and international fixed-income
securities provided shareholders of Putnam Intermediate Government
Income Trust with positive results during the fiscal year ended November
30, 1996. The fund's allocation to international fixed-income securities
demonstrated the value of diversification within the world's bond
markets as a counter to the somewhat restrained results posted by U.S.
government securities.
In the international bond sector, your fund's managers emphasized the
higher-yielding European markets of Italy, Spain, and Sweden. During the
fiscal year's second half, the fund benefited from strong performance of
its holdings in emerging markets. Within the less vibrant U.S.
government sector, a shift away from Treasuries and increasing emphasis
on mortgage-backed securities proved worthwhile.
In the following report, your fund's management team comments in depth
about fiscal 1996 performance and prospects at home and abroad for
fiscal 1997.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
January 15, 1997
Report from the Fund Managers
Neil J. Powers, lead manager
D. William Kohli
Mark J. Siegel
For Putnam Intermediate Government Income Trust, the fiscal year ended
November 30, 1996, brought more evidence that the fund's dual-sector
strategy is an effective one. In a year marked by fluctuating markets at
home and abroad, your fund's ability to invest in both U.S. government
securities and international government securities proved especially
valuable, enabling it to outperform all three competitive indexes we use
as benchmarks for the fund's performance. Complete performance
information appears on pages 8 and 9.
When fiscal 1996 began, the U.S. bond market was at the height of one of
the strongest periods in its history. A declining inflation rate at home
and bond market rallies around the world had helped boost both sectors
of the fund's portfolio. Shortly into the fiscal year, however, the U.S.
bond market became increasingly unsettled as interest rates rose
dramatically. As signs of economic strength emerged and investors became
concerned about an overheating economy and increased inflation, the
performance of U.S. government securities weakened. The fiscal year
wrapped up on a brighter note for U.S. government securities as
inflation fears calmed and bond prices rallied between September and
November.
At the same time, international bonds -- including many in emerging
markets -- generally delivered positive returns throughout the fiscal
year. In light of this environment, our strategy for fiscal 1996 was to
take advantage of the relatively strong performance of international
bonds while reducing the allocation to U.S. government securities.
* PERIPHERAL EUROPEAN AND EMERGING MARKETS MAKE STRONG SHOWING
At the close of fiscal 1995, we had shifted approximately 5% of the
fund's U.S. government sector holdings into the international sector.
This move, prompted by our expectation of stronger performance from
international bond markets, proved quite effective. The fund's
investments in international bonds contributed substantially to
performance during fiscal 1996. And while most international bond
markets delivered positive returns, we believe our emphasis on country
selection, currency management, and longer duration in the international
sector of the portfolio allowed the fund to derive superior returns from
international holdings.
Our primary focus has been on European government bonds. Early in the
fiscal year, we emphasized bonds in higher-yielding markets, such as
those of Italy and Spain, rather than those in core markets. Since that
time, these and most other European countries have focused their efforts
on reining in fiscal budgets in order to gain acceptance into the
European Monetary Union (EMU), which intends to create a single currency
to be used among member nations. As a result of these efforts, Italy,
Spain, and Sweden have made significant reductions in their inflation
levels -- which has resulted in lower bond yields. As yields declined,
the fund's holdings in these markets benefited from price appreciation.
Toward the end of the period, we reduced the fund's allocation to these
countries as we achieved our targets.
A similar trend took place among markets in Canada and Australia. In
those two markets, yields at the outset of the fiscal period were
considerably higher than those in the United States. Interest rates have
fallen quite a bit since then, narrowing yield spreads between these
bonds and U.S. Treasuries. Also during the fiscal year, we increased the
fund's holdings in emerging-market securities, which enjoyed robust
gains. Toward the end of the period, when yield spread levels had met
our targets, we made a slight reduction in the fund's allocation to
emerging markets.
Our currency strategy involved hedging international bonds back to the
U.S. dollar in an effort to protect the fund's value from losses due to
currency fluctuations. This helped protect the portfolio's value as
several European currencies declined in value against the dollar. We
underweighted the yen and deutschemark and capitalized on other currency
movements as European nations struggled with the stringent budgetary and
growth criteria required to qualify for EMU inclusion.
* MORTGAGE-BACKED SECURITIES PLAY KEY ROLE IN U.S. GOVERNMENT SECTOR
During the first half of the fiscal year, we shifted our strategy from a
focus on duration to an emphasis on maximizing yield. Duration is a
measure of a portfolio's sensitivity to interest-rate changes; a longer
duration can be beneficial during a period of declining rates, such as
the 1995 fiscal year.
As surprising economic strength in the first half of the fiscal year
caused interest rates to rise dramatically, the U.S. bond market rally
came to an abrupt halt, experiencing the sharpest one-day price decline
in its history. Recognizing the considerable impact this would have on
the mortgage-backed securities market, we made some strategic shifts in
the U.S. government sector of the portfolio. The rise in interest rates
drove down the prices of mortgage-backed securities. This, in turn,
reduced prepayment risk because higher interest rates made mortgage
refinancing less attractive to mortgage holders. At that point, we
quickly swapped a considerable portion of the fund's U.S. Treasury
holdings for mortgage-backed securities before the majority of the
market adjusted to these changes.
The remainder of the fiscal year brought a bit more stability to the
U.S. bond markets, and yields on Treasuries remained within a fairly
narrow range. As a result, mortgage-backed securities offered greater
price appreciation and higher income than Treasuries. As the U.S. bond
market rallied during the final months of the fiscal year, we reduced
the fund's allocation to mortgage-backed securities in order to better
manage the portfolio's exposure to prepayment risk.
* CONTINUED MODERATE GROWTH EXPECTED
Our outlook for the coming months reflects what we have seen during much
of this year: moderate economic growth, low inflation, and interest
rates that move within a relatively limited range. For this reason, we
anticipate that the securities that have served the fund well in recent
months, such as mortgage-backed securities, may continue to do so into
the beginning of calendar 1997.
[GRAPHIC OMITTED: TOP FIVE HOLDINGS PER SECTOR]
TOP FIVE HOLDINGS PER SECTOR
U.S. GOVERNMENT OBLIGATIONS
U.S. Treasury notes 6.5%, 2006
GNMA 7.5%, 2020 - 2022
GNMA 7%, 2021 - 2022
FNMA 7%, 2019 - 2022
U.S. Treasury notes 5.75%, 2003
FOREIGN BONDS
Germany (Federal Republic of) 6.25%, 2006
Canada (Government of) 9%, 2004
Australia (Government of) 10%, 2006
United Kingdom Treasury notes 7.75%, 2006
United Kingdom Treasury bonds 6.75%, 2004
Among international bond markets, we expect to continue to invest in
countries whose inflation rates are declining. We will also seek to take
advantage of European markets as progress toward the EMU creates
opportunities. We also anticipate that the rate of U.S. economic growth
may begin to slow in the coming months, and interest rates will likely
decline once again. For this reason, we expect to maintain a longer-
than-average portfolio duration to enable the fund to participate in any
corresponding price appreciation among U.S. government bonds.
Footnote reads:
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 11/30/96, there is no guarantee the fund
will continue to hold these securities in the future. International
investing involves certain risks, including those related to economic
instability, unfavorable political developments, and currency
fluctuations not present with domestic investments.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Intermediate Government Income Trust is designed for
investors seeking high current income and relative stability of net
asset value through a portfolio of U.S. government and foreign
government securities with limited maturities. Performance should always
be considered in light of a fund's investment strategy.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 11/30/96
Market
NAV price
- ------------------------------------------------------------------------
1 year 7.70% 6.44%
- ------------------------------------------------------------------------
5 years 46.87 30.53
Annual average 7.99 5.47
- ------------------------------------------------------------------------
Life (6/27/88) 107.52 69.93
Annual average 9.05 6.49
- ------------------------------------------------------------------------
COMPARATIVE INDEXES AND BENCHMARKS
Lehman Bros. Salomon Bros.
Govt. Lehman Bros. Non-U.S. Consumer
Intermed. Mortgage-Backed World Govt. Price
Bond Index Securities Index Bond Index Index
- ------------------------------------------------------------------------
1 year 5.66% 7.22% 5.73% 3.26%
- ------------------------------------------------------------------------
5 years 39.34 41.88 71.17 15.09
Annual average 6.86 7.24 11.34 2.85
- ------------------------------------------------------------------------
Life (6/27/88) 95.80 110.81 125.61 34.41
Annual average 8.31 9.26 10.15 3.57
- ------------------------------------------------------------------------
Footnote reads:
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset value
and market price will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost.
TOTAL RETURN FOR PERIODS ENDED 12/31/96
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------
1 year 4.99% 6.42%
- ------------------------------------------------------------------------
5 years 39.96 26.54
Annual average 6.95 4.82
- ------------------------------------------------------------------------
Life (6/27/88) 105.50 68.23
Annual average 8.83 6.30
- ------------------------------------------------------------------------
PRICE AND DISTRIBUTION INFORMATION
12 months ended 11/30/96
- ------------------------------------------------------------------------
Distributions (number) 12
- ------------------------------------------------------------------------
Income $0.60
- ------------------------------------------------------------------------
Total $0.60
- ------------------------------------------------------------------------
Share value: NAV Market price
- ------------------------------------------------------------------------
11/30/95 $8.70 $7.750
- ------------------------------------------------------------------------
11/30/96 8.66 7.625
- ------------------------------------------------------------------------
Current return (end of year)
- ------------------------------------------------------------------------
Current dividend rate1 6.93% 7.87%
- ------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares.
Market price is the current trading price of one share of the fund.
Market prices are set by transactions between buyers and sellers on the
New York Stock Exchange.
COMPARATIVE BENCHMARKS
Lehman Brothers Government Intermediate Bond Index* is composed of all
bonds covered by the Lehman Brothers Government Bond Index+ with
maturities between 1 and 9.99 years.
Lehman Brothers Mortgage-Backed Securities Index* reflects performance
of 15- and 30-year fixed-rate securities backed by mortgage pools of the
GNMA, FHLMC, and FNMA.
Salomon Brothers Non-U.S. World Government Bond Index* is an unmanaged
list of bonds issued by 10 countries.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
* Securities indexes assume reinvestment of all distributions and
interest payments and do not take in account brokerage fees or taxes.
Securities in the fund do not match those in the indexes and performance
of the fund will differ. It is not possible to invest directly in an
index.
+The Lehman Brothers Government Bond Index is an unmanaged list of U.S.
government and mortgage-backed securities.
Report of independent accountants
To the Trustees and Shareholders of
Putnam Intermediate Government Income Trust
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Putnam Intermediate Government Income Trust (the "fund") at November 30,
1996, and the results of its operations, the changes in its net assets
and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the fund's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
investments owned at November 30, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
January 13, 1997
Portfolio of investments owned
November 30, 1996
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (74.2%) *
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C>
U.S. Government Agency Mortgage Pass-Through Certificates (39.2%)
- ----------------------------------------------------------------------------------------------------------
$ 291,921 Federal Home Loan Mortgage Association 6 1/2s, September 1, 2002 $ 289,764
Federal National Mortgage Association
32,526,689 8s, with due dates from June 1, 2026 to October 1, 2026 33,431,270
34,882,372 7 1/2s, with due dates from January 1, 2026 to July 1, 2026 35,285,619
36,163,778 7s, with due dates from November 1, 2023 to May 1, 2026 35,880,995
Government National Mortgage Association
18,400,000 8s, TBA, December 16, 2026 18,963,410
51,114 8s, July 15, 2023 53,344
51,866,585 7 1/2s, with due dates from May 15, 2024 to July 15, 2026 52,611,935
42,744,370 7s, with due dates from July 15, 2025 to June 15, 2026 42,490,490
--------------
219,006,827
U.S. Treasury Obligations (35.0%)
- ----------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
15,000,000 12 3/8s, May 15, 2004 20,685,900
20,000,000 11 5/8s, November 15, 2004 26,996,800
U.S. Treasury Notes
21,500,000 8 1/8s, February 15, 1998 22,145,000
75,441,000 6 1/2s, October 15, 2006 77,916,219
12,470,000 5 7/8s, November 30, 2001 12,491,448
35,750,000 5 3/4s, August 15, 2003 35,381,418
--------------
195,616,785
--------------
Total U.S. Government and Agency Obligations
(cost $410,154,029) $414,623,612
FOREIGN GOVERNMENT BONDS AND NOTES (30.7%) *
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
AUD 20,515,000 Australia (Government of) bonds 10s, 2006 $19,849,450
USD 3,100,000 Banco Nacional Comercio Exterior sovereign eurobond
11 1/4s, 2006 (Mexico) 3,355,750
CAD 25,400,000 Canada (Government of) deb. 9s, 2004 22,664,586
FRF 40,075,000 France (Government of) Treasury bill 7s, 2000 8,380,732
FRF 41,120,000 France (Government of) Treasury bill 4 1/2s, 1998 7,985,878
DEM 25,025,000 Germany (Federal Republic of) bonds Ser. 118, 5 1/4s, 2001 16,813,545
DEM 48,390,000 Germany (Federal Republic of) bonds Ser. 96, 6 1/4s, 2006 32,857,990
ITL 11,340,000,000 Italy (Government of) bonds 9 1/2s, 2001 8,205,272
ESP 1,030,300,000 Spain (Government of) deb. 10.1s, 2001 9,068,041
SEK 50,800,000 Sweden (Government of) bonds 10 1/4s, 2000 8,637,484
GBP 10,200,000 United Kingdom Treasury bonds 6 3/4s, 2004 16,669,364
GBP 9,985,000 United Kingdom Treasury notes 7 3/4s, 2006 17,241,163
--------------
Total Foreign Government Bonds and Notes
(cost $170,043,436) $171,729,255
BRADY BONDS (0.9%) *
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
$3,091,900 Argentina (Republic of) FRB 6.625s, 2005 $ 2,670,629
2,700,000 Brazil (Republic of) FRB Ser. EI-L, 6.5s, 2006 2,342,250
--------------
Total Brady Bonds (cost $4,915,250) $ 5,012,879
- ----------------------------------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES (0.3%) *(cost $1,777,125)
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
$2,100,000 Banco Nacional deb. 7 1/4s, 2004 (Mexico) $ 1,842,750
<CAPTION>
PURCHASED OPTIONS OUTSTANDING (0.1%) *
NUMBER OF EXPIRATION DATE/
CONTRACTS STRIKE PRICE VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JPY 7,500,000,000 Japanese Government Bond
Futures Contracts (Call) Jan. 97/JPY 128.25 $ 135,752
$19,400,000 U.S. Dollars In Exchange
for Swiss Francs Dec. 96 /CHF 1.285 319,731
--------------
Total Purchased Options Outstanding (cost $305,805) $ 455,483
<CAPTION>
SHORT-TERM INVESTMENTS (5.9%) *(cost $32,959,251)
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
$32,949,000 Interest in $732,975,000 joint repurchase agreement
dated November 29, 1996 with Morgan (J.P.) & Co., Inc.
due December 2, 1996 with respect to U.S. Treasury
obligations -- maturity value of $32,964,376 for an
effective yield of 5.60%. $ 32,959,251
- ----------------------------------------------------------------------------------------------------------
Total Investments (cost $620,154,896) *** $ 626,623,230
- ----------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $559,136,924.
*** The aggregate identified cost on a tax basis is $621,690,048, resulting in gross unrealized
appreciation and depreciation of $5,565,121 and $631,939, respectively, or net unrealized
appreciation of $4,933,182.
TBA after the name of a security represents to be announced securities (Note 1).
The rate shown on FRB are the current interest rates shown at November 30, 1996, which are subject to
change based on the terms of the security.
<CAPTION>
Forward Currency Contracts to Buy at November 30, 1996
(aggregate face value $133,541,615)
Aggregate
Market Face Delivery Unrealized
Value Value Date Depreciation
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Danish Krone $ 5,367,240 $ 5,472,391 12/18/96 $ (105,151)
Deutschemarks 25,066,601 25,715,912 12/18/96 (649,311)
French Francs 19,149,652 19,764,711 12/18/96 (615,059)
Italian Lira 10,965,426 11,022,142 12/18/96 (56,716)
Japanese Yen 58,567,604 60,782,931 12/18/96 (2,215,327)
Swiss Francs 10,448,232 10,783,528 12/18/96 (335,296)
- ------------------------------------------------------------------------
$(3,976,860)
- ------------------------------------------------------------------------
<CAPTION>
Forward Currency Contracts to Sell at November 30, 1996
(aggregate face value $90,974,965)
Aggregate Unrealized
Market Face Delivery Appreciation/
Value Value Date (Depreciation)
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollars $15,990,208 $15,467,131 12/18/96 $(523,077)
British Pounds 15,106,152 14,820,872 12/18/96 (285,280)
Canadian Dollars 14,606,965 14,671,557 3/19/97 64,592
Deutschemarks 23,582,505 23,909,144 12/18/96 326,639
French Francs 11,458,624 11,932,584 12/18/96 473,960
Italian Lira 3,741,731 3,712,425 12/18/96 (29,306)
Japanese Yen 2,244,588 2,386,298 12/18/96 141,710
Spanish Peseta 351,374 355,803 12/18/96 4,429
Swedish Krona 2,795,712 2,840,413 12/18/96 44,701
Swiss Francs 856,989 878,738 12/18/96 21,749
- ------------------------------------------------------------------------
$240,117
- ------------------------------------------------------------------------
<CAPTION>
TBA Sale Commitments Outstanding at November 30, 1996
(Proceeds receivable $68,532,308)
Principal Delivery Coupon Market
Agency Amount Month Rate Value
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
FNMA $32,514,000 December 8.0% $33,418,214
FNMA 34,882,000 December 7.5% 35,285,236
- -------------------------------------------------------------------
$68,703,450
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1996
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $620,154,896) (Note 1) $626,623,230
- ----------------------------------------------------------------------------------------------
Cash 237,477
- ----------------------------------------------------------------------------------------------
Interest and other receivables 8,716,456
- ----------------------------------------------------------------------------------------------
Receivable for securities sold 106,058,077
- ----------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 1,104,485
- ----------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 4,245,547
- ----------------------------------------------------------------------------------------------
Total assets 746,985,272
Liabilities
- ----------------------------------------------------------------------------------------------
Distributions payable to shareholders 3,236,501
- ----------------------------------------------------------------------------------------------
Payable for securities purchased 106,159,322
- ----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 236,995
- ----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,001,153
- ----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 75,442
- ----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 11,568
- ----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,984
- ----------------------------------------------------------------------------------------------
Payable for open forward currency contracts 4,841,228
- ----------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 3,474,696
- ----------------------------------------------------------------------------------------------
TBA sale commitments, at value (proceeds receivable $68,532,308) 68,703,450
- ----------------------------------------------------------------------------------------------
Other accrued expenses 106,009
- ----------------------------------------------------------------------------------------------
Total liabilities 187,848,348
- ----------------------------------------------------------------------------------------------
Net assets $559,136,924
Represented by
- ----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $562,542,044
- ----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 279,021
- ----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (6,235,345)
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 2,551,204
- ----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $559,136,924
Computation of net asset value:
- ----------------------------------------------------------------------------------------------
Net asset value per share ($559,136,924 divided by
64,600,552 shares) $8.66
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended November 30, 1996
<S> <C>
Interest income (net of foreign tax of $202,238): $39,725,547
- ----------------------------------------------------------------------------------------------
Expenses:
- ----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,075,170
- ----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 625,900
- ----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 31,737
- ----------------------------------------------------------------------------------------------
Administrative services (Note 2) 12,279
- ----------------------------------------------------------------------------------------------
Reports to shareholders 60,230
- ----------------------------------------------------------------------------------------------
Registration fees 325
- ----------------------------------------------------------------------------------------------
Auditing 60,956
- ----------------------------------------------------------------------------------------------
Legal 14,564
- ----------------------------------------------------------------------------------------------
Postage 15,533
- ----------------------------------------------------------------------------------------------
Exchange listing fees 55,625
- ----------------------------------------------------------------------------------------------
Other 18,066
- ----------------------------------------------------------------------------------------------
Total expenses 4,970,385
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (91,219)
- -----------------------------------------------------------------------------------------------
Net expenses 4,879,166
- -----------------------------------------------------------------------------------------------
Net investment income 34,846,381
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 7,538,529
- -----------------------------------------------------------------------------------------------
Net realized gain on written options (Notes 1 and 3) 196,314
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (173,251)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the year (3,682,778)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments, written options,
and TBA sale commitments during the year (3,414,128)
- -----------------------------------------------------------------------------------------------
Net gain on investments 464,686
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $35,311,067
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended November 30
-----------------------------
1996 1995
<S> <C> <C>
- ----------------------------------------------------------------------------------
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------
Net investment income $ 34,846,381 $ 37,461,249
- ----------------------------------------------------------------------------------
Net realized gain on investments and
foreign currency transactions 7,561,592 19,478,458
- ----------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities
in foreign currencies (7,096,906) 23,036,965
- ----------------------------------------------------------------------------------
Net increase in net assets resulting from operations 35,311,067 79,976,672
- ----------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------
From net investment income (38,008,000) (39,052,373)
- ----------------------------------------------------------------------------------
In excess of net investment income (959,831) --
- ----------------------------------------------------------------------------------
Shares repurchased (Note 4) (3,254,878) (467,593)
- ----------------------------------------------------------------------------------
Total increase (decrease) net assets (6,911,642) 40,456,706
- ----------------------------------------------------------------------------------
Net assets
- ----------------------------------------------------------------------------------
Beginning of year 566,048,566 525,591,860
- ----------------------------------------------------------------------------------
End of year (including undistributed net investment
income and distributions in excess of net investment
income of $279,021 and $3,643,637, respectively) $559,136,924 $566,048,566
- ----------------------------------------------------------------------------------
Number of fund shares
- ----------------------------------------------------------------------------------
Shares outstanding at beginning of year 65,037,152 65,098,252
- ----------------------------------------------------------------------------------
Shares repurchased (Note 4) (436,600) (61,100)
- ----------------------------------------------------------------------------------
Shares outstanding at end of year 64,600,552 65,037,152
- ----------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the year)
Year ended November 30
---------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $8.70 $8.07 $9.05 $9.32 $9.21
- --------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------
Net investment income .54 .58 .56 .55 .60
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .01 .65 (.84) .21 .28
- --------------------------------------------------------------------------------------------------------
Total from investment operations .55 1.23 (.28) .76 .88
- --------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------
From net investment income (.59) (.60) (.39) (.55) (.60)
- --------------------------------------------------------------------------------------------------------
In excess of net investment income (.01) -- -- (.04) --
- --------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- (.07) (.44) (.17)
- --------------------------------------------------------------------------------------------------------
Return of capital -- -- (.24) -- --
- --------------------------------------------------------------------------------------------------------
Total distributions (.60) (.60) (.70) (1.03) (.77)
- --------------------------------------------------------------------------------------------------------
Increase in net asset value from
shares repurchased (c) .01 -- -- -- --
- --------------------------------------------------------------------------------------------------------
Net asset value, end of year $8.66 $8.70 $8.07 $9.05 $9.32
- --------------------------------------------------------------------------------------------------------
Market value, end of year $7.625 $7.750 $7.250 $8.125 $9.125
- --------------------------------------------------------------------------------------------------------
Total investment return at
market value (%)(a) 6.44 15.58 (2.38) (.01) 8.69
- --------------------------------------------------------------------------------------------------------
Net assets, end of year
(in thousands) $559,137 $566,049 $525,592 $589,227 $601,573
- --------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .90 1.00 .87 .89 .92
- --------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.31 6.85 6.64 5.98 6.51
- --------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 326.92 416.86 242.42 303.68 216.24
- --------------------------------------------------------------------------------------------------------
(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 year ended November 30, 1995 and thereafter, includes
amounts paid through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
(c) See (Note 4) to the financial statements.
</TABLE>
Notes to financial statements
November 30, 1996
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, closed-end management investment company. The
fund's investment objective is to seek, with equal emphasis, high
current income and relative stability of net asset value by investing in
a portfolio of U.S. government and agency obligations and foreign
governmental obligations with limited maturities.
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. 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.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on
investments from fluctuations arising from changes in the market prices
of the securities. Such fluctuations are included with the net realized
and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign
currencies and the difference between the amount of investment income
and foreign withholding taxes recorded on the fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net unrealized
gains and losses on foreign currency transactions arise from changes in
the value of open forward currency contracts and assets and liabilities
other than investments at the period end, resulting from changes in the
exchange rate.
F) Forward currency contracts The fund may engage in forward currency
contracts, which are agreements between two parties to buy and sell
currencies at a set price on a future date, to protect against a decline
in value relative to the U.S. dollar of the currencies in which its
portfolio securities are denominated or quoted (or an increase in the
value of a currency in which securities a fund intends to buy are
denominated, when a fund holds cash reserves and short-term
investments). The U.S. dollar value of forward currency contracts is
determined using forward currency exchange rates supplied by a quotation
service. The market value of the contract will fluctuate with changes in
currency exchange rates. The contract is "marked to market" daily and
the change in market value is recorded as an unrealized gain or loss.
When the contract is closed, the fund records a realized gain or loss
equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed. The fund could be
exposed to risk if the value of the currency changes unfavorably, if the
counterparties to the contracts are unable to meet the terms of their
contracts or if the fund is unable to enter into a closing position.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
H) TBA 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 commitments will not fluctuate
more than 1.0% from the principal amount. The fund holds, and maintains
until settlement date, cash or high-grade debt obligations in an amount
sufficient to meet the purchase price, or the fund may enter into
offsetting contracts for the forward sale of other securities it owns.
Income on the securities will not be earned until settlement date. 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, 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 their 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.
I) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale
commitments are not received until the contractual settlement date.
During the time a TBA sale commitment is outstanding, equivalent
deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover"
for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures
described under "Security valuation" above. The contract is "marked-to-
market" daily and the change in market value is recorded by a fund as an
unrealized gain or loss. If the TBA sale commitment is closed through
the acquisition of an offsetting purchase commitment, the fund realizes
a gain or loss on the underlying security. If the fund delivers
securities under the commitment, the fund realizes a gain or a loss from
the sale of the securities based upon the unit price established at the
date the commitment was entered into.
J) 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. 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 $4,700,000 available to offset future capital gains, if
any, which will expire on November 30, 2002.
K) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid annually. At certain times, the fund may pay distributions at a
level rate even though, as a result of market conditions or investment
decisions, the fund may not achieve projected investment results for a
given period. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences include treatment of losses on wash sale transactions,
realized and unrealized gains and losses on forward foreign currency
contracts, and currency gains and losses on foreign bonds.
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 November
30, 1996, the fund reclassified $8,044,109 to increase undistributed net
investment income and $4,882,490 to decrease paid-in-capital, with an
increase to accumulated net realized loss on investments of $3,161,619.
The calculation of net investment income per share in the financial
highlights table excludes these adjustments.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment
advisory services, is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.75% of the
$500 million of average weekly net assets, 0.65% of the next $500
million, 0.60% of the next $500 million, 0.55% of any amount over $1.5
billion.
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 year ended November 30, 1996, fund expenses were reduced by
$91,219 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $1,260 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund
and are invested in 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.
Note 3
Purchase and sales of securities
During the year ended November 30, 1996, purchases and sales of
investment securities other than U.S. government obligations and short-
term investments aggregated $681,883,403 and $763,658,551, respectively.
Purchases and sales of U.S. government obligations aggregated
$1,053,252,427 and $994,815,933, 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
Amounts Received
- ----------------------------------------------------
Written options
outstanding at
beginning of
year $16,480,000 $70,864
- ----------------------------------------------------
Options
opened 38,600,000 125,450
- ----------------------------------------------------
Options
expired (55,080,000) (196,314)
- ----------------------------------------------------
Written options
outstanding at
end of year $ -- $ --
- ----------------------------------------------------
Note 4
Share Repurchase Program
The Trustees authorized the fund to repurchase up to 3,250,000 of its
shares in the open market. Repurchases will only be made when the fund's
shares are trading at less than net asset value and at such times and
amounts as is believed to be in the best interest of the fund's
shareholders. Any repurchases of shares will have the effect of
increasing the net asset value per share of remaining shares
outstanding.
For the year ended November 30, 1996, the fund repurchased 436,600
shares for $3,254,878, which reflects a discount from net asset value of
$453,977 or 12.2%. As of November 30, 1996, 497,700 shares had been
repurchased since the inception of the program.
Dividend Policy
It is the fund's dividend policy to pay monthly distributions from net
investment income and any net realized short-term gains (including gains
from options and futures transactions.) Long-term capital gains, if any,
are distributed at least annually. In an effort to maintain a more
stable level of distributions, the fund's monthly distribution rate will
be based on Putnam Management's projections of the net investment income
and net realized short-term capital gains that the fund is likely to
earn over the long term. Such distributions at times may exceed the
current earnings of the fund, resulting in a return of capital to
shareholders.
Results of October 3, 1996 shareholder meeting
A meeting of shareholders of the fund was held on October 3, 1996. At
the meeting, each of the nominees for Trustees was elected, as follows:
Votes
Votes for withheld
--------- --------
Jameson Adkins Baxter 55,846,803 2,655,218
Hans H. Estin 55,867,178 2,634,843
John A. Hill 55,852,089 2,649,932
Ronald J. Jackson 55,866,930 2,635,091
Elizabeth T. Kennan 55,850,318 2,651,703
Lawrence J. Lasser 55,842,608 2,659,413
Robert E. Patterson 55,885,791 2,616,230
Donald S. Perkins 55,875,389 2,626,632
William F. Pounds 55,484,385 2,617,636
George Putnam 55,852,566 2,649,455
George Putnam, III 55,827,558 2,674,463
Eli Shapiro 55,795,929 2,706,092
A.J.C. Smith 55,864,058 2,637,963
W. Nicholas Thorndike 55,854,117 2,647,904
A proposal to ratify the selection of Price Waterhouse LLP as auditors
for the fund was approved as follows: 57,131,773 votes for, and 562,804
votes against, with 807,444 abstentions and broker non-votes.
A proposal to approve or disapprove the conversion of the Fund from
closed-end to open-end status and to authorize certain related
amendments to the Agreement and Declaration of Trust, the result of the
vote taken at the Meeting was disapproved as follows: 8,396,285 votes
for, and 21,803,411 votes against, with 28,302,325 abstentions and
broker non-votes.
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
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Neil J. Powers
Vice President and Fund Manager
D. William Kohli
Vice President and Fund Manager
Mark J. Siegel
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
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-
to-date information about the fund's NAV.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------------
29945-076 1/97
