Putnam
Intermediate
U.S. Government
Income Fund
[GRAPHIC OMITTED:ARTWORK]
ANNUAL REPORT
November 30, 1995
[LOGO: BOSTON * LONDON* TOKYO]
Fund highlights
* "For the 12 months ended December 31, 1995, Putnam Intermediate U.S.
Government Income Fund's class A share total return ranked 7 out of 128,
placing it in the top 6% of short-term U.S. government funds tracked by
Lipper Analytical Services.*
* "Funds in [the government bond] group have bounced back nicely from
1994's troubles, with the most interest-rate sensitive of the lot
turning in gains that even come close to those of stock funds. As this
performance suggests, duration has largely determined funds' relative
status this year."
-- Morningstar Mutual Funds, October 13, 1995
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
13 Financial statements
*Lipper Analytical Services, an independent research organization, ranks
funds according to total return performance. Their rankings vary over
time and do not reflect the effects of sales charges. For the period
ended 12/31/95, the fund's class A and class B shares ranked 7 and 9,
respectively, out of 128 short-term U.S. government funds for 1-year
performance.
From the Chairman
[GRAPHIC OMITTED: photo of George Putnam]
* Karsh, Ottawa
Dear Shareholder:
Putnam Intermediate U.S. Government Income Fund closed the books on an
eventful 12-month period that began at the tag end of one of the
sharpest bond market declines on record and ended in the midst of one of
the market's strongest rallies. As Fund Manager Michael Martino relates
in the report that follows, results for the fiscal year that ended on
November 30, 1995, were gratifying, especially in contrast to last
year's challenges.
The changes made to your fund's asset allocation requirements early in
the year have proved particularly timely, enabling Mike to position the
portfolio's assets among market sectors where near-term performance
seemed most likely to benefit the fund. Mike also sees firm evidence
that the current environment, which has been so amenable to fixed-income
investments, will continue in the months ahead. Among the favorable
factors are prospects for a sustainable pace of economic growth and
continued low inflation.
Whatever opportunities fiscal 1996 may bring, your fund's enhanced
flexibility should enable Mike and his management team to take greater
advantage of them.
/s/George Putnam
-------------
George Putnam
Chairman of the Trustees
January 17, 1996
Report from the Fund Manager
Michael Martino
Putnam Intermediate U.S. Government Income Fund generated above-average
total returns for the fiscal year ended November 30, 1995, as fixed-
income markets rallied. The fund's 13.85% return for class A shares at
net asset value (NAV) outpaced the 13.66% return measured by its
benchmark, the Lehman Brothers Intermediate Government Bond Index. The
fund's class B shares returned a solid 13.17% at NAV.
While the bond market's surge was instrumental in achieving the fund's
sturdy performance, judicious investment strategies were essential in
enabling the fund to take advantage of the rally. Early in the fund's
fiscal year, we recognized the need for greater flexibility in the
portfolio's fixed-income sector allocations. Accordingly, on April 10,
1995, with the approval of the fund's Trustees, we adjusted the fund's
allocation requirements -- including the elimination of a minimum
allocation to mortgage-backed securities -- and changed the fund's name
from Putnam Balanced Government Fund. Our objective in this change was
to position the fund to better capitalize on prevailing market trends.
We immediately set about taking advantage of the fund's newly enhanced
flexibility. Specifically, we positioned the fund's Treasury holdings to
capitalize on the price appreciation that resulted from falling interest
rates, and we allocated the portfolio's assets among market sectors
where, in our opinion, near-term performance would most benefit the
fund.
* LONGER DURATION CAPITALIZES ON FALLING INTEREST RATES
An integral contributor to your fund's performance over the fiscal year
was prudent management of the portfolio's duration. Duration is a
measure of the price sensitivity of a portfolio of bonds to changes in
interest rates. Like maturity, with which it is often confused, duration
is measured in years.
In the first few months of the fund's fiscal year, we kept the
portfolio's duration relatively short to protect the fund's value as
interest rates remained high. As the current bond-market rally picked up
steam in response to slowing economic growth and moderate inflation,
investors' fears of inflation gradually dissipated. This, in turn,
pushed long-term interest rates lower. At the same time, we extended the
portfolio's duration in order to capitalize on the interest-rate
decline. While such a strategy can work against the fund if interest
rates begin to rise, it proved enormously beneficial to performance over
the past 12 months.
* PORTFOLIO ALLOCATION: MORTGAGE-BACKED SECURITIES GIVE WAY TO
TREASURIES
In the first half of the fund's fiscal period, mortgage-backed
securities largely outperformed Treasuries. For this reason, and in
order to comply with the fund's sector allocation requirements at the
time, we kept more than 60% of the portfolio's assets invested in fixed-
rate mortgage (FRM) and adjustable-rate mortgage (ARM) securities.
During this period, the fund's FRM holdings -- which included bonds
issued by the Federal Home Loan Mortgage Corporation (Freddie Mac), the
Federal National Mortgage Association (Fannie Mae), and the Government
National Mortgage Association (Ginnie Mae) -- made solid contributions
to the fund's total return.
[GRAPHIC OMITTED: vertical bar chart PORTFOLIO COMPOSITION
showing:
FRMs 54.2%
16.5%
ARMs 28.1%
4.6%
U.S. Treasuries 6.4%
64.9%
Short-term investments 11.1%
13.7%
Footnote reads:
*Based on percentage of net assets. Holdings will vary over time.]
In April, at roughly the same time that we changed the fund's allocation
requirements, Treasuries began to outperform mortgage-backed securities.
Soon thereafter, we took advantage of the portfolio's new flexibility
and shifted a significant portion of assets out of FRMs and ARMs and
into Treasuries.
As it turned out, this reallocation proved advantageous for the fund. In
response to the ongoing decline in interest rates, mortgage-backed
securities began to suffer from an increase in mortgage prepayments.
Prepayments typically accelerate as mortgage holders rush to refinance
in response to falling long-term interest rates, consequently
diminishing the value of mortgage-backed securities. Indeed, this trend
remained somewhat steady through the remainder of the fiscal year, and
Treasuries continued to outperform FRMs and ARMs.
* SLOW ECONOMIC GROWTH AND VALUE OPPORTUNITIES AMONG MORTGAGE-BACKED
SECURITIES
As we approach 1996, we expect that both economic growth and inflation
will remain at low levels. Congress and the Clinton administration
appear increasingly likely to approve a budget that reduces the national
deficit, and short-term interest rates remain relatively high -- two
factors that may constrict economic growth in the coming months. In this
environment, we believe the Fed is likely to reduce short-term interest
rates, possibly in the near future, to keep the economy expanding at a
productive pace. Although there can be no assurances, all of this
suggests a healthy environment for bonds in the near term.
For your fund, we will likely take advantage of the inexpensive prices
that are creating attractive value opportunities among mortgage-backed
securities. FRMs currently offer yields that are considerably higher
than their historical average when compared to Treasuries, and this
added yield advantage should help enhance the fund's earnings. To help
reduce the prepayment risk of purchasing mortgage-backed securities
during a market rally, we may emphasize FRMs with coupons (a bond's
interest rate) in the 6.5%-7.5% range. These securities have coupons
that, under today's market conditions, may be in a range in which they
yield somewhat more than comparable Treasuries without being exposed to
unacceptable prepayment risk, although there can be no guarantees.
[GRAPHIC OMITTED: vertical bar chart MATURITY BREAKDOWN OF TREASURY
SECURITIES*
showing:
0-5 years 26.98%
5-10 years 23.30%
10-30 years 14.63%
Footnote reads:
*Based on percentage of net assets on 11/30/95. Holdings will vary over
time. ]
In the coming months, we expect that approximately 60% of the portfolio
will remain invested in Treasuries, while the allocation to mortgage-
backed securities (FRMs and ARMs combined) will be increased to roughly
40%. Using these percentages as guides, we will emphasize market sectors
that offer the best returns and we will decrease allocations to sectors
that are underperforming. Overall, we will continue to emphasize
intermediate-term bonds in an effort to minimize interest-rate risk
while still taking advantage of market rallies.
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 11/30/95, there is no guarantee the fund
will continue to hold these securities in the future. While U.S.
government backing of individual securities does not insure your
principal, which will fluctuate, it does guarantee that the fund's
government-backed holdings will make timely payments of interest and
principal.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Intermediate U.S. Government Income Fund is designed
for investors seeking as high a level of current income as is consistent
with preservation of capital.
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 back into the fund.
TOTAL RETURN FOR PERIODS ENDED 11/30/95
Class A Class B Class M
(2/16/93)* (2/16/93)* (4/1/95)*
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 13.85% 10.26% 13.17% 10.17% -- --
- -----------------------------------------------------------------------
Life of class 15.32 11.52 13.41 11.44 9.63% 7.33%
Annual average 5.24 3.99 4.61 3.96 -- --
- -----------------------------------------------------------------------
COMPARATIVE RETURNS FOR PERIODS ENDED 11/30/95
Lehman Bros. Consumer
Intermediate Government Price
Bond Index Index
- -----------------------------------------------------------------------
1 year 13.66% 2.61%
- -----------------------------------------------------------------------
Life of class A and B 16.50 7.71
Annual average 5.71 2.70
- -----------------------------------------------------------------------
Life of class M 8.77 1.45
- -----------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 12/31/95
(most recent calendar quarter)
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 15.04% 11.39% 14.34% 11.34% -- --
- -----------------------------------------------------------------------
Life of class 16.84 13.00 14.85 12.86 11.06% 8.73%
Annual average 5.57 4.35 4.94 4.31 -- --
- -----------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions.
Investment returns and net asset value will fluctuate so that an
investor's shares when sold may be worth more or less than their
original cost. POP assumes 3.25% maximum sales charge for class A shares
and 2.00% for class M shares. CDSC for class B shares assumes 3.00%
maximum contingent deferred sales charge. Performance data for periods
before 4/10/95 do not reflect current investment policies.
*Commencement of operations.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT
showing:
Y-axis reads (top to bottom) $12,000 to $9,000
X-axis reads (left to right) 2/93 to 11/95 in three month increments
A solid black line represents Funds Class A at POP
ranging from $9,675 to $11,153
A solid white line represents Lehman Bros. Int. Govt. Bond Index
ranging from $10,000 to $11,651
A solid gray line represents Consumer Price Index
ranging from $10,000 to $10,771
Fund
at
POP Index CPI
-------- ------- -------
2/16/93 $ 9,675 $10,000 $10,000
5/31/93 9,776 10,088 10,112
8/31/93 9,910 10,408 10,175
11/30/93 9,969 10,423 10,224
2/28/94 9,975 10,424 10,288
5/31/94 9,736 10,213 10,344
8/31/94 9,888 10,378 10,449
11/30/94 9,796 10,248 10,498
2/28/95 10,126 10,651 10,582
5/31/95 10,508 10,139 10,673
8/31/95 10,739 11,309 10,722
11/30/95 11,153 11,651 10,771
Footnote reads:
Past performance is no assurance of future results. A $10,000 investment
in the fund's class B shares at inception on 2/16/93 would have been
valued at $11,341 on 11/30/95 ($11,144 with a redemption at the end of
the period). A $10,000 investment in the fund's class M shares at
inception on 4/1/95 would have been valued at $10,963 at net asset value
on 11/30/95, at public offering price $10,733.]
PRICE AND DISTRIBUTION INFORMATION
12 months ended 11/30/95
Class A Class B Class M
- -----------------------------------------------------------------------
Distributions (number) 12 12 8
- -----------------------------------------------------------------------
Income $0.291 $0.263 $0.185
- -----------------------------------------------------------------------
Capital gains1 -- -- --
- -----------------------------------------------------------------------
Return of capital3 $0.007 $0.007 $0.005
- -----------------------------------------------------------------------
Total $0.298 $0.270 $0.190
- -----------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- -----------------------------------------------------------------------
11/30/94 $4.60 $4.75 $4.60 -- --
- -----------------------------------------------------------------------
4/1/95 (inception of
class M shares) -- -- -- $4.68 $4.78
- -----------------------------------------------------------------------
11/30/95 4.92 5.09 4.92 4.93 5.03
- -----------------------------------------------------------------------
Current return NAV POP NAV NAV POP
End of period
- -----------------------------------------------------------------------
Current dividend rate1 5.84% 5.65% 5.27% 5.68% 5.57
- -----------------------------------------------------------------------
Current 30-day SEC yield2 5.04 4.88 4.44 4.90 4.72
- -----------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based on investment income, calculated using SEC guidelines.
3 For an explanation, see page 21.
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 3.25% sales charge for class A
shares and 2.00% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B shares and assumes redemption at the end of
the period. Your fund's CDSC declines from a 3% maximum during the first
year to 1% during the fourth year. After the fourth year, the CDSC no
longer applies.
Lehman Brothers Intermediate Government Bond Index is composed of all
bonds covered by the Lehman Brothers Government Bond Index with
maturities between one and 9.9 years. The index does not take into
account brokerage commissions or other costs, may include bonds
different from those in the fund, and may pose different risks than the
fund. It is not possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Report of independent accountants
For the fiscal year Ended November 30, 1995
To the Trustees and Shareholders of
Putnam Intermediate U.S. Government Income Fund
We have audited the accompanying statement of assets and liabilities of
Putnam Intermediate U.S. Government Income Fund, including the portfolio
of investments owned, as of November 30, 1995, and the related statement
of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended and the
financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of
the fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free from material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of November 30, 1995, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Intermediate U.S. Government Income Fund as
of November 30, 1995, the results of its operations for the year ended,
the changes in its net assets for each of the two years in the peroid
then ended and the financial highlights for each of the peroids
indicated therein, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 15, 1996
<TABLE>
Portfolio of investments owned
November 30, 1995
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (86.1%) *
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Mortgage Corp.
Adjustable Rate Mortgages (ARMs)
$ 1,915,632 7.856s, November 1, 2018 $1,957,833
1,779,608 7.383s, June 1, 2018 1,819,934
Federal National Mortgage Association Pass-Throughs
1,174,895 8s, May 1, 2013 1,203,900
1,917,681 6 1/2s, with various due dates from April 1, 1999
to January 1, 2001 1,930,857
Government National Mortgage Association Pass-Throughs
3,763,632 9s, with various due dates from January 15, 2009
to July 15, 2021 4,013,351
1,257,771 8 1/4s, with various due dates from October 15, 2006
to July 15, 2008 1,310,443
4,808,839 8s, with various due dates from March 15, 2001 to
to September 15, 2023 4,976,729
10,000,000 U.S. Treasury Bond 7 5/8s, February 15, 2025 11,895,300
U.S. Treasury Notes
6,200,000 6 7/8s, March 31, 2000 6,518,742
15,000,000 6 1/2s, August 15, 2005 15,785,100
3,000,000 6 1/2s, May 15, 2005 3,156,090
15,000,000 6 1/4s, May 31, 2000 15,419,550
- --------------------------------------------------------------------------------------
Total U.S. Government and Agency Obligations
(cost $68,547,176) $69,987,829
- --------------------------------------------------------------------------------------
<CAPTION>
SHORT-TERM INVESTMENTS (13.7%) * (cost $11,134,812)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C>
$11,133,000 Interest in $798,484,000 joint repurchase agreement dated
November 30, 1995 with Morgan (J.P) & Co. Inc. due
December 1, 1995 with respect to various U.S. Treasury
obligations-maturity value of $11,134,812 for an effective
yield of 5.86%. $11,134,812
-----------
Total Investments (cost $79,681,988)*** $81,122,641
- --------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $81,308,106.
*** The aggregate identified cost for federal income tax purposes is $79,681,988
resulting in gross unrealized appreciation and depreciation of $1,750,236 and
$309,583 respectively, or net unrealized appreciation of $1,440,653.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
Statement of assets and liabilities
November 30,1995
<CAPTION>
Assets
- ---------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value
(identified cost $79,681,988 (Note 1) $81,122,641
- ---------------------------------------------------------------------------------
Cash 735
- ---------------------------------------------------------------------------------
Interest and other receivables 790,317
- ---------------------------------------------------------------------------------
Receivable for shares of the fund sold 119,516
- ---------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 22,082
- ---------------------------------------------------------------------------------
Total assets 82,055,291
Liabilities
- ---------------------------------------------------------------------------------
Distributions payable to shareholders 347,815
- ---------------------------------------------------------------------------------
Payable for shares of the fund repurchased 162,464
- ---------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 118,621
- ---------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 463
- ---------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 20,113
- ---------------------------------------------------------------------------------
Payable for administrative services (Note 2) 920
- ---------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 40,184
- ---------------------------------------------------------------------------------
Payable for organizational expenses (Note 1) 49,893
- ---------------------------------------------------------------------------------
Other accrued expenses 6,712
- ---------------------------------------------------------------------------------
Total liabilities 747,185
- ---------------------------------------------------------------------------------
Net assets $81,308,106
Represented by
- ---------------------------------------------------------------------------------
Paid-in-capital (Notes 1 and 4) $83,370,099
- ---------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (347,815)
- ---------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions (Note 1) (3,154,831)
- ---------------------------------------------------------------------------------
Net unrealized appreciation on investments 1,440,653
- ---------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $81,308,106
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------
Net asset value and redemption price of class A shares
($57,048,824 divided by 11,593,834 shares) $4.92
- ---------------------------------------------------------------------------------
Offering price per Class A share (100/96.75 of $4.92)* $5.09
- ---------------------------------------------------------------------------------
Net asset value and offering price of class B shares
($23,200,927 divided by 4,715,919 shares) ** $4.92
- ---------------------------------------------------------------------------------
Net asset value and redemption price of class M shares
($1,058,355 divided by 214,814 shares) $4.93
- ---------------------------------------------------------------------------------
Offering price per Class M share (100/98.00 of $4.93)* $5.03
- ---------------------------------------------------------------------------------
* On single retail sales of less than $100,000. On sales of$100,000 or more and
on group sales the offering price is reduced.
**Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended November 30,1995
<S> <C>
Interest income $5,158,662
- --------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------
Compensation of Manager (Note 2) 453,637
- --------------------------------------------------------------------------
Investor Servicing and custodian fees (Note 2) 144,130
- --------------------------------------------------------------------------
Compensation of Trustees (Note 2) 8,301
- --------------------------------------------------------------------------
Reports to shareholders 43,418
- --------------------------------------------------------------------------
Auditing 21,295
- --------------------------------------------------------------------------
Legal 13,473
- --------------------------------------------------------------------------
Postage 10,896
- --------------------------------------------------------------------------
Administrative services (Note 2) 5,235
- --------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 10,026
- --------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 132,308
- --------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 189,261
- --------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,226
- --------------------------------------------------------------------------
Registration Fees 758
- --------------------------------------------------------------------------
Other expenses 2,400
- --------------------------------------------------------------------------
Total expenses 1,036,364
- --------------------------------------------------------------------------
Expense reduction (Note 2) (68,747)
- --------------------------------------------------------------------------
Net expenses 967,617
- --------------------------------------------------------------------------
Net investment income 4,191,045
- --------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 259,045
- --------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 5,137,752
- --------------------------------------------------------------------------
Net gain on investment transactions 5,396,797
- --------------------------------------------------------------------------
Net increase in net assets resulting from operations $9,587,842
- --------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
Statement of changes in net assets
<CAPTION>
Year ended November 30
--------------------------
1995 1994
- --------------------------------------------------------------------------------------------
Increase (decrease) in net assets
- --------------------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $4,191,045 $5,116,142
- --------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 259,045 (3,902,597)
- --------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 5,137,752 (2,920,007)
- --------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 9,587,842 (1,706,462)
- --------------------------------------------------------------------------------------------
Distributions to shareholders
- --------------------------------------------------------------------------------------------
From net investment income:
Class A (3,210,923) (3,404,487)
- --------------------------------------------------------------------------------------------
Class B (1,221,731) (992,855)
- --------------------------------------------------------------------------------------------
Class M (17,436) --
- --------------------------------------------------------------------------------------------
Return of capital
Class A (82,490) (355,268)
- --------------------------------------------------------------------------------------------
Class B (31,387) (103,607)
- --------------------------------------------------------------------------------------------
Class M (448) --
- --------------------------------------------------------------------------------------------
In excess of net investment income
Class A (34,353) --
- --------------------------------------------------------------------------------------------
Class B (13,071) --
- --------------------------------------------------------------------------------------------
Class M (187) --
- --------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions
(Note 4) 1,078,564 (33,118,455)
- --------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 6,054,380 (39,681,134)
- --------------------------------------------------------------------------------------------
Net Assets
- --------------------------------------------------------------------------------------------
Beginning of year 75,253,726 114,934,860
- --------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $347,815 and $300,204
respectively) $81,308,106 $75,253,726
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
Financial highlights
(For a share outstanding throughout the period)
<CAPTION>
For the Period For the Period
April 1, 1995 February 16, 1993
(commencement (commencement
of operations) to of operations) to
November 30 Year ended November 30 November 30
1995 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Class M Class B
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $4.68 $4.60 $4.91 $5.00
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .12(a) .24 .24(b) .18(a)(b)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .32 .35 (.32) (.08)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .44 .59 (.08)(b) .10(b)
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (.18) (.26) (.21) (.19)
- ---------------------------------------------------------------------------------------------------------------------------
Return of capital (.01) (.01) (.02) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.19) (.27) (.23) (.19)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.93 $4.92 $4.60 $4.91
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (d) 9.63(c) 13.17 (1.71) 1.95(c)
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,058 $23,201 $21,423 $4,317
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(e) .87(c) 1.81 1.69(b) .67(b)(c)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 3.37(c) 5.17 4.98(b) 3.53(b)(c)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 383.88 383.88 351.62 309.80
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Period
February 16, 1993
(commencement
Year Ended of operations) to
November 30 November 30
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $4.60 $4.91 $5.00
- ------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------
Net investment income .27 . 27(b) .21(a)(b)
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .35 (.32) (.09)
- ------------------------------------------------------------------------------------------------------------
Total from investment operations .62 (.05)(b) .12(b)
- ------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
- ------------------------------------------------------------------------------------------------------------
Net investment income (.29) (.24) (.21)
- ------------------------------------------------------------------------------------------------------------
Return of capital (.01) (.02) --
- ------------------------------------------------------------------------------------------------------------
Total distributions (.30) (.26) (.21)
- ------------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.92 $4.60 $4.91
- ------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (d) 13.85 (1.12) 2.44(c)
- ------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $57,049 $53,831 $19,088
- ------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(e) 1.20 1.09 1.05(b)(c)
- ------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.78 5.59 3.13(b)(c)
- ------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 383.88 351.62 309.80
- ------------------------------------------------------------------------------------------------------------
(a) Per share net investment income for the periods ended November 30, 1993, for class A and class B, and
November 30, 1995, for class M, have been determined on the basis of the weighted average number of
shares outstanding during the periods.
(b) Reflects an expense limitation in effect during the period February 16, 1993 (commencement of operations)
to November 30, 1993 (see Note 2). As a result of such limitation, expenses of the fund for the period
reflect a reduction of $0.01 per share for class A and $0.01 per share for class B. For the year ended
November 30, 1994 the reduction is less than $0.01 per share for class A and less than $0.01 per share
for class B.
(c) Not annualized.
(d) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(e) The ratio of expenses to average net assets for the period ended November 30, 1995 includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts (See Note 2).
</TABLE>
Notes to financial statements
November 30, 1995
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The
fund seeks high current income consistent with preservation of capital,
through investments primarily in U.S. governement securities.
The fund offers class A, class B and class M shares. Class A shares are
sold with a maximum front-end sales charge of 3.25%. Class B shares,
which convert to class A shares after eight years, do not pay a front-
end sales charge, but pay a higher ongoing distribution fee than class A
shares and are subject to a contingent deferred sales charge, if those
shares are redeemed within four years of purchase. Class M shares are
sold with a maximum front-end sales charge of 2.00% and pay an ongoing
distribution fee that is lower than class B shares and higher than
class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The policies are in conformity with generally accepted
accounting principles.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sale price, or, if no sales are reported -- as in the
case of some securities traded over-the-counter -- the last reported bid
price, except that certain U.S. government obligations are stated at the
mean between the last reported bid and asked prices. Short-term
investments having remaining maturities of 60 days or less are stated at
amortized cost, which approximates market value, and other investments
are stated at fair market value following procedures approved by the
Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission the fund may transfer uninvested cash
balances into a joint trading account, along with the cash of other
registered investment companies managed by Putnam Investment Management,
Inc., ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc. and certain other accounts. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, 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 102% of 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) 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 of securities held and excise tax on income and capital
gains.
At November 30, 1995, the fund had a capital loss carryover of
approximately $3,155,000, available to offset future capital gains, if
any, which will expire on November 30, 2002.
F) Distributions to shareholders Income dividends are recorded daily by
the fund and are distributed monthly. Capital gains distributions, if
any, are recorded on the ex-dividend date and paid 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.
These differences include treatment of dividends payable, the
utilization of capital loss carryover, and paydown gains and losses on
mortgage backed securities. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations.
For the year ended November 30, 1995, the fund reclassified $259,045 to
decrease distributions in excess of net investment income and $204,481
to decrease accumulated net realized loss on investment transactions,
with a decrease to paid in capital of $463,526. The calculation of net
investment income per share in the financial highlights table excludes
these adjustments.
G) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities
and Exchange Commission and with various states and the initial public
offering of its shares were $49,893. These expenses are being
amortized on a straight-line basis over a five-year period. The fund
will reimburse Putnam Management for the payment of these expenses.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund for the quarter. Such fee is based on the following annual
rates: 0.60% of the first $1 billion of average net assets, 0.50% of the
next $500 million, 0.45% of the any excess over 1.5 billion, subject to
reduction in any year to the extent that expenses (exclusive of
distribution fees, brokerage, interest and taxes) of the fund exceed
2.5% of the first $30 million of average net assets, 2.0% of the next
$70 million, and 1.5% of any excess over $100 million and by the amount
of certain brokerage commissions and fees (less expenses) received by
affiliates of Putnam Management on the fund's portfolio transactions.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Trustees of the fund receive an annual Trustee's fee of $530 and an
additional fee for each Trustees' 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.
During the year ended November 30, 1995, the fund adopted a Trustee Fee
Deferral Plan (the "Plan") which allows the Trustees to defer the
receipt of all or a portion of Trustees Fees payable on or after July
1, 1995. The deferred fees remain in the fund and are invested in the
fund or in other Putnam funds until distribution in accordance with the
Plan.
Custodial functions for the fund'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, 1995, fund expenses were reduced by
$68,747 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 the assets utilized in connection with the expense offset
arrangements in an income producing asset if it had not entered into
such arrangements.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B and class M shares pursuant to Rule 12b-1 under
the Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of
Putnam Investments Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments
by the fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%,
0.85% and 1.00% of the average net assets attributable to class A, class
B and class M shares, respectively. The Trustees have approved payment
by the fund at an annual rate of 0.25%, 0.85% and 0.40% of the average
net assets attributable to class A, class B and class M shares
respectively.
For the year ended November 30, 1995, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $12,653 and $864 from the
sale of class A and class M shares, respectively and received $89,369 in
contingent deferred sales charges from redemptions of class B shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of
class A shares. For the year ended November 30, 1995, Putnam Mutual
Funds Corp., acting as underwriter received $2,044 on class A
redemptions.
Note 3
Purchases and sales of securities
During the year ended November 30, 1995, purchases and sales of
investment securities other than U.S. government obligations and short-
term investments aggregated $0 and $9,762,795, respectively. Purchases
and sales of U.S. government obligations aggregated $257,663,616 and
$250,138,331, respectively. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Capital shares
At November 30, 1995, there was an unlimited number of shares of
beneficial interest authorized. Transactions were as follows:
Year ended November 30, 1995
Class A Shares Amount
- ----------------------------------------------------
Shares sold 3,635,834 $17,320,323
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 426,252 2,016,383
- ----------------------------------------------------
4,062,086 19,336,706
Shares
repurchased (4,164,440) (19,624,855)
- ----------------------------------------------------
Net decrease (102,354) $(288,149)
- ----------------------------------------------------
Year ended November 30, 1994
Class A Shares Amount
- ----------------------------------------------------
Shares sold 6,328,904 $30,343,192
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 644,768 3,091,225
- ----------------------------------------------------
6,973,672 33,434,417
Shares
repurchased (14,365,493) (68,320,646)
- ----------------------------------------------------
Net decrease (7,391, 821) $(34,886,229)
- ----------------------------------------------------
Year ended November 30, 1995
Class B Shares Amount
- ----------------------------------------------------
Shares sold 2,532,117 $12,093,732
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 198,942 941,425
- ----------------------------------------------------
2,731,059 13,035,157
Shares
repurchased (2,671,253) (12,701,553)
- ----------------------------------------------------
Net increase 59,806 $333,604
- ----------------------------------------------------
Year ended November 30, 1994
Class B Shares Amount
- ----------------------------------------------------
Shares sold 3,048,911 $14,623,970
Shares issued in
connection with
reinvestment of
distributions 174,536 830,767
- ----------------------------------------------------
3,223,447 15,454,737
Shares
repurchased (2,884,188) (13,686,963)
- ----------------------------------------------------
Net increase 339,259 $1,767,774
- ----------------------------------------------------
April 1, 1995
(commencement of
operations) to
November 30, 1995
Class M Shares Amount
- ----------------------------------------------------
Shares sold 273,507 $1,318,280
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,194 10,635
- ----------------------------------------------------
275,701 1,328,915
Shares repurchased (60,887) (295,806)
- ----------------------------------------------------
Net increase 214,814 $1,033,109
- ----------------------------------------------------
- -----------------------------------------------------------------------
Federal tax information
(Unaudited)
For the year ended November 30, 1995, a portion of the fund's
distribution represents a return of captial and is therefore not taxable
to shareholders. This resulted from prepayments on higher-coupon
mortgage-backed securities as long-term interest rates declined early in
the fiscal year, and from the fund's subsequent investments in lower-
coupon mortgage-backed securities. While lower-coupon securities offered
a degree of protection against prepayments, their lower yields caused
the fund's income to be less than was projected.
Our commitment to quality service
* CHOOSE AWARD-WINNING SERVICE.
Putnam Investor Services has won the DALBAR Quality Tested Service Seal
for the past five years. In 1994, over 80,000 tests of 55 shareholder
service components demonstrated that Putnam outperformed the industry
standard in every category.
* HELP YOUR INVESTMENT GROW.
Set up a systematic program for investing with as little as $25 a month
from a Putnam money market fund or from your checking or savings
account.*
* SWITCH FUNDS EASILY.
You can move money from one account to another with the same class of
shares without a service charge. (This privilege is subject to change or
termination.)
* ACCESS YOUR MONEY QUICKLY.
You can get checks sent regularly or redeem shares any business day at
the then-current net asset value, which may be more or less than the
original cost of the shares.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a
helpful Putnam representative.
* To make an additional investment in this or any other Putnam fund,
contact your financial advisor or call our toll-free number:
1-800-225-1581.
*Regular investing of course, does not guarantee a profit or
protect against a loss in a declining market.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Alan J. Bankart
Vice President
Michael Martino
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Senior Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam
Intermediate U.S. Government Income Fund. It may also be used as sales
literature when preceded or accompanied by the current prospectus, which
gives details of sales charges, investment objectives, and operating
policies of the fund, and the most recent copy of Putnam's Quarterly
Performance Summary. For more information, or to request a prospectus,
call toll free: 1-800-225-1581.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the
Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board
or any other agency; and involve risk, including the possible loss of
the principal amount invested.
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Boston Massachusetts, 02109
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