Putnam
Intermediate
U.S. Government
Income Fund
SEMIANNUAL REPORT
May 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Putnam Intermediate U.S. Government Income Fund continues to provide
strong relative performance. For the 3 years ended June 30, 1997,
the fund's class A share total return ranked 4 out of 70 short/
intermediate U.S. government funds tracked by Lipper Analytical
Services.*
* "At a time when the stock market continues to hover near all-time
highs . . . many money managers . . . have turned their sights to bonds,
finding better value in securities that they have largely overlooked in
recent years."
-- The Wall Street Journal, June 3, 1997
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
12 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. The fund's class B shares
were ranked 17 out of 70 short/intermediate U.S. government funds for
3-year performance for the period ended 6/30/97. The fund's class A, class
B, and class M shares were ranked 20, 50, and 24 out of 95 funds,
respectively, for 1-year performance. Past performance is not indicative
of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Managing a portfolio of intermediate-term U.S. government and agency
securities requires a deft and delicate hand. For one thing, the universe
encompasses securities with maturities within a relatively narrow band of
3 to 10 years. In addition, there is a limited menu of types of securities
from which the portfolio manager can choose.
Thus changes that might seem relatively minor in funds with broader charters
can make a significant difference in the results of Putnam Intermediate U.S.
Government Income Fund. With portfolio adjustments tending toward the subtle,
Fund Manager Michael Martino's discussion of "barbells" and "ARMs reduction"
might seem, at first glance, somewhat heavy-handed. Such is not at all the
case, for these are valuable tactical tools widely employed in the management
of fixed-income investments.
As you will see in the following report, Mike discusses his effective use of
both maneuvers during the first half of the fund's current year, the six
months ended May 31, 1997. He also reviews prospects for the year's second
half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 16, 1997
Report from the Fund Manager
Michael Martino
For shareholders of Putnam Intermediate U.S. Government Income Fund, the
Federal Reserve Board's preemptive strike against inflation late in March
marked the turning point in a challenging period. Over the six months ended
May 31, 1997, bond investors reacted -- and in some cases, overreacted -- to a
flood of data that suggested the economy was overheating. Their fears were far
from ungrounded. The economy grew at a 5.9% annual rate in the first quarter
of 1997, while unemployment dropped to its lowest level since 1973. Your fund
steered a successful course through the resulting market volatility, reaching
the midpoint of its 1997 fiscal year with a small but positive total return.
Complete performance information for the fund appears on pages 8 through 10.
* DURATION MANAGEMENT BOOSTS RETURNS
Historically, the active management of your fund's duration has been integral
to the search for income and relative price stability. An important tool for
investment professionals, duration measures a portfolio's sensitivity to
changes in interest rates and is manipulated by altering a portfolio's mix of
securities. Essentially, the shorter a portfolio's duration, the less its net
asset value will be adversely affected by an increase in interest rates. The
tradeoff for this protection is that a short duration restricts a portfolio's
participation in market rallies.
As investor sentiment swung between optimism and caution toward the latter
part of 1996, we pared the fund's duration to approximately 2.8 years. This
indicates a defensive outlook; as an intermediate-term bond fund, your fund's
duration typically will not exceed that of a 5-year Treasury note; that is,
about 4 years. As evidence of stronger economic growth mounted in early 1997,
we decided to maintain our conservative stance. Rather than simply hold
securities of approximately 3-year duration, however, we chose to divide
portfolio assets between cash and longer-duration securities, such as 10-year
Treasuries.
As it turned out, interest rates did rise in the first quarter of calendar
1997, sparked by the quarter of a percentage point increase in the federal
funds rate in late March. Although longer-maturity bonds suffered relatively
greater price declines, the fund's long-term holdings provided a high level of
income. In fact, so far this year, 10-year Treasuries have outperformed all
other Treasuries on a total-return basis. At the same time, the fund's
increased cash position (17% at period's end) acted as a buffer against bond
market declines.
* ARMs REDUCED IN FAVOR OF FIXED-RATE SECURITIES
In 1996, in an environment of stable short-term interest rates, your fund's
focus on adjustable-rate mortgages (ARMs) proved particularly beneficial to
its performance. Mortgage-backed securities typically carry higher yields than
Treasuries of equivalent maturity in order to compensate investors for the
risk of prepayment. Because many homeowners opt to refinance or prepay their
mortgages when interest rates fall -- and lower mortgage rates become
available -- this prepayment risk can dampen performance. The premature
payment of mortgage principal produces an uneven stream of income and forces
investors to reinvest their money at lower prevailing rates.
[GRAPHIC HORIZONTAL BAR CHART OMITTED: COMPARATIVE PORTFOLIO COMPOSITION]
COMPARATIVE PORTFOLIO COMPOSITION*
11/30/96 5/31/97
Fixed-rate 8.3% 14.5%
mortgage-backed
securities
Adjustable-rate 25.0% 12.0%
mortgage-backed
securities
U.S. Treasury 58.0% 56.4%
securities
Cash and 8.7% 16.7%
short-term
investments
Footnote reads:
*Based on net assets. Composition will vary over time.
ARMs, however, differ from other mortgage-backed securities in that their
income levels track the movements in short-term interest rates. A lag in the
rate at which these securities reset meant that for a time last year some ARMs
provided an even greater income advantage relative to Treasuries of comparable
maturity. By year's end, however, we believed ARMs had become fully valued and
were suitable candidates for sale.
Our opportunity to reduce the fund's ARM position came in early 1997, when we
suspected a rate increase was imminent. In a rising interest-rate environment,
certain types of ARMs can be relative underperformers, since the lag in coupon
resetting means these securities could offer less income than fixed-rate
mortgages of equivalent quality. In all, we reduced the fund's adjustable-rate
mortgage holdings by roughly half -- from 25% of portfolio holdings on
November 30, 1996, to 12% at the end of May.
The proceeds from the sale of these securities helped build the cash position
that later became an important part of our "barbell" duration strategy. To a
lesser degree, the sale of ARMs funded an increase in fixed-rate
mortgage-backed securities, which we believe offer value in a rising
interest-rate environment. As rates rose during the period, the added income
from your fund's longer-maturity fixed-rate mortgages helped boost performance
at a time when bond prices in general were falling. We currently expect to
increase the fund's holding of fixed-rate mortgage securities in the coming
months.
* "HISTORY COUNSELS CAUTION": ADVICE FOR BOND AND EQUITY INVESTORS
Federal Reserve Board Chairman Alan Greenspan's warning was directed at U.S.
equity investors but may also be appropriate for those in the bond markets. By
the end of May, the bond markets had recovered from their late-March selloff,
and a host of crucial economic reports suggested inflation was less of a
threat than had been predicted. The six-year-old economic expansion may very
well peter out, paving the way for lower interest rates and a sustained bond
market rally. Importantly profit expectations may be overly optimistic, given
that many companies are unable to raise prices.
[GRAPHIC VERTICAL BAR CHART OMITTED: EFFECTIVE MATURITY BREAKDOWN]
EFFECTIVE MATURITY BREAKDOWN*
0-1 Years 21.1%
1-5 Years 40.8%
5-9 Years 29.8%
9-10 Years 7.3%
15+ Years 1.0%
Footnote reads:
* Based on net assets as of 5/31/97. Measures of effective maturity are
derived from calculations that incorporate assumptions about prepayment
rates and cash flows of mortgage-backed securities. The actual, or
effective, maturities of mortgage-backed securities are frequently shorter
than their stated maturities. Effective maturities and the assumptions on
which they are based will vary over time.
But the timing of an economic downturn is difficult to predict. For now,
growth is strong and reported profits continue to exceed expectations.
Although the Fed left interest rates unchanged at its May 20 and July 2
meetings, it may find sufficient reason to raise rates later this year. It is
interesting to note that historically the Fed has shifted monetary policy by
engineering a series of small rate changes, seldom just one. Going forward, we
intend to keep the fund's duration neutral to short, investing in sectors of
the bond market that we believe offer value in a rising interest-rate
environment.
While U.S. government backing of individual securities does not insure your
principal, which will fluctuate with market conditions, it does guarantee that
the fund's government-backed holdings will make timely payments of interest
and principal. The views expressed here are exclusively those of Putnam
Management. They are not meant as investment advice. Although the described
holdings were viewed favorably as of 5/31/97, there is no guarantee the fund
will continue to hold these securities in the future.
Performance summary
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.
TOTAL RETURN FOR PERIODS ENDED 5/31/97
Class A Class B Class M
(inception date) (2/16/93) (2/16/93) (4/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 1.28% -1.92% 1.19% -1.77% 1.41% -0.62%
- ------------------------------------------------------------------------------
1 year 6.92 3.46 6.50 3.50 6.97 4.78
- ------------------------------------------------------------------------------
Life of class 23.47 19.42 20.58 20.58 22.83 20.43
Annual average 5.05 4.23 4.47 4.47 4.92 4.44
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/97
Lehman Bros.
Intermediate Consumer
Govt. Bond Index Price Index
- ------------------------------------------------------------------------------
6 months 1.34% 0.95%
- ------------------------------------------------------------------------------
1 year 7.12 2.23
- ------------------------------------------------------------------------------
Life of class 24.74 11.88
Annual average 5.34 2.68
- ------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 6/30/97
(most recent calendar quarter)
Class A Class B Class M
(inception date) (2/16/93) (2/16/93) (4/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 2.75% -0.54% 2.44% -0.55% 2.67% 0.60%
- ------------------------------------------------------------------------------
1 year 6.84 3.40 6.21 3.21 6.68 4.50
- ------------------------------------------------------------------------------
Life of class 24.55 20.46 21.32 21.32 23.88 21.46
Annual average 5.15 4.35 4.52 4.52 5.02 4.55
- ------------------------------------------------------------------------------
Return for class A and class M shares reflect current maximum initial
sales charges of 3.25% and 2.00%, respectively. Class B share returns for
the 6 months, 1-year, and life of fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 3.00% in the first year,
declining to 1.00% in the sixth year, and eliminated thereafter. Returns
shown for class B and class M for periods prior to their inception are
derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and, in the case of class B and class M shares,
the higher operating expenses applicable to such shares. Returns shown for
class A shares have not been adjusted to reflect payments under the class
A distribution plan prior to its implementation. All returns assume
reinvestment of distributions at NAV and represent past performance; they
do not guarantee future results. Investment return and principal value
will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Performance data for periods before
4/10/95 do not reflect current investment policies.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 5/31/97
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.141142 $0.126578 $0.137431
- ------------------------------------------------------------------------------
Total $0.141142 $0.126578 $0.137431
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
11/30/96 $4.90 $5.06 $4.90 $4.90 $5.00
- ------------------------------------------------------------------------------
5/31/97 4.82 4.98 4.83 4.83 4.93
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 5.93% 5.74% 5.32% 5.77% 5.65%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 5.37 5.20 4.76 5.23 5.12
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales 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 sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
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.
Portfolio of investments owned
May 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (82.9%) *
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
U.S. Government Agency Mortgage Pass-Through Certificates (26.5%)
- ---------------------------------------------------------------------------------------------------------------------
$3,459,056 Federal Home Loan Mortgage Corp. 7 1/2s, August 1, 2007 $ 3,499,042
Federal National Mortgage Association
117,743 11 1/4s, October 1, 2010 131,579
720,187 8s, May 1, 2013 732,902
31,202 7.275s, May 1, 2016 31,825
304,666 6.071s, with due dates from November 1, 2024 to July 1, 2026 301,050
Government National Mortgage Association
39,146,296 8 1/2s, with due dates from March 15, 2026 to May 15, 2027 40,573,040
3,949,478 8s, with due dates from March 15, 2023 to September 15, 2023 4,074,088
4,821,517 6s, July 20, 2026 4,905,894
--------------
54,249,420
U.S. Treasury Obligations (56.4 %)
- ---------------------------------------------------------------------------------------------------------------------
2,000,000 U.S. Treasury Bonds 6s, February 15, 2026 1,760,320
U.S. Treasury Notes
5,000,000 8 1/2s, February 15, 2000 5,264,050
30,000,000 8 1/4s, July 15, 1998 30,740,700
10,000,000 8 1/8s, February 15, 1998 10,157,800
10,000,000 8s, May 15, 2001 10,528,100
1,500,000 7 3/8s, November 15, 1997 1,511,250
10,000,000 6 7/8s, May 15, 2006 10,132,800
15,000,000 6 1/2s, October 15, 2006 14,817,150
7,000,000 6 1/4s, April 30, 2001 6,949,670
23,610,000 5 7/8s, November 15, 1999 23,384,997
--------------
115,246,837
--------------
Total U.S. Government and Agency Obligations
(cost $171,187,773) $ 169,496,257
SHORT-TERM INVESTMENTS (16.7%) * (cost $34,225,493)
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
$34,215,000 Interest in $386,564,000 joint repurchase agreement dated May 30, 1997 UBS
Securities due June 2, 1997 with respect to various U.S. Treasury obligations
-- maturity value of $34,230,739 for an effective yield of 5.52 %. $ 34,225,493
- ---------------------------------------------------------------------------------------------------------------------
Total Investments (cost $205,413,265) *** $ 203,721,750
- ---------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $204,574,411.
*** The aggregate identified cost on a tax basis is $205,420,766, resulting in gross unrealized appreciation and
depreciation of $492,033 and $2,191,049, respectively, or net unrealized depreciation of $1,699,016.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1997 (Unaudited)
<S> <C>
Assets
- -------------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $205,413,265) (Note 1) $203,721,750
- --------------------------------------------------------------------------------------------------------
Cash 410
- --------------------------------------------------------------------------------------------------------
Interest receivable and other receivables 2,003,775
- --------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,184,446
- --------------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 7,148
- --------------------------------------------------------------------------------------------------------
Total assets 206,917,529
Liabilities
- --------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 163,972
- --------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,511,931
- --------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 307,846
- --------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 45,237
- --------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 1,142
- --------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,227
- --------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 108,969
- --------------------------------------------------------------------------------------------------------
Payable for organization expenses (Note 1) 34,973
- --------------------------------------------------------------------------------------------------------
Other accrued expenses 167,821
- --------------------------------------------------------------------------------------------------------
Total liabilities 2,343,118
- --------------------------------------------------------------------------------------------------------
Net assets $204,574,411
Represented by
- --------------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $207,893,183
- --------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) ($293,716)
- --------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investment (Note 1) (1,333,541)
- --------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (1,691,515)
- --------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $204,574,411
Computation of net asset value and offering price
- --------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($138,677,045 divided by 28,743,989 shares) $4.82
- --------------------------------------------------------------------------------------------------------
Offering price per class A share (100/96.75 of $4.82)* $4.98
- --------------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($61,727,356 divided by 12,787,313 shares)** $4.83
- --------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($4,170,010 divided by 862,853 shares) $4.83
- --------------------------------------------------------------------------------------------------------
Offering price per class M share (100/98.00 of $4.83)* $4.93
- --------------------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the
offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent deferred sales
charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended May 31, 1997 (Unaudited)
<S> <C>
Interest Income $ 6,917,604
- --------------------------------------------------------------------------------------------------
Expenses:
Compensation of Manager (Note 2) 605,741
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 214,132
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 15,278
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,678
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 171,969
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 258,378
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 8,564
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 4,989
- --------------------------------------------------------------------------------------------------
Reports to shareholders 31,962
- --------------------------------------------------------------------------------------------------
Registration fees 37,569
- --------------------------------------------------------------------------------------------------
Auditing 16,752
- --------------------------------------------------------------------------------------------------
Legal 3,610
- --------------------------------------------------------------------------------------------------
Postage 15,113
- --------------------------------------------------------------------------------------------------
Other 6,185
- --------------------------------------------------------------------------------------------------
Total expenses 1,393,920
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (42,685)
- --------------------------------------------------------------------------------------------------
Net expenses 1,351,235
- --------------------------------------------------------------------------------------------------
Net investment income 5,566,369
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 197,241
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (2,946,653)
- --------------------------------------------------------------------------------------------------
Net loss on investments (2,749,412)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 2,816,957
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
May 31 November 30
1997* 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 5,566,369 $ 5,563,624
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 197,241 1,507,914
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (2,946,653) (530,704)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,816,957 6,540,834
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (4,007,890) (3,860,962)
- ----------------------------------------------------------------------------------------------------------------------
Class B (1,560,896) (1,444,592)
- ----------------------------------------------------------------------------------------------------------------------
Class M (118,811) (141,936)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A -- (370,887)
- ----------------------------------------------------------------------------------------------------------------------
Class B -- (138,769)
- ----------------------------------------------------------------------------------------------------------------------
Class M -- (13,634)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 2,577,977 122,988,914
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets (292,663) 123,558,968
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 204,867,074 81,308,106
- ----------------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income of $293,716 and $172,488
respectively) $ 204,574,411 $204,867,074
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share May 31 Feb. 16, 1993+
operating performance (Unaudited) Year ended November 30 to Nov. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $4.90 $4.92 $4.60 $4.91 $5.00
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .14 .29 .27 .27 (b) .21 (a)(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.08) (.02) .35 (.32) (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .06 .27 .62 (.05) .12
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.14) (.26) (.29) (.24) (.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- (.01) (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.03) -- (e) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.14) (.29) (.30) (.26) (.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $4.82 $4.90 $4.92 $4.60 $4.91
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(c) 1.28 * 5.71 13.85 (1.12) 2.44 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $138,677 $143,575 $57,049 $53,831 $19,088
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(d) .59 * 1.22 1.20 1.09 (b) 1.05 (b)*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.83 * 5.54 5.78 5.59 (b) 3.13 (b)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 102.60 * 367.19 383.88 351.62 309.80 *
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income has 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. As a result of such limitation, expenses
for the fund reflect a reduction of approximately $0.01 per share for class A and class B for the
periods ended November 30, 1993 and 1994.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charge.
(d) The ratio of expenses to average net assets for the periods ended November 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude these
amounts (Note 2).
(e) Distributions in excess of net investment income were less than $0.01 per share.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share May 31 Feb. 16, 1993+
operating performance (Unaudited) Year ended November 30 to Nov. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $4.90 $4.92 $4.60 $4.91 $5.00
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .13 .26 .24 .24 (b) .18 (a)(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.07) (.02) .35 (.32) (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .06 .24 .59 (.08) .10
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.13) (.24) (.26) (.21) (.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- (.01) (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.02) -- (e) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.13) (.26) (.27) (.23) (.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $4.83 $4.90 $4.92 $4.60 $4.91
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(c) 1.19 * 5.08 13.17 (1.71) 1.95 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $61,727 $56,889 $23,201 $21,243 $4,317
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(d) .89 * 1.80 1.81 1.69 (b) .67 (b)*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.58 * 4.94 5.17 4.98 (b) 3.53 (b)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 102.60 * 367.19 383.88 351.62 309.80 *
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income has 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. As a result of such limitation, expenses
for the fund reflect a reduction of approximately $0.01 per share for class A and class B for the
periods ended November 30, 1993 and 1994.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charge.
(d) The ratio of expenses to average net assets for the periods ended November 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude these
amounts (Note 2).
(e) Distributions in excess of net investment income were less than $0.01 per share.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share May 31 Year ended Apr. 3, 1995+
operating performance (Unaudited) Nov. 30 to Nov. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $4.90 $4.93 $4.68
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .14 .27 .12 (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.07) (.02) .32
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .07 .25 .44
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.14) (.26) (.18)
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.02) -- (e)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.14) (.28) (.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $4.83 $4.90 $4.93
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(c) 1.41 * 5.33 9.63 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $4,170 $4,404 $1,058
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(d) .67 * 1.35 .87 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.78 * 5.28 3.37 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 102.60 * 367.19 383.88
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income has 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. As a result of such limitation, expenses
for the fund reflect a reduction of approximately $0.01 per share for class A and class B for the
periods ended November 30, 1993 and 1994.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charge.
(d) The ratio of expenses to average net assets for the periods ended November 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude these
amounts (Note 2).
(e) Distributions in excess of net investment income were less than $0.01 per share.
</TABLE>
Notes to financial statements
May 31, 1997 (Unaudited)
Note 1
Significant accounting policies
Putnam Intermediate U.S. Government Income Fund (the "fund") is registered
under the Investment Company Act of 1940, as amended, as a diversified,
open-end management investment company. The fund seeks high current income
consistent with preservation of capital, through investments primarily in U.S.
government securities.
The fund offers class A, class B and class M shares. Class A shares are sold
with a maximum front-end sales charge of 3.25%. Class B shares, which convert
to class A shares after approximately eight years, do not pay a front-end
sales charge, but pay a higher ongoing distribution fee than class A shares,
and are subject to a contingent deferred sales charge, if those shares are
redeemed within 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
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 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 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) Federal taxes It is the policy of the fund to distribute all of its taxable
(for tax exempt and municipal bond funds exclude "taxable") income within the
prescribed time and otherwise comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies. It is also the
intention of the fund to distribute an amount sufficient to avoid imposition
of any excise tax under Section 4982 of the Internal Revenue Code of 1986, as
amended. Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation on securities held nor for excise tax
on income and capital gains.
At November 30, 1996, the fund had a capital loss carryover of approximately
$24,327,000. This amount includes approximately $22,707,000 of capital loss
carryovers acquired in connection with the fund's acquisition of the net
assets of Putnam Adjustable Rate U.S. Government Fund in 1996. The amount of
the capital loss carryover that can be used to offset realized capital gains
by the fund in any one year may be limited by the Internal Revenue Code and
Regulations. To the extent that capital loss carryovers are used to offset
realized capital gains, it is unlikely that gains so offset would be
distributed to shareholders since any distribution might be taxable as
ordinary income.
Loss Carryover Expiration
- ---------------- --------------------
$ 385,000 November 30, 1997
799,000 November 30, 1998
7,515,000 November 30, 2000
13,497,000 November 30, 2001
1,621,000 November 30, 2002
510,000 November 30, 2003
F) Distributions to shareholders The fund declares a distribution each day
based upon the projected net investment income, for a specified period,
calculated as if earned prorata throughout the period on a daily basis. Such
distributions are recorded daily and paid monthly. Capital gain distributions,
if any, are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution (or
available capital loss carryovers) under income tax regulations.
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. 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 next $5
billion, 0.425% of the next $5 billion, 0.405% of the next $5 billion, 0.39%
of the next $5 billion, and 0.38% of any excess thereafter. Prior to March
20, 1997, any amount over $1.5 billion was based on a rate of 0.45%.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended May 31, 1997, fund expenses were reduced by $42,685
under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the Statement
of operations exclude these credits. The fund could have invested a portion of
the assets utilized in connection with the expense offset arrangements in an
income producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $590 and an additional
fee for each Trustee's meeting attended. Trustees who are not interested
persons of Putnam Management and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Plan") which allows the
Trustees to defer the receipt of all or a portion of Trustees Fees payable on
or after July 1, 1995. The deferred fees remain in the fund and are invested
in certain Putnam funds until distribution in accordance with the Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted 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 six months ended May 31, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $30,822 and $1,059 from the sale of
class A and class M shares, respectively and $38,360 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 six
months ended May 31, 1997, Putnam Mutual Funds Corp., acting as underwriter
received $42,351 on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended May 31, 1997, purchases and sales of U.S.
government and agency obligations other than short-term investments aggregated
$177,784,166 and $204,003,588, 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 May 31, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
May 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 15,613,341 $ 75,447,540
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 587,513 2,837,645
- ------------------------------------------------------------
16,200,854 78,285,185
Shares
repurchased (16,786,092) (81,163,481)
- ------------------------------------------------------------
Net decrease (585,238) $ (2,878,296)
- ------------------------------------------------------------
Year ended
November 30, 1996
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 21,352,359 $103,080,104
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 605,304 2,935,082
- ------------------------------------------------------------
Shares issued in
connection with
the merger of
Putnam
Adjustable Rate
U.S. Government
Fund 11,771,185 57,325,670
- ------------------------------------------------------------
33,728,848 163,340,856
Shares
repurchased (15,993,455) (77,207,708)
- ------------------------------------------------------------
Net increase 17,735,393 $86,133,148
- ------------------------------------------------------------
Six months ended
May 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 7,571,959 $36,556,081
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 255,332 1,233,057
- ------------------------------------------------------------
7,827,291 37,789,138
Shares
repurchased (6,661,072) (32,158,222)
- ------------------------------------------------------------
Net increase 1,166,219 $ 5,630,916
- ------------------------------------------------------------
Year ended
November 30, 1996
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 7,669,855 $36,980,646
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 272,195 1,319,922
- ------------------------------------------------------------
Shares issued in
connection with
the merger of
Putnam
Adjustable Rate
U.S. Government
Fund 4,390,784 21,383,118
- ------------------------------------------------------------
12,332,834 59,683,686
Shares
repurchased (5,427,659) (26,155,445)
- ------------------------------------------------------------
Net increase 6,905,175 $33,528,241
- ------------------------------------------------------------
Six months ended
May 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 749,238 $ 3,630,203
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 20,370 98,494
- ------------------------------------------------------------
769,608 3,728,697
Shares
repurchased (805,448) (3,903,340)
- ------------------------------------------------------------
Net decrease (35,840) $ (174,643)
- ------------------------------------------------------------
Year ended
November 30, 1996
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 1,450,087 $ 7,026,481
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 27,541 133,380
- ------------------------------------------------------------
1,477,628 7,159,861
Shares
repurchased (793,749) (3,832,336)
- ------------------------------------------------------------
Net increase 683,879 $3,327,525
- ------------------------------------------------------------
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Alan 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
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. You
can also learn more at Putnam Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board or any other agency,
and involve risk, including the possible loss of principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
34405-398/428/674 7/97
