PUTNAM MASTER INTERMEDIATE INCOME TRUST — Annual Report 2000

Nov 15, 2000

Putnam Master Intermediate Income Trust ANNUAL REPORT ON PERFORMANCE AND OUTLOOK 9-30-00 [SCALE LOGO OMITTED] FROM THE TRUSTEES Dear Shareholder: It is a pleasure to greet you in our new roles as Chairman of the Trustees and President of the Funds. As you know, both of us have been members of the Board of Trustees for a number of years -- years during which the global securities markets, the mutual fund industry, and Putnam itself have experienced tremendous growth and change. As we look to the future, we are certain that the changes will be breathtaking in their scope. What will not change is the Trustees' dedication to serving the best interests of our shareholders. We welcome the challenges that lie ahead and are confident that Putnam and your Board will continue to face those challenges successfully as they have for more than 60 years. We look forward to helping you meet your financial objectives for many years to come. Respectfully yours, /S/ JOHN A. HILL /S/ GEORGE PUTNAM, III John A. Hill George Putnam, III Chairman of the Trustees President of the Funds November 15, 2000 REPORT FROM FUND MANAGEMENT David L. Waldman and the Core Fixed Income Team Putnam Master Intermediate Income Trust weathered changing market environments in the 12 months ended September 30, 2000. At the beginning of fiscal 2000, investors were uncertain of what to expect, given Y2K-related concerns, but they also were confident enough to focus attention on the riskier sectors of the market. This confidence contributed to positive performance for these sectors into the new year. After the Y2K transition passed without incident, the euphoria of the market quickly dissipated into an environment filled with fears of inflation and fallout from the Federal Reserve Board's decisions to increase interest rates. After mid 2000, a more stable market environment returned. Inflation appeared to remain benign, the U.S. economy showed signs of slowing down, and the risk of further Fed rate increases ceased to be a real threat. This most recent environment, combined with the fund's diversified portfolio, helped to deliver a competitive performance over the period. Total return for 12 months ended 9/30/00 NAV Market price - ------------------------------- 4.29% 10.72% - ------------------------------- Past performance is not indicative of future results. Performance information for longer periods begins on page 5. * YIELD CURVE INVERSION IMPACTS FIXED-INCOME MARKET Within the investment-grade market, the action of the U.S. Treasury yield curve affected all sectors. The increases in short-term interest rates made short-term fixed-income securities much more attractive to investors. At the same time, the U.S. Treasury's buyback of long-term Treasury securities reduced supply and increased demand for longer-term Treasury debt. This combination created an inverted yield curve for most of the fiscal year, in which yields offered by short-term investments actually became higher than those of long-term bonds. As Treasuries serve as a benchmark for most other segments of the fixed-income market, the chain of events caused a volatile environment for fixed-income investments. [GRAPHIC OMITTED: horizontal bar chart TOP FIVE COUNTRY ALLOCATIONS (INTERNATIONAL SECTOR)] TOP FIVE COUNTRY ALLOCATIONS (INTERNATIONAL SECTOR) Canada 4.1% Denmark 3.1% Mexico 3.0% Brazil 2.5% Russia 2.1% Footnote reads: Based on net assets as of 9/30/00. Holdings will vary over time. Because of the fund's focus on fixed-income investments with limited maturities, we were unable to take advantage of the demand for long-term U.S. Treasury bonds. Fortunately, the fund's position in U.S. Treasuries of 7- to 10-year maturities was rewarded by these same market dynamics. Our position in mortgage-backed securities also served the fund well. With rising interest rates, fewer mortgages were being refinanced and we focused on mortgage-backed securities likely to benefit from the resulting decline in prepayments. * EMERGING MARKETS, DEVELOPED MARKETS BOLSTER RETURNS WHILE HIGH-YIELD BONDS DISAPPOINT Emerging markets have proved their resiliency since the correction in 1998. During the fiscal year, global growth was sustained, valuations were very cheap, and commodity prices were firm. The fund's holdings in Russia benefited from higher oil prices as well as the country's restructuring into a more market-oriented economy. Holdings in Mexico benefited both from U.S. economic growth and the increased economic stability. Within the developed market universe, the fund took advantage of opportunities over the fiscal year in various countries. The potential for further European integration was an incentive to have positions in Greece and Denmark. In addition, the fund remained underweight in Japan as economic growth and potential supply of Japanese government securities weighed on the market. Unfortunately, the fund's currency exposure did not contribute to positive performance. The euro in particular continued its slow deterioration since the beginning of the period. The attractiveness of the U.S. economy lured capital flows from abroad, and as a result, investors tended to buy the dollar and sell foreign securities. [GRAPHIC OMITTED: TOP THREE HOLDINGS PER SECTOR] TOP THREE HOLDINGS PER SECTOR HIGH-YIELD BONDS Nextel Communications, Inc. sr. notes, 9 3/8s, 2009 Hanvit Bank 144A sub. notes 11 3/4s, 2010 (Korea) Midland Funding II Corp., deb. Series A, 11 3/4s, 2005 FOREIGN BONDS Brazil (Federal Republic of) notes 14 1/2s, 2009 Denmark (Kingdom of) bonds 6s, 2009 United Mexican States bonds Series XW, 10 3/8s, 2009 U.S. INVESTMENT-GRADE SECURITIES U.S. Treasury Notes, 6 3/4s, May 15, 2005 U.S. Treasury Strip, zero %, August 15, 2009 Federal National Mortgage Association TBA 7 1/2s, 2015 Footnote reads: These holdings represent 19.2% of the fund's net assets as of 9/30/00. Portfolio holdings will vary over time. The combination of poor equity markets, defaults, and negative industry-wide mutual fund cash flows contributed to the underperformance of high-yield bonds during the period. Although the sector delivered attractive yields, the price performance was negative as spreads widened throughout the period. The high-yield bond market rallied in the fourth quarter of 1999, consistent with the performance of U.S. equity markets. However, throughout most of 2000, as equity markets were experiencing corrections, this volatility also spilled over into the high-yield market. Rising default rates over the past two years reduced demand for high-yield bonds even more. The rise in the default rate has received a great deal of attention. Historically, the most stressful time for a corporation is the three-year period following the issuance of high-yield bonds. The pattern of defaults that is now emerging can be attributed in part to the strong issuance in 1997 and 1998. As it did in the equity markets, the technology and telecommunications sector of the high-yield market hit a rough patch in 2000. The fund trimmed back its holdings in the sector but did not completely escape the effects. * OUTLOOK REMAINS POSITIVE Looking forward, we believe that increasing stability is on the horizon as the opportunity for a U.S. economic soft landing has become a stronger probability. With the threat of continued Fed tightening dissipating, bond prices should trade within a relatively narrow range. We remain supportive on the long-term performance of the high-yield bond market. Given the attractive valuations and our expectation that defaults will peak in 2001, we believe that many of the uncertainties that have caused the high-yield market to struggle show signs of subsiding. Emerging markets have shown continued strength in volatile times. But, despite global economic stability and firm commodity prices, we remain neutral on this sector because of pockets of specific country risk. With regard to developed country interest rates, we expect to minimize exposure to Japan and continue to take advantage of opportunities in Greece, Canada, and Denmark. We will continue to monitor events closely and maintain the fund's diversification while emphasizing strong valuations and working to minimize risk. 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 9/30/00, there is no guarantee the fund will continue to hold these securities in the future. International investments are subject to certain risks, such as currency fluctuations, economic instability, and political developments. While the 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. Mortgage-backed securities in the portfolio may be subject to prepayment risk. The lower credit ratings of high-yield bonds reflect a greater possibility that adverse changes in the economy or poor performance by the issuers of these bonds will affect the issuers' ability to pay principal and interest. PERFORMANCE SUMMARY This section provides information about your fund's performance, which should always be considered in light of its investment strategy. Putnam Master Intermediate Income Trust is designed for investors seeking high current income and relative stability of net asset value through U.S. investment-grade high-yield, and international fixed-income securities with limited maturities. TOTAL RETURN FOR PERIODS ENDED 9/30/00 NAV Market price - --------------------------------------------------------------------------- 1 year 4.29% 10.72% - --------------------------------------------------------------------------- 5 years 32.20 35.62 Annual average 5.74 6.28 - --------------------------------------------------------------------------- 10 years 135.94 153.96 Annual average 8.96 9.77 - --------------------------------------------------------------------------- Annual average (life of fund, since 4/29/88) 7.88 6.37 - --------------------------------------------------------------------------- Past performance is no assurance of future results. More recent returns may be more or less than those shown. They do not take into account any adjustment for taxes payable on reinvested distributions. Investment returns, net asset value, and market price will fluctuate so that an investor's shares when redeemed may be worth more or less than their original cost. COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/00 Lehman Bros. Salomon Bros. Govt. Non-U.S. First Boston Intermediate World Govt. High Yield Consumer Bond Index Bond Index Bond Index price index - ---------------------------------------------------------------------------- 1 year 6.21% -7.86% 1.92% 3.46% - ---------------------------------------------------------------------------- 5 years 34.19 6.47 35.09 13.32 Annual average 6.06 1.26 6.20 2.53 - ---------------------------------------------------------------------------- 10 years 101.03 101.90 204.16 30.82 Annual average 7.23 7.28 11.76 2.72 - ---------------------------------------------------------------------------- Annual average (life of fund, since 4/29/88) 7.51 6.14 9.41 3.22 - ---------------------------------------------------------------------------- Past performance is no assurance of future results. More recent returns may be more or less than those shown. They do not take into account any adjustment for taxes payable on reinvested distributions. Investment returns, net asset value and market price will fluctuate so that an investor's shares when sold may be worth more or less than their original cost. PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 9/30/00 - ---------------------------------------------------------------------------- Distributions from common shares - ---------------------------------------------------------------------------- Number 12 - ---------------------------------------------------------------------------- Income $0.642 - ---------------------------------------------------------------------------- Capital gains -- - ---------------------------------------------------------------------------- Total $0.642 - ---------------------------------------------------------------------------- Share value NAV Market price - ---------------------------------------------------------------------------- 9/30/99 $7.57 $6.438 - ---------------------------------------------------------------------------- 9/30/00 7.13 6.438 - ---------------------------------------------------------------------------- Current return - ---------------------------------------------------------------------------- Current dividend rate1 8.92% 9.88% - ---------------------------------------------------------------------------- 1 Income portion of most recent distribution, annualized and divided by NAV or market price at end of period. 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. Net asset value (NAV) is the value of all your fund's assets, minus any liabilities, divided by the number of outstanding common shares. Market price is the current trading price of one share of the fund. Market prices are set by transactions between buyers and sellers on the New York Stock Exchange. COMPARATIVE BENCHMARKS Lehman Brothers Government Intermediate Bond Index is an unmanaged list of U.S. government and mortgage-backed securities composed of all bonds covered by the Lehman Brothers Government Bond Index with maturities between 1 and 9.99 years. Salomon Brothers Non-U.S. World Government Bond Index is an unmanaged list of bonds issued by 10 countries. First Boston High Yield Bond Index is an unmanaged list of lower-rated higher-yielding U.S. corporate bonds. Consumer price index (CPI) is a commonly used measure of inflation; it does not represent an investment return. Securities indexes assume reinvestment of all distributions and interest payments and do not take into account brokerage fees or taxes. Securities in the fund do not match those in the indexes and performance of the fund will differ. It is not possible to invest directly in an index. A GUIDE TO THE FINANCIAL STATEMENTS These sections of the report, preceded by the Report of independent accountants, constitute the fund's financial statements. The fund's portfolio lists all the fund's investments and their values as of the last day of the reporting period. Holdings are organized by asset type and industry sector, country, or state to show areas of concentration and diversification. Statement of assets and liabilities shows how the fund's net assets and share price are determined. All investment and noninvestment assets are added together. Any unpaid expenses and other liabilities are subtracted from this total. The result is divided by the number of shares to determine the net asset value per share, which is calculated separately for each class of shares. (For funds with preferred shares, the amount subtracted from total assets includes the net assets allocated to remarketed preferred shares.) Statement of operations shows the fund's net investment gain or loss for the reporting period. This is determined by adding up all the fund's earnings -- from dividends and interest income -- and subtracting its operating expenses. This statement also lists any net gain or loss the fund realized on the sales of its holdings and -- for holdings that remain in the portfolio -- any change in unrealized gains or losses over the period. Statement of changes in net assets shows how the fund's net assets were affected by distributions to shareholders and by changes in the number of the fund's shares. It lists distributions and their sources (net investment income or realized capital gains) over the current reporting period and the most recent fiscal year-end. The distributions listed here may not match the sources listed in the Statement of operations because the distributions are determined on a tax basis and may be paid in a different period from the one in which they were earned. Financial highlights provide an overview of the fund's investment results, per-share distributions, expense ratios, net investment income ratios and portfolio turnover in one summary table, reflecting the five most recent reporting periods. In a semiannual report, the highlight table also includes the current reporting period. For open-end funds, a separate table is provided for each share class. REPORT OF INDEPENDENT ACCOUNTANTS The Board of Trustees and Shareholders Putnam Master Intermediate Income Trust We have audited the accompanying statement of assets and liabilities of Putnam Master Intermediate Income Trust, including the fund's portfolio, as of September 30, 2000, the related statement of operations for the year then ended, statement of changes in net assets for the year then ended and financial highlights for the year then ended. 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 audit. The statement of changes in net assets for the year ended September 30, 1999 and the financial highlights for each of the years or periods in the four-year period ended September 30, 1999 were audited by other auditors whose report dated November 11, 1999 expressed an unqualified opinion on that financial statement and those financial highlights. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform our audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of September 30, 2000 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 Master Intermediate Income Trust as of September 30, 2000, and the results of its operations, changes in its net assets and financial highlights for the year described above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Boston, Massachusetts November 2, 2000

NOTES TO FINANCIAL STATEMENTS September 30, 2000 Note 1 Significant accounting policies Putnam Master Intermediate Income Trust (the "fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company and is authorized to issue an unlimited number of shares. The fund's investment objective is to seek, with equal emphasis, high current income and relative stability of net asset value, by allocating its investments among the U.S. investment grade sector (formerly the U.S. government sector), high-yield sector and international sector. 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 of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. 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 sales price on its principal exchange, or if no sales are reported -- as in the case of some securities traded over-the-counter -- the last reported bid price. Securities quoted in foreign currencies are translated into U.S. dollars at the current exchange rate. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value. Other investments, including restricted securities, are stated at fair value following procedures approved by the Trustees. Market quotations are not considered to be readily available for certain debt obligations; such investments are stated at fair value on the basis of valuations furnished by a pricing service or dealers, approved by the Trustees, which determine valuations for normal institutional-size trading units of such securities using methods based on market transactions for comparable securities and variable relationships between securities that are generally recognized by institutional traders. B) Joint trading account Pursuant to an exemptive order issued by the Securities and Exchange Commission, the fund may transfer uninvested cash balances into a joint trading account along with the cash of other registered investment companies 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. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the fund and the counterparty. 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). Gains or losses on securities sold are determined on the identified cost basis. Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Discounts on zero coupon bonds, original issue discount bonds, stepped-coupon bonds and payment in kind bonds are accreted according to the yield-to-maturity basis. Any premium resulting from the purchase of stepped-coupon securities is amortized on a yield-to-maturity basis. E) Foreign currency translation The accounting records of the fund are maintained in U.S. dollars. The market value of foreign securities, currency holdings, and other assets and liabilities are recorded in the books and records of the fund after translation to U.S. dollars based on the exchange rates on that day. The cost of each security is determined using historical exchange rates. Income and withholding taxes are translated at prevailing exchange rates when accrued or incurred. The fund does not isolate that portion of realized or unrealized gains or losses resulting from changes in the foreign exchange rate on investments from fluctuations arising from changes in the market prices of the securities. Such gains and losses are included with the net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net realized exchange gains or losses on closed forward currency contracts, disposition of foreign currencies and the difference between the amount of investment income and foreign withholding taxes recorded on the fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized appreciation and depreciation of assets and liabilities in foreign currencies arise from changes in the value of open forward currency contracts and assets and liabilities other than investments at the period end, resulting from changes in the exchange rate. Investments in foreign securities involve certain risks, including those related to economic instability, unfavorable political developments, and currency fluctuations, not present with domestic investments. F) Forward currency contracts The fund may engage in forward currency contracts, which are agreements between two parties to buy and sell currencies at a set price on a future date, to protect against a decline in value relative to the U.S. dollar of the currencies in which its portfolio securities are denominated or quoted (or an increase in the value of a currency in which securities a fund intends to buy are denominated, when a fund holds cash reserves and short-term investments). The U.S. dollar value of forward currency contracts is determined using current forward currency exchange rates supplied by a quotation service. The market value of the contract will fluctuate with changes in currency exchange rates. The contract is "marked to market" daily and the change in market value is recorded as an unrealized gain or loss. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties to the contracts are unable to meet the terms of their contracts or if the fund is unable to enter into a closing position. G) Futures and options contracts The fund may use futures and options contracts to hedge against changes in the values of securities the fund owns or expects to purchase. The fund may also write options on securities it owns or in which it may invest to increase its current returns. The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. H) TBA purchase commitments The fund may enter into "TBA" (to be announced) purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 0.01% from the principal amount. The fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the fund's other assets. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Security valuation" above. Although the fund will generally enter into TBA purchase commitments with the intention of acquiring securities for their portfolio or for delivery pursuant to options contracts it has entered into, the fund may dispose of a commitment prior to settlement if Putnam Management deems it appropriate to do so. I) TBA sale commitments The fund may enter into TBA sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities, or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as "cover" for the transaction. Unsettled TBA sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Security valuation" above. The contract is "marked-to-market" daily and the change in market value is recorded by the fund as an unrealized gain or loss. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the fund realizes a gain or loss. If the fund delivers securities under the commitment, the fund realizes a gain or a loss from the sale of the securities based upon the unit price established at the date the commitment was entered into. J) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986, 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 September 30, 2000, the fund had a capital loss carryover of approximately $47,316,000 available to offset future capital gains, if any. The amount of the carryover and the expiration dates are: Loss Carryover Expiration - -------------- -------------------- $ 253,000 September 30, 2001 7,035,000 September 30, 2003 2,793,000 September 30, 2004 1,554,000 September 30, 2005 10,040,000 September 30, 2007 25,641,000 September 30, 2008 K) Distributions to shareholders Distributions to shareholders are recorded by the fund on the ex-dividend date. At certain times, the fund may pay distributions at a level rate even though, as a result of market conditions or investment decisions, the fund may not achieve projected investment results for a given period. Capital gains 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. These differences include temporary and permanent differences of losses on wash sale transactions, foreign currency gains and losses, post-October loss deferrals, dividends payable, defaulted bond interest, unrealized gains and losses on certain futures contracts, paydown gains and losses on mortgage-backed securities, market discount, interest on payment-in-kind securities, book accretion/amortization adjustment, and foreign market discount. 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 September 30, 2000, the fund reclassified $12,531,961 to increase distributions in excess of net investment income and $622,530 to decrease paid-in-capital, with a decrease to accumulated net realized losses of $13,154,491. The calculation of net investment income per share in the financial highlights table excludes these adjustments. Note 2 Management fee, administrative services and other transactions Compensation of Putnam Management, for management and investment advisory services is paid quarterly based on the average net assets of the fund. Such fee is based on the following annual rates: 0.75% of the first $500 million of average weekly net assets, 0.65% of the next $500 million, 0.60% of the next $500 million, and 0.55% thereafter. The fund reimburses Putnam Management an allocated amount 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 subsidiary of Putnam Investments, Inc. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. Under the subcustodian contract between the subcustodian bank and PFTC, the subcustodian bank has a lien on the securities of the fund to the extent permitted by the fund's investment restrictions to cover any advances made by the subcustodian bank for the settlement of securities purchased by the fund. At September 30, 2000, the payable to the subcustodian bank represents the amount due for cash advance for the settlement of a security purchased. For the year ended September 30, 2000, fund expenses were reduced by $66,434 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. Each Trustee of the fund receives an annual Trustee fee, of which $928 has been allocated to the fund, and an additional fee for each Trustees meeting attended. Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral 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 invested in certain Putnam funds until distribution in accordance with the Deferral 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 a Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Compensation of Trustees in the Statement of operations. Accrued pension liability is included in Payable for compensation of Trustees in the Statement of assets and liabilities. Note 3 Purchases and sales of securities During the year ended September 30, 2000, cost of purchases and proceeds from sales of investment securities other than U.S. government obligations and short-term investments aggregated $689,974,000 and $686,736,388, respectively. Purchases and sales of U.S. government obligations aggregated $137,087,972 and $184,092,681, respectively. Note 4 Share repurchase program In November 1994, the Trustees authorized the fund to repurchase up to 1,950,000 of its shares in the open market. Repurchases will only be made when the fund's shares are trading at less than net asset value and at such times and amounts as is believed to be in the best interest of the fund's shareholders. Any repurchases of shares will have the effect of increasing the net asset value per share of remaining shares outstanding. For the year ended September 30, 2000, the fund repurchased no shares. As of September 30, 2000, 570,000 shares have been repurchased since the inception of the program. Note 5 Change in independent accountants (unaudited) Based on the recommendation of the Audit Committee of the fund, the Board of Trustees has determined not to retain PricewaterhouseCoopers LLP as this fund's independent accountant and voted to appoint KPMG LLP for the fund's fiscal year ended September 30, 2000. During the two previous fiscal years, PricewaterhouseCoopers LLP audit reports contained no adverse opinion or disclaimer of opinion; nor were its reports qualified or modified as to uncertainty, audit scope, or accounting principle. Further, in connection with its audits for the two previous fiscal years and through July 24, 2000, there were no disagreements between the fund and PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused it to make reference to the disagreements in its report on the financial statements for such years. FEDERAL TAX INFORMATION (Unaudited) The fund has designated 0.32% of the distributions from net investment income as qualifying for the dividends received deduction for corporations. The Form 1099 you receive in January 2001 will show the tax status of all distributions paid to your account in calendar 2000. RESULTS OF JUNE 1, 2000 SHAREHOLDER MEETING (Unaudited) An annual meeting of shareholders of the fund was held on June 1, 2000. At the meeting, each of the nominees for Trustees was elected, as follows: Votes Votes for withheld Jameson Adkins Baxter 84,781,347 3,061,784 Hans H. Estin 84,680,557 3,162,573 J. A. Hill 84,802,648 3,040,483 Ronald J. Jackson 84,783,977 3,059,154 Paul L. Joskow 84,749,654 3,093,477 Elizabeth T. Kennan 84,728,632 3,114,499 Lawrence J. Lasser 84,771,993 3,071,138 John H. Mullin III 84,756,259 3,086,871 R. E. Patterson 84,799,728 3,043,403 George Putnam, III 84,750,875 3,092,256 A.J.C. Smith 84,747,183 3,095,948 W. Thomas Stephens 84,764,821 3,078,310 W. Nicholas Thorndike 84,676,532 3,166,599 A proposal to ratify the selection of PricewaterhouseCoopers LLP as the independent auditors of your fund was approved as follows: 86,426,707 votes for, and 511,321 votes against, with 905,103 abstentions and broker non-votes. All tabulations are rounded to nearest whole number. At their July, 2000 meeting, the Trustees approved the election of KPMG LLP as the fund's auditors for fiscal year 2000 (see note 5). FUND INFORMATION WEB SITE www.putnaminvestments.com INVESTMENT MANAGER Putnam Investment Management, Inc. One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Retail Management, Inc. One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray INDEPENDENT ACCOUNTANTS KPMG LLP TRUSTEES John A. Hill, Chairman Jameson Adkins Baxter Hans H. Estin Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan Lawrence J. Lasser John H. Mullin III Robert E. Patterson George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike OFFICERS George Putnam, III President Charles E. Porter Executive Vice President Patricia C. Flaherty Senior Vice President John D. Hughes Senior Vice President and Treasurer Lawrence J. Lasser Vice President Gordon H. Silver Vice President Ian C. Ferguson Vice President Brett C. Browchuk Vice President Stephen Oristaglio Vice President David L. Waldman Vice President and Fund Manager Richard A. Monaghan Vice President Richard G. Leibovitch Vice President John R. Verani Vice President Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit our Web site (www.putnaminvestments.com) any time for up-to-date information about the fund's NAV. [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 - --------------------- PRST STD U.S. POSTAGE PAID PUTNAM INVESTMENTS - --------------------- For account balances, economic forecasts, and the latest on Putnam funds, visit www.putnaminvestments.com 074 65457 11/00