Putnam
Adjustable Rate
U.S. Government
Fund
ANNUAL REPORT
October 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
As we reported to you in the fund's April 30, 1996, semiannual report
and in proxy materials that were mailed during the summer, Putnam
Management proposed a merger of Putnam Adjustable Rate U.S. Government
Fund into Putnam Intermediate U.S. Government Income Fund. A majority of
shareholders approved the proposal and the two funds were merged on
November 11, 1996.
Your fund completed its final fiscal year by posting solid total returns
in a market environment marked by alternating periods of turbulence and
strength. Fiscal 1996 began with the same bond market strength that
capped off a successful calendar 1995. Beginning in January and
extending through the first four months of calendar 1996, however,
interest rates rose dramatically across the spectrum of bond maturities.
Then, from May to the end of the fiscal year, rates stayed in a
relatively tight range of 6.7% to 7.2% for the 30-year Treasury bond and
were accompanied by a somewhat surprising lack of activity by the
Federal Reserve Board. In fact, a pronounced market rally in September
was in response to the Fed's decision to keep the target for short-term
bank-lending rates unchanged at 5.25% -- a level it established last
January -- based on evidence of a slowing economy.
Fund Manager Michael Martino currently plans to retain many of the
fund's adjustable-rate mortgage-backed securities (ARMs) that were
transferred into the Putnam Intermediate U.S. Government Income Fund
portfolio. He believes they are well structured with respect to
prepayment risk* and may contain yet-to-be-realized value with regard to
appreciation potential.
Looking ahead, Mike believes that the economy's growth rate is likely to
moderate, perhaps moving back toward a 2% annual level. While he
anticipates that inflation could exhibit some near-term signs of
accelerating, if the pace of economic growth slows in the months ahead,
he maintains that inflation is likely to remain well behaved over the
longer term. Accordingly, while we cannot provide assurances, if Mike's
expectations for the economy prove correct, then the current favorable
environment for bonds may persist for some time.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
December 18, 1996
Footnote reads:
*Mortgage-backed securities are subject to prepayment risk, which is the
risk that an investor's principal will be returned in full at some point
prior to the security's stated maturity date. Such prepayment may cause
an investor's actual rate of return to differ from the expected rate of
return. Prepayment risk is greatest when interest rates are falling,
since mortgage holders rush to refinance, forcing retirement of the
bonds that back their existing mortgages.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Adjustable Rate U.S. Government Fund is designed for
investors seeking attractive current income and preservation of capital
primarily through U.S. adjustable rate mortgage securities.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 10/31/96
Class A Class B
(inception date) (1/5/88) (5/11/92)
NAV POP NAV CDSC
- ------------------------------------------------------------------------
1 year 5.86% 2.40% 5.33% 2.33%
- ------------------------------------------------------------------------
5 years 19.95 16.02 -- --
Annual average 3.70 3.02 -- --
- ------------------------------------------------------------------------
Life of class 57.39 52.31 13.59 13.59
Annual average 5.28 4.89 2.88 2.88
- -----------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/96
Lehman Bros.
Mortgaged-backed Consumer
Securities Index Price Index
- ------------------------------------------------------------------------
1 year 6.92% 2.99%
- ------------------------------------------------------------------------
5 years 40.90 15.21
Annual average 7.09 2.87
- ------------------------------------------------------------------------
Life of class A 120.34 37.18
Annual average 9.35 3.65
- ------------------------------------------------------------------------
Life of class B 36.97 13.48
Annual average 7.23 2.86
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions.
Investment returns and net asset value will fluctuate so that an
investor's shares, when sold, may be worth more or less than their
original cost. POP assumes 3.25% maximum sales charge for class A
shares. CDSC for class B shares assumes the applicable sales charge,
with the maximum being 3%.
[GRAPHIC WORM CHART OMITTED: GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 1/5/88
Starting value (Insert ending Total)
$9,675 Fund's class A shares at POP $15,231
$10,000 Lehman Bros. Mortgage-Backed Securities Index $22,034
$10,000 Consumer Price Index $13,718
(plot points for 10-year total return mountain chart)
Lehman Bros.
Mort.-Backed
Date/year Fund at POP Securities Index CPI
- ---------- ----------- ------------- --------
1/5/88 9,675 10,000 10,000
10/31/88 10,081 11,091 10,416
10/31/89 10,925 12,333 10,884
10/31/90 11,687 13,376 11,568
10/31/91 12,697 15,638 11,906
10/31/92 13,169 16,915 12,288
10/31/93 13,346 18,251 12,626
10/31/94 13,385 17,981 12,955
10/31/95 14,387 20,607 13,319
10/31/96 15,231 22,034 13,718
Footnote reads:
Past performance is no assurance of future results. A $10,000 investment
in the fund's class B shares at inception on 5/11/92 would have been
valued at $11,359 on 10/31/96.
TOTAL RETURN FOR PERIODS ENDED 9/30/96
(most recent calendar quarter)
Class A Class B
(inception date) (1/5/88) (5/11/92)
NAV POP NAV CDSC
- ------------------------------------------------------------------------
1 year 5.65% 2.20% 5.02% 2.03%
- ------------------------------------------------------------------------
5 years 19.73 15.82 -- --
Annual average 3.67 2.98 -- --
- ------------------------------------------------------------------------
Life of class 56.18 51.13 12.66 12.66
Annual average 5.23 4.84 2.75 2.75
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns
and net asset value will fluctuate so that an investor's shares, when
sold, may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/96
Class A Class B
- ------------------------------------------------------------------------
Distributions (number) 12 12
- ------------------------------------------------------------------------
Income $0.570 $0.507
- ------------------------------------------------------------------------
Return of capital 0.030 0.030
- ------------------------------------------------------------------------
Total $0.600 $0.537
- ------------------------------------------------------------------------
Share value: NAV POP NAV
- -----------------------------------------------------------------------
10/31/95 $10.38 $10.73 $10.36
- ------------------------------------------------------------------------
10/31/96 10.37 10.72 10.36
- ------------------------------------------------------------------------
Current return: (end of period)
- ------------------------------------------------------------------------
Current dividend rate1 5.47% 5.29% 4.93%
- ------------------------------------------------------------------------
Current 30-day SEC yield2 5.39 5.21 4.78
- ------------------------------------------------------------------------
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
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon 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.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B shares and assumes redemption at the end of
the period. Your fund's CDSC declines from a 3% maximum during the first
year to 1% during the fourth year. After the fourth year, the CDSC no
longer applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Mortgaged-backed Securities Index reflects performance
of 15- and 30-year fixed-rate securities backed by mortgage pools of the
Government National Mortgage Association, Federal Home Loan Mortgage
Corporation, and Federal National Mortgage Association. The index
assumes reinvestment of all distributions and interest payments and does
not take into account brokerage fees or taxes. Securities in the fund do
not match those in the index and performance of the fund will differ. It
is not possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Report of independent accountants
To the Trustees and Shareholders of
Putnam Adjustable Rate U.S. Government Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Putnam Adjustable Rate U.S. Government Fund (the "fund") at October 31,
1996, and the results of its operations, the changes in its net assets
and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the fund's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
investments owned at October 31, 1996 by correspondence with the
custodian provide a reasonable basis for the opinion expressed above.
As explained in Note 5, effective November 11, 1996, the fund will merge
into Putnam Intermediate U.S. Government Income Fund (the "Intermediate
Fund") through the transfer of all of the assets of the fund to the
Intermediate Fund in exchange for Class A and Class B shares of the
Intermediate Fund and the assumption by the Intermediate Fund of all the
liabilities of the fund.
Price Waterhouse LLP
Boston, Massachusetts
November 9, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
October 31, 1996
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (97.8%) *
PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation
Adjustable Rate Mortgage Participation
certificates (ARMS)
$1,818,823 8.125s, September 1, 2021 1,897,269
443,529 7.761s, February 1, 2018 459,607
54,312 7.72s, March 1, 2019 -+ 55,339
4,134,624 7.676s, March 1, 2019 4,312,951
1,276,742 7.617s, January 1, 2018 1,315,645
1,117,647 7.581s, April 1, 2019 1,156,240
2,332,608 7.578s, March 1, 2019 2,430,299
1,851,850 7.5s, November 1, 2016 1,905,665
3,763,480 7.454s, February 1, 2022 3,893,433
1,339,564 7.329s, April 1, 2019 1,387,293
2,150,595 7.125s, February 1, 2018 2,213,780
2,774,024 6.875s, April 1, 2018 2,872,419
4,198,318 6.375s, April 1, 2017 4,272,461
Federal National Mortgage Association ARMS
203,142 7.95s, January 1, 2017 211,078
197,252 7.69s, February 1, 2027 202,061
1,396,298 7.603s, May 1, 2020 1,456,521
2,049,567 7.556s, December 1, 2019 2,137,965
3,373,162 7.501s, September 1, 2018 3,518,647
31,616 7.275s, May 1, 2016 32,071
2,491,099 7.251s, April 1, 2022 2,597,370
6,239,410 6.975s, April 1, 2028 6,506,520
192,070 6.069s, July 1, 2026 191,290
134,690 6.069s, November 1, 2024 134,144
152,997 Federal National Mortgage Association
pass-through certificates
11 1/4s, October 1, 2010 172,599
Federal National Mortgage Association ARM
pass-through certificates
3,698,334 7.229s, June 1, 2018 3,819,677
4,043 6.08s, February 1, 2016 4,028
14,140,781 Government National Mortgage Association ARM
pass-through certficates
6s, with various due dates to July 20, 2026 14,315,152
U.S. Treasury Notes
10,000,000 8 1/4s, July 15, 1998 10,406,200
1,500,000 7 3/8s, November 15, 1997 1,526,715
2,000,000 6 1/4s, April 30, 2001 2,013,440
- ---------------------------------------------------------------------------------------------
Total Investments (cost $77,173,997)*** 77,417,879
- ---------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $79,145,974.
*** The aggregate identified cost on a tax basis is
$78,585,455, resulting in gross unrealized
depreciation of $1,167,576.
The rates shown on ARMS are the current rates at October 31,1996,
which are subject to change based on the terms of the security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1996
<S> <C>
Assets
- -----------------------------------------------------------------------------------------
Investments in securities, at value (identified
cost $77,173,997) (Note 1) $77,417,879
- -----------------------------------------------------------------------------------------
Cash 903,703
- -----------------------------------------------------------------------------------------
Interest and other receivables 1,233,574
- -----------------------------------------------------------------------------------------
Total assets 79,555,156
Liabilities
- -----------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 170,253
- -----------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 124,150
- -----------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 17,530
- -----------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 142
- -----------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,564
- -----------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 28,138
- -----------------------------------------------------------------------------------------
Payable for postage 32,206
- -----------------------------------------------------------------------------------------
Payable for auditing fee 26,774
- -----------------------------------------------------------------------------------------
Other accrued expenses 8,425
- -----------------------------------------------------------------------------------------
Total liabilities 409,182
- -----------------------------------------------------------------------------------------
Net assets $79,145,974
Represented by
- -----------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $105,738,451
- -----------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (26,836,359)
- -----------------------------------------------------------------------------------------
Net unrealized appreciation of investments 243,882
- -----------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $79,145,974
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($57,655,482 divided by 5,558,261 shares) $10.37
- -----------------------------------------------------------------------------------------
Offering price per class A share (100/96.75 of $10.37)* $10.72
- -----------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($21,490,492 divided by 2,074,917 shares)** $10.36
- -----------------------------------------------------------------------------------------
* On single retail sales of less than $100,000. On sales of $100,000
or more and on group sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1996
<S> <C>
Interest income $6,485,253
- -----------------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 579,797
- -----------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 206,265
- -----------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 8,861
- -----------------------------------------------------------------------------------------------------
Administrative services (Note 2) 5,863
- -----------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 175,265
- -----------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 225,906
- -----------------------------------------------------------------------------------------------------
Reports to shareholders 37,055
- -----------------------------------------------------------------------------------------------------
Registration fees 425
- -----------------------------------------------------------------------------------------------------
Auditing 25,000
- -----------------------------------------------------------------------------------------------------
Legal 4,737
- -----------------------------------------------------------------------------------------------------
Postage 49,052
- -----------------------------------------------------------------------------------------------------
Other 5,984
- -----------------------------------------------------------------------------------------------------
Total expenses 1,324,210
- -----------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (60,660)
- -----------------------------------------------------------------------------------------------------
Net expenses 1,263,550
- -----------------------------------------------------------------------------------------------------
Net investment income 5,221,703
- -----------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (917,185)
- -----------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 979,597
- -----------------------------------------------------------------------------------------------------
Net gain on investments 62,412
- -----------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $5,284,115
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
--------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ---------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------
Net investment income $5,221,703 $6,955,653
- ---------------------------------------------------------------------------------------------------------
Net realized loss on investments (917,185) (472,237)
- ---------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 979,597 1,992,189
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 5,284,115 8,475,605
- ---------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------
From net investment income:
Class A (3,828,074) (4,678,220)
- ---------------------------------------------------------------------------------------------------------
Class B (1,299,833) (1,453,488)
- ---------------------------------------------------------------------------------------------------------
From return of capital:
Class A (223,360) --
- ---------------------------------------------------------------------------------------------------------
Class B (75,843) --
- ---------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (30,198,648) (41,088,335)
- ---------------------------------------------------------------------------------------------------------
Total decrease in net assets (30,341,643) (38,744,438)
- ---------------------------------------------------------------------------------------------------------
Net assets
- ---------------------------------------------------------------------------------------------------------
Beginning of year 109,487,617 148,232,055
- ---------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income
of $0 and $314,913, respectively) $79,145,974 $109,487,617
- ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
Year ended October 31
--------------------------------------------------------
1996 1995 1994
--------------------------------------------------------
Class B
--------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.36 $10.15 $10.53
- ------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------
Net investment income .52 .54 .43
- ------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .02 .14 (.46)
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations .54 .68 (.03)
- ------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ------------------------------------------------------------------------------------------------------------------
Net investment income (.51) (.47) (.33)
- ------------------------------------------------------------------------------------------------------------------
Return of capital (.03) -- (.02)
- ------------------------------------------------------------------------------------------------------------------
Total distributions (.54) (.47) (.35)
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.36 $10.36 $10.15
- ------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (b) 5.33 6.86 (0.31)
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $21,490 $29,375 $38,030
- ------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) 1.81 1.80 1.59
- ------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 4.97 5.20 3.98
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 120.41 178.97 196.00
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
For the Period
May 11, 1992
(commencement
of operations) to
October 31
---------------------------------------------------------
1993 1992 1996
---------------------------------------------------------
Class B Class A
---------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $10.91 $11.15 $10.38
- -------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------
Net investment income .52 .33(a) .59
- -------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.45) (.26) --
- -------------------------------------------------------------------------------------------------------------------
Total from investment operations .07 .07 .59
- -------------------------------------------------------------------------------------------------------------------
Less distributions from:
- -------------------------------------------------------------------------------------------------------------------
Net investment income (.45) (.31) (.57)
- -------------------------------------------------------------------------------------------------------------------
Return of capital -- -- (.03)
- -------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.31) (.60)
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.53 $10.91 $10.37
- -------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(b) 0.66 0.58* 5.86
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $43,851 $42,017 $57,656
- -------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) 1.67 .82(a)* 1.21
- -------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 4.78 2.45(a)* 5.58
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 49.16 237.21 120.41
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
---------------------------------------------------------------
1995 1994 1993
---------------------------------------------------------------
Class A
---------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.17 $10.55 $10.92
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .61 .55 .59
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .13 (.52) (.44)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .74 .03 .15
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (.53) (.39) (.52)
- ---------------------------------------------------------------------------------------------------------------------------
Return of capital -- (.02) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.53) (.41) (.52)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.38 $10.17 $10.55
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (b) 7.48 0.30 1.34
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $80,112 $110,202 $193,510
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) 1.20 .99 1.07
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.78 4.59 5.42
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 178.97 196.00 49.16
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
1992
--------------------------
<S> <C>
- ---------------------------------------------------------------------------------
Net asset value, beginning of period $11.25
- ---------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------
Net investment income .75(a)
- ---------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.34)
- ---------------------------------------------------------------------------------
Total from investment operations .41
- ---------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------
Net investment income (.74)
- ---------------------------------------------------------------------------------
Return of capital --
- ---------------------------------------------------------------------------------
Total distributions (.74)
- ---------------------------------------------------------------------------------
Net asset value, end of period $10.92
- ---------------------------------------------------------------------------------
Total investment return at net asset value (%)(b) 3.72
- ---------------------------------------------------------------------------------
Net assets, end of period (in thousands) $376,353
- ---------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(c) 1.12(a)
- ---------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.44(a)
- ---------------------------------------------------------------------------------
Portfolio turnover (%) 237.21
- ---------------------------------------------------------------------------------
* Not annualized.
(a) Reflects an expense limitation in effect during the period. (Note 1).
Expenses for the period ended October 31, 1992 reflect a reduction
of approximately $0.01 per share for class A and class B shares.
(b) Total investment return assumes dividend reinvestment
and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets for the year ended October 31,
1995 and thereafter includes amounts paid through expense offset
arrangements. Prior period ratios exclude these amounts (Note 2).
</TABLE>
Notes to financial statements
October 31, 1996
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The
fund seeks attractive current income and preservation of capital by
investing primarily in adjustable rate mortgage securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities.
The fund offers both class A and class B 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 may be subject to a contingent deferred sales
charge, if those shares are redeemed within four years of purchase.
Expenses of the fund are borne pro-rata by the holders of both classes
of shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sale price, or, if no sales are reported -- as in the
case of some securities traded over-the-counter -- the last reported bid
price. 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) 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.
C) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
At October 31, 1996, the fund had a capital loss carryover of
approximately $25,425,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
-------------- --------------
$ 483,000 October 31, 1998
799,000 October 31, 1999
7,516,000 October 31, 2001
16,119,000 October 31, 2002
508,000 October 31, 2004
D) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid annually. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences include treatment of losses on wash sale transactions and
paydown gains and losses on mortgage backed securities.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended October 31,
1996, the fund reclassified $408,709 to decrease undistributed net
investment income, with a decrease to accumulated net realized loss on
investment transactions of $408,709. 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 0.60% of the
first $500 million of average net assets, 0.50% of the next $500
million. 0.45% of the next $500 million, and 0.40% of any amount over
$1.5 billion subject, under current law, to reduction in any year by the
amount of certain brokerage commissions and fees (less expenses)
received by affiliates of Putnam Management on the fund's portfolio
transactions.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended October 31, 1996, fund expenses were reduced by
$60,660 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $480 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund
and are invested in certain Putnam funds until distribution in
accordance with the Plan.
The fund has adopted distribution plans (the "Plans") with respect to
its class A shares and class B 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% and
1.00% of the average net assets attributable to class A and class B
shares, respectively. The Trustees have approved payment by the fund at
an annual rate of 0.25% and 0.85% of the average net assets attributable
to class A and class B shares, respectively.
For the year ended October 31, 1996, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $21,123 from the sale of
class A shares and $64,191 in contingent deferred sales charges from
redemptions of class B shares. A deferred sales charge of up to 1% is
assessed on certain redemptions of class A shares. For the year ended
October 31, 1996, Putnam Mutual Funds Corp., acting as underwriter
received $1,189 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended October 31, 1996, purchases and sales of U.S.
Government and agency obligations other than short-term investments
aggregated $102,387,279 and $129,783,101, 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 October 31, 1996 there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended
October 31, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 4,045,546 $41,961,220
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 268,501 2,776,463
- ----------------------------------------------------
4,314,047 44,737,683
Shares
repurchased (6,474,777) (67,084,931)
- ----------------------------------------------------
Net decrease (2,160,730) $(22,347,248)
- ----------------------------------------------------
Year ended
October 31, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 4,270,588 $43,668,758
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 326,061 3,329,547
- ----------------------------------------------------
4,596,649 46,998,305
Shares
repurchased (7,714,371) (78,844,222)
- ----------------------------------------------------
Net decrease (3,117,722) $ (31,845,917)
- ----------------------------------------------------
Year ended
October 31, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 1,043,749 $10,801,127
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 103,515 1,068,947
- ----------------------------------------------------
1,147,264 11,870,074
Shares
repurchased (1,907,091) (19,721,474)
- ----------------------------------------------------
Net decrease (759,827) $(7,851,400)
- ----------------------------------------------------
Year ended
October 31, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 1,322,585 $13,480,112
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 110,183 1,124,255
- ----------------------------------------------------
1,432,768 14,604,367
Shares
repurchased (2,343,549) (23,846,785)
- ----------------------------------------------------
Net decrease (910,781) $ (9,242,418)
- ----------------------------------------------------
Note 5
Merger into Putnam Intermediate U.S. Government Income Fund
On October 31, 1996, the shareholders of the fund approved the transfer
of all of the assets of the fund to Putnam Intermediate U.S. Government
Income Fund (the "Intermediate Fund") in exchange for the shares of the
Intermediate Fund and the assumption by the Intermediate Fund of all of
the liabilities of the fund. The tax-free exchange is effective November 11,
1996.
Federal tax information
(Unaudited)
For the year ended October 31, 1996, a portion of the Fund's
distribution represents a return of capital and is therefore not taxable
to shareholders.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
Results of October 3, 1996 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on October 3,
1996. At the meeting, each of the nominees for Trustees was elected, as
follows:
A proposal of the Agreement and Plan of Reorganization providing for the
transfer of all of the assets of Putnam Adjustable Rate U.S. Government
Fund (the "Adjustable Rate Fund") to Putnam Intermediate U.S. Government
Income Fund (the "Intermediate Fund") in exchange for shares of the
Intermediate Fund and the assumption by the Intermediate Fund of all of
the liabilities of the Adjustable Rate Fund, in liquidation of the
Adjustable Rate Fund was approved as follows: 4,960,644 votes for, and
289,272 votes against, with 272,772 abstentions.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
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 Adjustable
Rate U.S. Government 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.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------------
29195-048/887 12/96
