Putnam
U.S. Government
Income Trust
Item 1. Report to Stockholders:
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The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-03
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
You may have seen media coverage of market timing allegations involving
Putnam Investments. A separate letter has been sent to you detailing the
steps being taken by Putnam Investments to address these matters. In
addition, the Board of Trustees of The Putnam Funds is conducting an
independent investigation of these issues. When that investigation is
complete, we will report to you on the steps we are taking to make sure
that nothing like this happens in the future. We will, of course, ensure
that your fund is fully compensated for any losses resulting from
improper trading activity at Putnam. We appreciate your loyalty and want
you to know that we intend to restore full confidence in Putnam, an
organization that aspires to the highest ethical and business standards.
The balance of this report focuses on the performance of your fund. We
are pleased to bring you this report on the positive performance at net
asset value of Putnam U.S. Government Income Trust for the fiscal year
ended September 30, 2003. The fund slightly underperformed its Lipper
category average during the period, and underperformed its benchmark
index. The details are shown on the facing page.
Strong performance during the fiscal year's third quarter was almost
entirely responsible for the positive results at net asset value at the
end of the period. We also believe it is important to point out that the
management team had positioned the portfolio defensively in response to
the uncertainties present in the challenging market environment, and
this positioning contributed to the outcome for the full fiscal year.
Unfortunately, as interest rates continued their decline and mortgage
repayments remained high, it became necessary to adjust the fund's
dividend. Details are on page 5.
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 19, 2003
Report from Fund Management
Fund highlights
* Putnam U.S. Government Income Trust class A shares returned 2.52% at
net asset value and -2.35% at public offering price for the 12 months
ended September 30, 2003.
* Due to its emphasis on defensive positioning, the fund underperformed
its benchmark, the Lehman GNMA Index, which returned 3.25% during the
same period.
* The fund slightly underperformed the average for its Lipper category,
GNMA Funds, which was 2.62%.
* The fund's dividend was reduced three times over the course of the
fiscal year. See page 5 for more details.
* Effective January 21, 2003, the fund's investment policy was modified.
See page 5 for more details.
* See the Performance Summary beginning on page 7 for complete fund
performance, comparative performance, and Lipper data.
Performance commentary
During much of the fiscal year, we were concerned about the possibility
of rising interest rates and their impact on the portfolio's value.
Since yields move in the opposite direction of bond prices, an important
part of our positioning strategy for the period was to reduce the fund's
sensitivity to changes in interest rates relative to its benchmark and
peer group. It appears that we were a bit early with this approach, as
rates initially continued to decline. However, from mid June through
late August, the bond market encountered a significant correction, with
rates on the rise and bond prices falling. With its defensive
positioning, your fund enjoyed significant outperformance relative to
the index and the Lipper group during the third quarter. However, these
results were not strong enough to offset the decline experienced during
the first nine months of the fund's fiscal year.
FUND PROFILE
Putnam U.S. Government Income Trust seeks current income by investing in
U.S. government securities, such as Government National Mortgage
Association certificates (Ginnie Maes), Federal National Mortgage
Association certificates (Fannie Maes), Federal Home Loan Mortgage
Corporation certificates (Freddie Macs), and U.S. Treasury securities.
While not guaranteed by the U.S. government, Ginnie Maes, Fannie Maes,
and Freddie Macs are generally high quality and typically provide higher
yields than Treasury securities of similar maturities. The fund is
designed primarily for investors seeking income, but it can also lower
volatility in a well-diversified portfolio.
Market overview
There was a sharp change in market sentiment during the fiscal year.
Early on, investors were concerned about the direction of the U.S.
economy and favored the relative security offered by U.S. government and
mortgage-backed securities. However, during the summer months, the
atmosphere grew more optimistic. When it became apparent that most
investors anticipated stronger growth and, therefore, higher interest
rates, demand for these securities dropped off dramatically as investors
re-entered the equity market. In addition, the U.S. dollar weakened,
leading to curtailed demand from overseas investors. During the second
half of the fiscal year, another development further weakened prospects
for U.S. government securities. Although the U.S. government had been
buying back Treasury securities with the surplus it had enjoyed for a
few years, it now started to issue more Treasuries in order to finance
deficit spending. This increased supply coincided with the marked
drop-off in demand, resulting in a bond market characterized by rapidly
rising interest rates and sharply falling bond prices. In a short and
dramatic reversal, yields on Treasury securities fell to historically
low levels in June, only to rise sharply through the end of August. In
September, conditions stabilized somewhat, and yields leveled off or
fell somewhat thereafter.
Against this backdrop, mortgage-backed securities lagged Treasuries over
the fiscal year. Earlier on, as interest rates were on the decline,
mortgage-backed securities suffered somewhat from prepayment risk -- the
risk that homeowners will refinance their mortgages, leaving principal
repayments that must be reinvested at lower rates. When rates began to
climb, prepayment risk dissipated. However, when interest rates rise,
another type of risk comes into play. This so-called extension risk
means that holders of these securities are unable to take advantage of
the current higher rates because their investments are locked in at an
older, lower rate. Thus, mortgage-backed securities can become
increasingly vulnerable to sharp price declines as rates go up.
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MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 9/30/03
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Bonds
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Lehman GNMA Index (Government National Mortgage Association
certificates) 3.25%
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Lehman Aggregate Bond Index (broad bond market) 5.41%
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Lehman Municipal Bond Index 3.90%
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CSFB High Yield Index 28.05%
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Equities
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S&P 500 Index (broad stock market) 24.40%
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Russell 1000 Growth Index (large-company growth stocks) 25.92%
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Russell 1000 Value Index (large-company value stocks) 24.37%
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These indexes provide an overview of performance in different market
sectors for the 12 months ended 9/30/03.
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Strategy overview
Coming into the fiscal year, we believed that positive returns would be
dictated more by interest income than by significant capital
appreciation. We felt that interest rates would rise, and therefore kept
the portfolio's duration -- a measure of interest rate sensitivity --
relatively short through August in order to preserve capital. To achieve
this, we invested a significant amount of the portfolio in Treasury
securities and short-term money market investments that were less
sensitive to changes in interest rates. In the mortgage-backed arena, we
looked to underweight those securities that were more likely to be
prepaid in a falling-rate environment, and sought to unearth value among
lower-coupon Ginnie Maes, Fannie Maes, and Freddie Macs. We also focused
on collateralized mortgage obligations (CMOs) that we believed provided
appealing relative yields and little relative risk.
When rates moved dramatically lower from March to June, we lowered the
duration of the portfolio further, and invested the mortgage-backed
portion in those securities we believed likely to be less affected by
rising rates. To that end, we underweighted recently issued GNMAs and
those with coupon rates significantly higher than those generally found
in the market.
Once interest rates started to rise, we sought to protect the portfolio
from both the negative effects of rising interest rates and increased
extension risk in the mortgage market. When the yield on the 10-year
Treasury note rose to 4.25% at the end of August, we moved the portfolio
to a less defensive positioning. While we adjusted this somewhat as the
market rallied in September, we remained committed to deriving returns
primarily from the income provided by portfolio holdings. As a result,
the end of the fiscal year found your fund heavily invested in
mortgage-backed securities, with little to no investments in Treasury
securities or short-term cash equivalents.
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
3/31/03 9/30/03
Average effective
maturity in years 1.6 3.4
Duration in years 1.1 1.9
Footnote reads:
This chart compares changes in the fund's duration (a measure of its
sensitivity to interest-rate changes) and its average effective maturity
(a weighted average of the holdings' maturities).
Average effective maturity also takes into account put and call
features, where applicable, and reflects prepayments for mortgage-backed
securities over the six months ended 9/30/03.
How sector allocations affected performance
The period brought with it significant volatility, and thus numerous
challenges. In the midst of such uncertainty, we sought to protect the
fund's principal while at the same time looking to garner high current
income. Our decision to insulate the fund against possible interest-rate
increases dampened performance until rates started to rise significantly
from June 13 through August 31. In that timeframe, a defensive duration
proved helpful.
During the first half of the fiscal year, our decision to bring the fund
down from its target allocation of 100% mortgage-backed securities -- in
order to position it defensively by investing in Treasury bills and
other short-term cash equivalents -- also held back returns. This was
the case because mortgage-backed securities performed better than
Treasuries during that six-month period. Overall, while mortgage-backed
securities offered solid absolute returns during the past 12 months,
they did not perform as well as Treasuries. Mortgages tend to outperform
during stable interest-rate environments, and the past year was anything
but stable. Our move back into a high mortgage stake may have held us
back a bit during the last six months of the period. However, being
ready to handle the volatility that arose helped propel your fund to
very strong relative performance during the third quarter of 2003.
Within the portfolio's mortgage-backed allocation, we continued our
focus on Ginnie Maes (issued by the Government National Mortgage
Association), your fund's traditional investments. However, as of late
January, an investment policy change enabled us to invest in Freddie
Macs (issued by the Federal Home Loan Mortgage Corporation) and Fannie
Maes (issued by the Federal National Mortgage Association), two other
types of mortgage-backed securities. These securities differ from Ginnie
Maes in that they are backed only by the credit of the issuing
government agency. Ginnie Maes, on the other hand, are backed by the
full faith and credit of the U.S. government. Segments of the mortgage
market that we currently favor include 30-year Ginnie Maes and 30-year
Fannie Maes with 6.5% coupons. We chose investments within these sectors
by issuer or coupon rate by analyzing relative valuation and yields.
[GRAPHIC OMITTED: horizontal bar chart PORTFOLIO COMPOSITION AS OF 9/30/03]
PORTFOLIO COMPOSITION AS OF 9/30/03
Collateralized
mortgage obligations 8.4%
Short-term
investments 12.2%
Fannie Mae 19.4%
U.S. government and
agency obligations Ginnie Mae 68.6%
Freddie Mac 1.4%
Footnote reads:
Weightings are shown as a percentage of net asset value. Holdings will
vary over time. A portion of short-term investments reflect amounts used
to settle TBA purchase commitments.
Another investment that proved particularly useful during the fiscal
year was a type of collateralized mortgage obligation (CMO) known as
interest-only strips. Issued by the Federal Home Loan Mortgage
Corporation, Government National Mortgage Association, or private
issuers, CMOs are high-quality investments that typically offer slightly
lower yields than conventional mortgage-backed securities but provide a
more stable stream of income. Payment sources from these securities are
limited to the interest paid on mortgages, a characteristic that enabled
us to use them as a hedge against rising rates and extension risk.
Please note that all holdings discussed in this report are subject to
review in accordance with the fund's investment strategy and may vary in
the future.
OF SPECIAL INTEREST
Falling interest rates through much of the fiscal year made it necessary
to decrease the fund's dividend. The fund's dividend for class A shares
was lowered from $0.040 to $0.033 per share in January 2003; from $0.033
to $0.027 per share in March 2003; and from $0.027 to $0.018 per share
in July 2003. Other share classes experienced similar reductions.
On January 21, 2003, the fund's investment policies were modified to
allow investments in mortgage-backed securities issued by Fannie Mae and
Freddie Mac. Mortgage securities issued by these two agencies account
for 78% of the mortgage-backed universe. These changes will allow the
fund to take fuller advantage of fixed-income opportunities,
particularly in the mortgage-backed area.
The fund's management team
The fund is managed by the Putnam Core Fixed-Income Team. The members of
the team are Kevin Cronin (Portfolio Leader), Rob Bloemker (Portfolio
Member), Carl Bell, Andrea Burke, Steve Horner, D. William Kohli,
Michael Salm, John Van Tassel, and David Waldman.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
We expect the economy to continue to grow and believe that the pace of
that growth is likely to quicken. Up to this point, this recovery has
been a consumer-led one. We, along with the rest of the market, will be
looking closely to see if businesses will help stimulate growth by
increasing capital spending. Investors will likely look very closely at
the employment market for signs of improvement. Economies abroad --
particularly in Asia -- are currently growing at a
faster-than-anticipated pace. This improvement could prove to be helpful
to the U.S. economy as well. Headwinds that the economy currently faces
include a high current account deficit, diminished consumer confidence,
and the impact of a weaker dollar.
We do not expect interest rates to decline or rise dramatically.
Therefore, we believe that returns in the bond market during the next 6
to 12 months will largely be driven by interest income rather than
capital appreciation or depreciation. As a result, we have worked to
maximize the current income of the fund by investing in the types of
securities that yield the most within the fund's investment universe,
namely mortgage-backed securities. Our stance currently is neither
defensive nor aggressive, but neutral. We will continue to seek
opportunities based on our analysis of relative valuation and yields.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Mutual funds that
invest in these government securities are not guaranteed.
Mortgage-backed securities are subject to prepayment risk.
Performance summary
This section provides information about your fund's performance during
its fiscal year, which ended September 30, 2003. Performance should
always be considered in light of a fund's investment strategy. Past
performance does not indicate future results. More recent returns may be
less or more than those shown. Investment return and principal value
will fluctuate and you may have a gain or a loss when you sell your
shares. A profile of your fund's strategy appears on the first page of
this report. See page 9 for definitions of some terms used in this
section.
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TOTAL RETURN FOR PERIODS ENDED 9/30/03
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Class A Class B Class C Class M Class R
(inception dates) (2/8/84) (4/27/92) (7/26/99) (2/6/95) (1/21/03)
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NAV POP NAV CDSC NAV CDSC NAV POP NAV
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1 year 2.52% -2.35% 1.67% -3.32% 1.70% 0.70% 2.25% -1.05% 2.32%
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5 years 29.57 23.43 24.74 22.76 24.77 24.77 27.98 23.78 27.99
Annual average 5.32 4.30 4.52 4.19 4.53 4.53 5.06 4.36 5.06
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10 years 77.41 68.97 64.26 64.26 64.56 64.56 72.83 67.21 73.13
Annual average 5.90 5.39 5.09 5.09 5.11 5.11 5.62 5.27 5.64
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Annual average
(life of fund) 7.82 7.56 6.92 6.92 7.01 7.01 7.46 7.28 7.56
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Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for class A and M
shares reflect a sales charge of 4.75% and 3.25%, respectively. Class B
share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the
first year that is eliminated thereafter. Class R share returns have no
initial sales charge or CDSC. Performance for class B, C, M, and R
shares before their inception is derived from the historical performance
of class A shares, adjusted for the applicable sales charge (or CDSC)
and higher operating expenses for such shares.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/03
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Lipper
Lehman GNMA Funds
GNMA Index category average*
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1 year 3.25% 2.62%
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5 years 36.83 31.31
Annual average 6.47 5.59
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10 years 95.11 80.05
Annual average 6.91 6.05
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Annual average
(life of fund) 9.46 8.40
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Index and Lipper results should be compared to fund performance at net
asset value.
* Over the 1-, 5-, and 10-year periods ended 9/30/03, there were 66, 46,
and 25 funds, respectively, in this Lipper category.
[GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT]
CHANGE IN THE VALUE OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment, 9/30/93 to 9/30/03
Fund's class A Lehman
Date shares at POP GNMA Index
9/30/93 9,425 10,000
9/30/94 9,301 9,878
9/30/95 10,475 11,268
9/30/96 10,927 11,931
9/30/97 11,992 13,156
9/30/98 13,041 14,259
9/30/99 13,141 14,600
9/30/00 13,986 15,725
9/30/01 15,489 17,599
9/30/02 16,482 18,896
9/30/03 $16,897 $19,511
Footnote reads:
Past performance does not indicate future results. At the end of the
same time period, a $10,000 investment in the fund's class B and class C
shares would have been valued at $16,426 and $16,456, respectively, and
no contingent deferred sales charges would apply. A $10,000 investment
in the fund's class M shares would have been valued at $17,283 ($16,721
at public offering price). A $10,000 investment in the fund's class R
shares would have been valued at $17,313. See first page of performance
section for performance calculation method.
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PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 9/30/03
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Class A Class B Class C Class M Class R
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Distributions (number) 12 12 12 12 8
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Income $0.348 $0.247 $0.251 $0.312 $0.180
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Capital gains -- -- -- -- --
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Total $0.348 $0.247 $0.251 $0.312 $0.180
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Share value: NAV POP NAV NAV NAV POP NAV
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9/30/02 $13.22 $13.88 $13.15 $13.20 $13.20 $13.64 --
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1/21/033 -- -- -- -- -- -- $13.22
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9/30/03 13.20 13.86 13.12 13.17 13.18 13.62 13.20
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Current return
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Current dividend rate 1 1.64% 1.56% 0.82% 0.82% 1.37% 1.32% 1.45%
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Current 30-day
SEC yield 2 1.66 1.58 0.92 0.92 1.41 1.38 1.41
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1 Most recent distribution, excluding capital gains, annualized and
divided by NAV or POP at end of period.
2 Based only on investment income, calculated using SEC guidelines.
3 Inception date of class R shares.
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 price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. The
NAV is calculated by dividing the net value of all the fund's assets by
the number of outstanding shares.
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 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth year,
the CDSC no longer applies. The CDSC for class C shares is 1% for one
year after purchase.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without an initial sales charge).
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption (except on certain
redemptions of shares bought without an initial sales charge).
Class R shares are not subject to an initial sales charges or CDSC and
are available only to certain defined contribution plans.
Comparative indexes
Credit Suisse First Boston (CSFB) High Yield Index is an unmanaged index
of high-yield debt securities.
Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.
Lehman GNMA Index is an unmanaged index of Government National Mortgage
Association bonds.
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Russell 1000 Growth Index is an unmanaged index of those companies in
the Russell 1000 Index chosen for their growth orientation.
Russell 1000 Value Index is an unmanaged index of those companies in the
Russell 1000 Index chosen for their value orientation.
S&P 500 Index is an unmanaged index of common stock performance.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper Inc. is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
Putnam's policy on confidentiality
In order to conduct business with our shareholders, we must obtain
certain personal information such as account holders' addresses,
telephone numbers, Social Security numbers, and the names of their
financial advisors. We use this information to assign an account number
and to help us maintain accurate records of transactions and account
balances.
It is our policy to protect the confidentiality of your information,
whether or not you currently own shares of our funds, and in particular,
not to sell information about you or your accounts to outside marketing
firms. We have safeguards in place designed to prevent unauthorized
access to our computer systems and procedures to protect personal
information from unauthorized use.
Under certain circumstances, we share this information with outside
vendors who provide services to us, such as mailing and proxy
solicitation. In those cases, the service providers enter into
confidentiality agreements with us, and we provide only the information
necessary to process transactions and perform other services related to
your account. We may also share this information with our Putnam
affiliates to service your account or provide you with information about
other Putnam products or services. It is also our policy to share
account information with your financial advisor, if you've listed one on
your Putnam account.
If you would like clarification about our confidentiality policies or
have any questions or concerns, please don't hesitate to contact us at
1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or
Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
preceded by the Independent Auditors' Report, 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.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or
loss the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal year.
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.
Independent auditors' report
The Board of Trustees and Shareholders
Putnam U.S. Government Income Trust:
We have audited the accompanying statement of assets and liabilities of
Putnam U.S. Government Income Trust, including the fund's portfolio, as
of September 30, 2003, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the
two years in the period then ended and the financial highlights for each
of the four years in the period 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 audits.
We conducted our audits 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, 2003 by correspondence with the custodian and brokers
or by other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam U.S. Government Income Trust as of
September 30, 2003, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the four
years in the period then ended in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Boston, Massachusetts
November 17, 2003
The fund's portfolio
September 30, 2003
U.S. government and agency obligations (94.9%) (a)
Principal amount Value
U.S. Government and Agency Mortgage Obligations (94.9%)
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$38,806,426 Federal Home Loan Mortgage Corporation, 4 1/2s,
August 1, 2018 $39,168,720
Federal National Mortgage Association
Pass-Through Certificates
147,027,356 7s, with due dates from November 1,
2025 to March 1, 2033 155,595,703
410,533,000 6 1/2s, TBA, October 1, 2032 427,852,566
5,048,163 6s, with due dates from September 1,
2017 to November 1, 2017 5,269,639
14,099,826 5s, with due dates from August 1,
2018 to August 1, 2033 14,459,958
73,938,796 5s, with due dates from October 1,
2016 to July 1, 2018 75,785,723
Government National Mortgage
Association
37,432 13 1/2s, with due dates from March
15, 2011 to April 15, 2011 43,753
9,386 12 3/4s, November 15, 2013 10,939
14,882 12 1/2s, June 15, 2010 17,064
80,861 12 1/4s, with due dates from
September 15, 2013 to February 15,
2014 93,467
155,463 10s, with due dates from October 15,
2009 to May 15, 2010 172,194
Government National Mortgage
Association Graduated Payment
Mortgages
11,150 13 3/4s, November 20, 2014 13,118
20,025 13 1/4s, December 20, 2014 23,390
46,300 12 3/4s, with due dates from June
20, 2014 to February 20, 2015 53,696
Government National Mortgage
Association Pass-Through
Certificates
484 13 1/4s, October 15, 2014 569
26,849 13s, March 15, 2015 31,570
36,521 12 3/4s, with due dates from October
15, 2013 to May 15, 2014 42,562
154,028 12 1/4s, with due dates from
December 20, 2013 to January 15,
2015 177,701
250,238 11 1/4s, with due dates from
September 15, 2015 to January 15,
2016 286,408
39,671 10 3/4s, with due dates from January
15, 2016 to February 15, 2016 45,095
8,656 10 1/4s, April 15, 2016 9,755
157,634 9 1/4s, with due dates from April
15, 2016 to May 15, 2016 174,038
44 9s, January 15, 2005 45
1,138,969 8 1/2s, with due dates from December
15, 2004 to December 15, 2019 1,216,980
5,491 8 1/2s, with due dates from
September 15, 2004 to November 15,
2004 5,634
140,793,416 8s, with due dates from May 15, 2024
to August 15, 2032 152,202,225
6,919,946 8s, with due dates from January 15,
2008 to November 15, 2009 7,425,527
122,299,616 7 1/2s, with due dates from October
15, 2021 to November 15, 2032 131,411,901
86,836 7 1/2s, with due dates from March
15, 2017 to June 15, 2017 93,728
157,243,679 7s, with due dates from March 15,
2022 to May 15, 2032 167,609,983
5,993,925 7s, with due dates from October 15,
2007 to August 15, 2012 6,396,447
697,052,749 6 1/2s, with due dates from May 15,
2023 to September 15, 2033 732,575,620
3,651,197 6s, with due dates from November 15,
2023 to January 15, 2033 2,345,021
668,637,874 5s, with due dates from January 15,
2033 to September 15, 2033 670,504,507
--------------
Total U.S. government and agency obligations $2,591,115,246
(cost $2,541,705,427)
Collateralized mortgage obligations (8.4%) (a)
Principal amount Value
- -------------------------------------------------------------------------------
Federal National Mortgage
Association
$1,414,646 Ser. 02-26, Class A2, 7 1/2s, 2048 $1,555,226
15,621,060 Ser. 02-T18, Class A4, 7 1/2s, 2042 17,208,884
59,538 Ser. 02-W6, Class 2A, 7 1/2s, 2042 65,590
20,824,427 Ser. 03-W2, Class 1A3, 7 1/2s, 2042 22,941,155
17,335,547 Ser. 03-W3, Class 1A3, 7 1/2s, 2042 19,097,601
11,142,791 Ser. 01-T10, Class A2, 7 1/2s, 2041 12,275,416
664,079 Ser. 01-T12, Class A2, 7 1/2s, 2041 731,580
5,897,298 Ser. 01-T8, Class A1, 7 1/2s, 2041 6,496,737
27,439,238 Ser. 01-T7, Class A1, 7 1/2s, 2041 30,228,338
3,942,181 Ser. 01-T3, Class A1, 7 1/2s, 2040 4,342,880
11,589,444 Ser. 01-T1, Class A1, 7 1/2s, 2040 12,767,469
4,632,440 Ser. 99-T2, Class A1, 7 1/2s, 2039 5,103,311
1,107,616 Ser. 02-33, Class A2, 7 1/2s, 2032 1,220,201
11,548,613 Ser. 02-T1, Class A3, 7 1/2s, 2031 12,722,488
2,493,417 Ser. 00-T6, Class A1, 7 1/2s, 2030 2,746,864
393,770 Ser. 02-W7, Class A5, 7 1/2s, 2029 433,795
11,492,092 Ser. 01-T4, Class A1, 7 1/2s, 2028 12,660,222
970,918 Ser. 02-W3, Class A5, 7 1/2s, 2028 1,069,608
16,400,022 Ser. 03-W10, Class 1A1, 1.701s, 2032 16,376,959
56,904,327 Ser. 329, Class 2, IO, 5.5s, 2033 11,914,628
43,444,765 Ser. 332, Class 2, IO, 6s, 2033 8,118,958
Federal Home Loan Mortgage Corp.
Structured Pass-Through Securities
25,945,621 Ser. T-58, Class 4A, 7 1/2s, 2043 28,528,021
330,408 Ser. T-42, Class A5, 7 1/2s, 2042 363,993
--------------
Total Collateralized mortgage
obligations (cost $228,012,918) $228,969,924
Short-term investments (12.2%) (a)
Principal amount Value
- -------------------------------------------------------------------------------
$50,000,000 Federal Home Loan Mortgage Corp. for
an effective yield of 1.09%,
November 25, 2003 $49,918,333
100,000,000 Federal Home Loan Mortgage Corp. for an
effective yield of 1.13%, November 12, 2003 99,879,833
50,000,000 Federal Home Loan Mortgage Corp. for
an effective yield of 1.03%, October
31, 2003 49,958,334
72,769,000 Interest in $263,000,000 tri-party
repurchase agreement dated September
30, 2003 with Goldman Sachs & Co.
due October 1, 2003 with respect to
various U.S. Government obligations
-- maturity value of $72,771,183 for
an effective yield of 1.08% 72,769,000
61,180,000 Interest in $357,000,000 tri-party
repurchase agreement dated September
30, 2003 with UBS Securities, LLC
due October 1, 2003 with respect to
various U.S. Government obligations
-- maturity value of $61,181,835 for
an effective yield of 1.08% 61,180,000
--------------
Total Short-term investments (cost $333,705,500) $333,705,500
- -------------------------------------------------------------------------------
Total Investments (cost $3,103,423,845) $3,153,790,670
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $2,730,700,264.
TBA after the name of a security represents to be announced securities
(Note 1).
TBA sales commitments at September 30, 2003
(proceeds receivable $149,726,251)
Principal Settlement
Agency amount date Value
- -------------------------------------------------------------------------------
FNMA, 6 1/2s, October 1, 2033 $144,000,000 10/15/03 $150,075,072
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities
September 30, 2003
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$3,103,423,845) (Note 1) $3,153,790,670
- -------------------------------------------------------------------------------
Cash 54,112,074
- -------------------------------------------------------------------------------
Interest and other receivables 13,333,270
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,331,108
- -------------------------------------------------------------------------------
Receivable for securities sold 229,036,717
- -------------------------------------------------------------------------------
Total assets 3,451,603,839
Liabilities
- -------------------------------------------------------------------------------
Payable for securities purchased 555,759,085
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 9,168,388
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 3,166,018
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 564,178
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 197,833
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,554
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,845,759
- -------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable
$149,726,251) (Note 1) 150,075,072
- -------------------------------------------------------------------------------
Other accrued expenses 124,688
- -------------------------------------------------------------------------------
Total liabilities 720,903,575
- -------------------------------------------------------------------------------
Net assets $2,730,700,264
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $2,795,877,869
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 385,639
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (115,581,248)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 50,018,004
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $2,730,700,264
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($2,022,133,583 divided by 153,248,992 shares) $13.20
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $13.20)* $13.86
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($529,385,885 divided by 40,342,280 shares)** $13.12
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($53,235,479 divided by 4,043,535 shares)** $13.17
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($73,354,677 divided by 5,567,578 shares) $13.18
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $13.18)* $13.62
- -------------------------------------------------------------------------------
Net asset value, offering price and redemption price per
class R share ($1,012 divided by 77 shares) $13.20
- -------------------------------------------------------------------------------
Net asset value, offering price and redemption price per
- -------------------------------------------------------------------------------
class Y share ($52,589,628 divided by 3,991,098 shares) $13.18
- -------------------------------------------------------------------------------
* 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.
Statement of operations
Year ended September 30, 2003
- -------------------------------------------------------------------------------
Interest income: $95,500,530
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 13,766,124
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 4,552,892
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 77,838
- -------------------------------------------------------------------------------
Administrative services (Note 2) 41,903
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 5,709,580
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 6,582,236
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 601,683
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 620,697
- -------------------------------------------------------------------------------
Distribution fees -- Class R (Note 2) 3
- -------------------------------------------------------------------------------
Other 1,555,912
- -------------------------------------------------------------------------------
Total expenses 33,508,868
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (303,880)
- -------------------------------------------------------------------------------
Net expenses 33,204,988
- -------------------------------------------------------------------------------
Net investment income 62,295,542
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 46,234,630
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (39,553,805)
- -------------------------------------------------------------------------------
Net gain on investments 6,680,825
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $68,976,367
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Year ended
September 30
- -------------------------------------------------------------------------------
Increase (decrease) in net assets 2003 2002
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $62,295,542 $139,075,597
- -------------------------------------------------------------------------------
Net realized gain on investments 46,234,630 51,600,625
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments (39,553,805) (6,033,973)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 68,976,367 184,642,249
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From net investment income
- -------------------------------------------------------------------------------
Class A (61,194,325) (119,921,444)
- -------------------------------------------------------------------------------
Class B (12,773,580) (24,407,970)
- -------------------------------------------------------------------------------
Class C (1,145,143) (1,644,171)
- -------------------------------------------------------------------------------
Class M (3,223,065) (6,849,443)
- -------------------------------------------------------------------------------
Class R (14) --
- -------------------------------------------------------------------------------
Class Y (1,748,493) (2,756,244)
- -------------------------------------------------------------------------------
Increase (decrease) from capital share
transactions (Note 4) (679,849,720) 420,909,498
- -------------------------------------------------------------------------------
Total increase (decrease) in net assets (690,957,973) 449,972,475
Net assets
- -------------------------------------------------------------------------------
Beginning of year 3,421,658,237 2,971,685,762
- -------------------------------------------------------------------------------
End of year (including undistributed net
investment income of $385,639 and $--,
respectively) $2,730,700,264 $3,421,658,237
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- -------------------------------------------------------------------------------------------------------------
Per-share Year ended September 30
operating performance 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.22 $13.10 $12.55 $12.57 $13.28
- -------------------------------------------------------------------------------------------------------------
Investment operations:
- -------------------------------------------------------------------------------------------------------------
Net investment income (a) .28 .62 .75 .79 .76
- -------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .05 .19 .56 (.02) (.66)
- -------------------------------------------------------------------------------------------------------------
Total from
investment operations .33 .81 1.31 .77 .10
- -------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------
From net
investment income (.35) (.69) (.76) (.79) (.76)
- -------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (e) (.05)
- -------------------------------------------------------------------------------------------------------------
Total distributions (.35) (.69) (.76) (.79) (.81)
- -------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.20 $13.22 $13.10 $12.55 $12.57
- -------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 2.52 6.41 10.74 6.43 .76
- -------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,022,134 $2,432,891 $2,256,218 $1,929,653 $1,986,980
- -------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .88 .85 .86 .87 .85
- -------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.12 4.74 5.87 6.40 5.94
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 331.95 (d) 277.25 (d) 156.53 (d) 133.29 123.04
- -------------------------------------------------------------------------------------------------------------
(a) Per share net investment income has been determined on the basis of
the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Portfolio turnover excludes certain treasury note transactions
executed in connection with a short-term trading strategy.
(e) Amount represents less than $0.01 per share.
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS B
- -------------------------------------------------------------------------------------------------------------
Per-share Year ended September 30
operating performance 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.15 $13.04 $12.49 $12.51 $13.22
- -------------------------------------------------------------------------------------------------------------
Investment operations:
- -------------------------------------------------------------------------------------------------------------
Net investment income (a) .18 .51 .65 .70 .67
- -------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .04 .20 .56 (.02) (.67)
- -------------------------------------------------------------------------------------------------------------
Total from
investment operations .22 .71 1.21 .68 --
- -------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------
From net
investment income (.25) (.60) (.66) (.70) (.67)
- -------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (e) (.04)
- -------------------------------------------------------------------------------------------------------------
Total distributions (.25) (.60) (.66) (.70) (.71)
- -------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.12 $13.15 $13.04 $12.49 $12.51
- -------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 1.67 5.59 9.98 5.65 .01
- -------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $529,386 $691,467 $500,366 $574,087 $1,082,048
- -------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.63 1.60 1.61 1.62 1.60
- -------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.38 3.96 5.15 5.64 5.18
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 331.95 (d) 277.25 (d) 156.53 (d) 133.29 123.04
- -------------------------------------------------------------------------------------------------------------
(a) Per share net investment income has been determined on the basis of
the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Portfolio turnover excludes certain treasury note transactions
executed in connection with a short-term trading strategy.
(e) Amount represents less than $0.01 per share.
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS C
- -------------------------------------------------------------------------------------------------------------
For the
period
July 26,
1999+ to
Per-share Year ended September 30 Sept. 30
operating performance 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.20 $13.08 $12.53 $12.55 $12.54
- -------------------------------------------------------------------------------------------------------------
Investment operations:
- -------------------------------------------------------------------------------------------------------------
Net investment income (a) .18 .50 .64 .70 .12
- -------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .04 .21 .58 (.02) .02
- -------------------------------------------------------------------------------------------------------------
Total from
investment operations .22 .71 1.22 .68 .14
- -------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------
From net
investment income (.25) (.59) (.67) (.70) (.12)
- -------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (e) (.01)
- -------------------------------------------------------------------------------------------------------------
Total distributions (.25) (.59) (.67) (.70) (.13)
- -------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.17 $13.20 $13.08 $12.53 $12.55
- -------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 1.70 5.64 9.99 5.67 1.12*
- -------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $53,235 $54,880 $27,512 $7,329 $2,577
- -------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.63 1.60 1.61 1.62 .29*
- -------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.34 3.93 5.07 5.67 .99*
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 331.95 (d) 277.25 (d) 156.53 (d) 133.29 123.04
- -------------------------------------------------------------------------------------------------------------
+ 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 period.
(b) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Portfolio turnover excludes certain treasury note transactions
executed in connection with a short-term trading strategy.
(e) Amount represents less than $0.01 per share.
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS M
- -------------------------------------------------------------------------------------------------------------
Per-share Year ended September 30
operating performance 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.20 $13.08 $12.52 $12.55 $13.25
- -------------------------------------------------------------------------------------------------------------
Investment operations:
- -------------------------------------------------------------------------------------------------------------
Net investment income (a) .27 .57 .71 .76 .72
- -------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .02 .21 .57 (.03) (.66)
- -------------------------------------------------------------------------------------------------------------
Total from
investment operations .29 .78 1.28 .73 .06
- -------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------
From net
investment income (.31) (.66) (.72) (.76) (.72)
- -------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (e) (.04)
- -------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.66) (.72) (.76) (.76)
- -------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.18 $13.20 $13.08 $12.52 $12.55
- -------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 2.25 6.14 10.56 6.09 .56
- -------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $73,355 $171,975 $144,285 $95,090 $133,362
- -------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.13 1.10 1.11 1.12 1.10
- -------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.03 4.47 5.60 6.15 5.68
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 331.95 (d) 277.25 (d) 156.53 (d) 133.29 123.04
- -------------------------------------------------------------------------------------------------------------
(a) Per share net investment income has been determined on the basis of
the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Portfolio turnover excludes certain treasury note transactions
executed in connection with a short-term trading strategy.
(e) Amount represents less than $0.01 per share.
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS R
- ----------------------------------------------------------------------------------------------------------------
For the
period
January 21,
2003+ to
Per-share Sept. 30
operating performance 2003
- ----------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.22
- ----------------------------------------------------------------------------------------------------------------
Investment operations:
- ----------------------------------------------------------------------------------------------------------------
Net investment income (a) .18
- ----------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.02)
- ----------------------------------------------------------------------------------------------------------------
Total from
investment operations .16
- ----------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------
From net
investment income (.18)
- ----------------------------------------------------------------------------------------------------------------
From return of capital --
- ----------------------------------------------------------------------------------------------------------------
Total distributions (.18)
- ----------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.20
- ----------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 1.23*
- ----------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1
- ----------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .78*
- ----------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.30*
- ----------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 331.95 (d)
- ----------------------------------------------------------------------------------------------------------------
+ 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 period.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Portfolio turnover excludes certain treasury note transactions executed in connection with a
short-term trading strategy.
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS Y
- -------------------------------------------------------------------------------------------------------------
Per-share Year ended September 30
operating performance 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.21 $13.09 $12.54 $12.56 $13.27
- -------------------------------------------------------------------------------------------------------------
Investment operations:
- -------------------------------------------------------------------------------------------------------------
Net investment income (a) .31 .62 .78 .82 .79
- -------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .04 .23 .56 (.02) (.66)
- -------------------------------------------------------------------------------------------------------------
Total from
investment operations .35 .85 1.34 .80 .13
- -------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------
From net
investment income (.38) (.73) (.79) (.82) (.79)
- -------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (e) (.05)
- -------------------------------------------------------------------------------------------------------------
Total distributions (.38) (.73) (.79) (.82) (.84)
- -------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.18 $13.21 $13.09 $12.54 12.56
- -------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 2.73 6.71 11.05 6.71 1.04
- -------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $52,590 $70,445 $43,306 $31,871 $28,087
- -------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .63 .60 .61 .62 .60
- -------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.39 4.92 6.11 6.66 6.19
- -------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 331.95 (d) 277.25 (d) 156.53 (d) 133.29 123.04
- -------------------------------------------------------------------------------------------------------------
(a) Per share net investment income has been determined on the basis of
the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Portfolio turnover excludes certain treasury note transactions
executed in connection with a short-term trading strategy.
(e) Amount represents less than $0.01 per share.
The accompanying notes are an integral part of these financial statements.
Notes to financial statements
September 30, 2003
Note 1
Significant accounting policies
Putnam U.S. Government Income Trust (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund's investment objective is to
seek as high a level of current income as is consistent with
preservation of capital by investing mainly in securities which have
short to long-term maturities and are backed by the full faith and
credit of the United States. The fund also invests in repurchase
agreements and forward commitments relating to those investments.
The fund offers class A, class B, class C, class M, class R and class Y
shares. The fund began offering class R shares on January 21, 2003.
Class A shares are sold with a maximum front-end sales charge of 4.75%.
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, class M and class R shares, and
are subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class C shares are subject to the
same fees and expenses as class B shares, except that class C shares
have a one-year 1.00% contingent deferred sales charge and do not
convert to class A shares. Class M shares are sold with a maximum front
end sales charge of 3.25% and pay an ongoing distribution fee that is
higher than class A and class R shares but lower than class B and class
C shares. Class R shares are sold without a front end sales charge and
pay an ongoing distribution fee that is higher than class A shares, but
lower than class B and class C shares. Class R shares are offered to
qualified employee-benefit plans. Class Y shares, which are sold at net
asset value, are generally subject to the same expenses as class A,
class B, class C, class M and class R shares, but do not bear a
distribution fee. Class Y shares are sold to certain eligible purchasers
including certain defined contribution plans (including corporate IRAs),
bank trust departments and trust companies.
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 accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in 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, including mortgage backed securities,
are valued on the basis of valuations provided by an independent pricing
service, approved by the Trustees. Such service providers use
information with respect to transactions in bonds, quotations from bond
dealers, market transactions in comparable securities and various
relationships between securities in determining value. Restricted
securities are valued at fair value following procedures approved by the
Trustees. Such valuations and procedures are reviewed periodically by
the Trustees. Short-term investments having remaining maturities of 60
days or less are valued at amortized cost, which approximates fair
value.
B) Joint trading account The fund may transfer uninvested cash balances,
including cash collateral received under security lending arrangements,
into a joint trading account along with the cash of other registered
investment companies and certain other accounts managed by Putnam
Investment Management, LLC ("Putnam Management"), the fund's manager, an
indirect wholly-owned subsidiary of Putnam, LLC. These balances may be
invested in issuers of high-grade short-term investments having
maturities of up to 397 days for collateral received under security
lending arrangements and up to 90 days for other cash investments.
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 recorded 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. All premiums/discounts
are amortized/accreted on a yield-to-maturity basis.
E) TBA purchase commitments The fund may enter into "TBA" (to be
announced) 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 significantly differ
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 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 its 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.
F) 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. TBA sale commitments outstanding at period
end are listed after The fund's portfolio.
G) 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, 2003, the fund had a capital loss carryover of
$115,552,142 available to the extent allowed by tax law to offset future
capital gains, if any. The amount of the carryover and the expiration
dates are:
Loss Carryover Expiration
- ----------------------------------
$51,883,929 September 30, 2004
8,892,718 September 30, 2005
23,731,356 September 30, 2008
31,044,139 September 30, 2009
H) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Distributions from capital gains, 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 and the expiration of a
capital loss carryover. 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, 2003, the fund reclassified $18,174,717 to
increase undistributed net investment income and $178,265,538 to
decrease paid-in-capital, with a decrease to accumulated net realized
losses of $160,090,821.
The tax basis components of distributable earnings and the federal tax
cost as of period end were as follows:
Unrealized appreciation $53,810,240
Unrealized depreciation (3,472,520)
------------
Net unrealized appreciation 50,337,720
Capital loss carryforward (115,552,142)
Cost for federal income
tax purposes $3,103,452,950
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on the following annual rates: 0.57% of the first $500 million
of average net assets, 0.475% of the next $500 million, 0.4275% of the
next $500 million and 0.38% 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, LLC. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the year ended September 30, 2003,
the fund's expenses were reduced by $303,880 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $3,362 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 Trustee compensation and expenses in the
Statement of operations. Accrued pension liability is included in
Payable for Trustee compensation and expenses in the Statement of assets
and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B, class C, class M and class R shares pursuant to
Rule 12b-1 under the Investment Company Act of 1940. The purpose of the
Plans is to compensate Putnam Retail Management, a wholly-owned
subsidiary of Putnam, LLC and Putnam Retail Management GP, 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 Retail
Management at an annual rate up to 0.35%, 1.00%, 1.00%, 1.00% and 1.00%
of the average net assets attributable to class A, class B, class C,
class M and class R shares, respectively. The Trustees have approved
payment by the fund at an annual rate of 0.25%, 1.00%, 1.00%, 0.50% and
0.50% of the average net assets attributable to class A, class B, class
C, class M and class R shares, respectively.
For the year ended September 30, 2003, Putnam Retail Management, acting
as underwriter, received net commissions of $229,261 and $40,234 from
the sale of class A and class M shares, respectively, and received
$1,620,999 and $30,856 in contingent deferred sales charges from
redemptions of class B and class C shares, respectively. A deferred
sales charge of up to 1.00% and 0.40% is assessed on certain redemptions
of class A and class M shares, respectively. For the year ended
September 30, 2003, Putnam Retail Management, acting as underwriter,
received $62,429and no monies on class A and class M redemptions,
respectively.
Note 3
Purchases and sales of securities
During the year ended September 30, 2003, cost of purchases and proceeds
from sales of U.S. government and agency obligations other than
short-term investments aggregated $8,065,412,911 and $7,949,954,822,
respectively.
Note 4
Capital shares
At September 30, 2003, there were an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended September 30, 2003
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 35,015,344 $465,312,563
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 3,931,022 47,917,376
- ----------------------------------------------------------------
38,946,366 513,229,939
Shares repurchased (69,673,599) (916,559,344)
- ----------------------------------------------------------------
Net decrease (30,727,233) $(403,329,405)
- ----------------------------------------------------------------
Year ended September 30, 2002
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 78,360,826 $1,021,999,691
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 6,850,986 88,982,588
- ----------------------------------------------------------------
85,211,812 1,110,982,279
Shares repurchased (73,411,088) (955,480,657)
- ----------------------------------------------------------------
Net increase 11,800,724 $155,501,622
- ----------------------------------------------------------------
Year ended September 30, 2003
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 14,026,611 $184,014,591
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 785,854 10,294,180
- ----------------------------------------------------------------
14,812,465 194,308,771
- ----------------------------------------------------------------
Shares repurchased (27,051,779) (353,647,377)
- ----------------------------------------------------------------
Net decrease (12,239,314) $(159,338,606)
- ----------------------------------------------------------------
Year ended September 30, 2002
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 27,588,063 $358,956,480
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 1,434,915 18,554,498
- ----------------------------------------------------------------
29,022,978 377,510,978
- ----------------------------------------------------------------
Shares repurchased (14,821,786) (191,958,181)
- ----------------------------------------------------------------
Net increase 14,201,192 $185,552,797
- ----------------------------------------------------------------
Year ended September 30, 2003
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 2,836,586 $37,055,863
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 69,627 1,145,143
- ----------------------------------------------------------------
2,906,213 38,201,006
Shares repurchased (3,020,888) (39,615,652)
- ----------------------------------------------------------------
Net decrease (114,675) $(1,414,646)
- ----------------------------------------------------------------
Year ended September 30, 2002
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 4,831,860 $62,989,848
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 98,283 1,275,564
- ----------------------------------------------------------------
4,930,143 64,265,412
Shares repurchased (2,875,057) (37,401,314)
- ----------------------------------------------------------------
Net increase 2,055,086 $26,864,098
- ----------------------------------------------------------------
Year ended September 30, 2003
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 2,833,334 $37,274,929
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 48,152 633,107
- ----------------------------------------------------------------
2,881,486 37,908,036
Shares repurchased (10,340,528) (136,014,374)
- ----------------------------------------------------------------
Net decrease (7,459,042) $(98,106,338)
- ----------------------------------------------------------------
Year ended September 30, 2002
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 6,466,481 $84,692,408
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 86,426 1,121,959
- ----------------------------------------------------------------
6,552,907 85,814,367
Shares repurchased (4,555,886) (59,304,161)
- ----------------------------------------------------------------
Net increase 1,997,021 $26,510,206
- ----------------------------------------------------------------
For the period January 21, 2003
(commencement of operations)
to September 30, 2003
- ----------------------------------------------------------------
Class R Shares Amount
- ----------------------------------------------------------------
Shares sold 76 $1,000
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 1 14
- ----------------------------------------------------------------
77 1,014
Shares repurchased -- --
- ----------------------------------------------------------------
Net increase 77 $1,014
- ----------------------------------------------------------------
Year ended September 30, 2003
- ----------------------------------------------------------------
Class Y Shares Amount
- ----------------------------------------------------------------
Shares sold 1,450,537 $19,086,340
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 132,487 1,748,493
- ----------------------------------------------------------------
1,583,024 20,834,833
Shares repurchased (2,924,607) (38,496,572)
- ----------------------------------------------------------------
Net decrease (1,341,583) $(17,661,739)
- ----------------------------------------------------------------
Year ended September 30, 2002
- ----------------------------------------------------------------
Class Y Shares Amount
- ----------------------------------------------------------------
Shares sold 3,688,993 $48,178,111
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 212,345 2,756,244
- ----------------------------------------------------------------
3,901,338 50,934,355
Shares repurchased (1,875,858) (24,453,580)
- ----------------------------------------------------------------
Net increase 2,025,480 $26,480,775
- ----------------------------------------------------------------
At September 30, 2003, Putnam Investments, LLC owned 77 class R
shares of the fund (100% of class R shares outstanding), valued
at $1,012.
Note 5
Regulatory matters and litigation
On November 13, 2003, Putnam Management agreed to entry of an order by the
Securities and Exchange Commission in partial resolution of administrative
and cease-and-desist proceedings initiated by the SEC on October 28, 2003
in connection with alleged excessive short-term trading by certain
investment professionals. Under the order, Putnam Management will make
restitution for losses attributable to excessive short-term trading by
Putnam employees, institute new employee trading restrictions and enhanced
employee trading compliance, retain an independent compliance consultant,
and take other remedial actions. Putnam Management neither admitted nor
denied the order's findings that it willfully violated provisions of the
securities laws. A civil monetary penalty and other monetary relief, if
any, will be determined at a later date. Putnam Management, and not the
investors in any Putnam fund, will bear all costs, including restitution,
civil penalties and associated legal fees. Administrative proceedings
initiated by the Commonwealth of Massachusetts on October 28, 2003 against
Putnam Management in connection with alleged market timing activities by
Putnam employees and by participants in some Putnam-administered 401(k)
plans are pending. The SEC's and Commonwealth's allegations also serve as
the general basis for numerous lawsuits, including purported class action
lawsuits, filed against Putnam Management and certain related parties,
including certain open-end Putnam funds. Putnam Management has agreed to
bear any reasonable legal costs incurred by the Putnam funds in connection
with defending these lawsuits. Based on currently available information,
Putnam Management believes that the likelihood that the pending actions
will have a material adverse financial impact on the fund is remote, and
that the pending actions are not likely to materially affect its ability to
provide investment management services to its clients, including the Putnam
funds.
Review of these matters by counsel for Putnam Management and by separate
independent counsel for the Putnam funds and their independent Trustees
is continuing. In addition, Marsh & McLennan Companies, Inc., Putnam
Management's parent company, has engaged counsel to conduct a separate
review of Putnam Management's trading policies and controls. Putnam
Management has committed to make complete restitution for any losses
suffered by Putnam shareholders as a result of any improper
market-timing activities by Putnam employees or within
Putnam-administered 401(k) plans.
- ----------------------------------------------------------------------
Federal tax information
(Unaudited)
The Form 1099 you receive in January 2004 will show the tax status of
all distributions paid to your account in calendar 2003.
About the Trustees
Jameson A. Baxter (9/6/43), Trustee since 1994
Ms. Baxter is the President of Baxter Associates, Inc., a private
investment firm that she founded in 1986.
Ms. Baxter serves as a Director of ASHTA Chemicals, Inc., Banta
Corporation (a printing and digital imaging firm), Ryerson Tull, Inc. (a
steel service corporation), Advocate Health Care, and BoardSource,
formerly the National Center for Nonprofit Boards. She is Chairman
Emeritus of the Board of Trustees, Mount Holyoke College, having served
as Chairman for five years and as a board member for thirteen years.
Until 2002, Ms. Baxter was a Director of Intermatic Corporation (a
manufacturer of energy control products).
Ms. Baxter has held various positions in investment banking and
corporate finance, including Vice President and Principal of the Regency
Group, and Vice President of and Consultant to First Boston Corporation.
She is a graduate of Mount Holyoke College.
Charles B. Curtis (4/27/40), Trustee since 2001
Mr. Curtis is President and Chief Operating Officer of the Nuclear
Threat Initiative (a private foundation dealing with national security
issues) and serves as Senior Advisor to the United Nations Foundation.
Mr. Curtis is a member of the Council on Foreign Relations and the
Trustee Advisory Council of the Applied Physics Laboratory, Johns
Hopkins University. Until 2003, Mr. Curtis was a member of the Electric
Power Research Institute Advisory Council and the University of Chicago
Board of Governors for Argonne National Laboratory. Prior to 2002, Mr.
Curtis was a Member of the Board of Directors of the Gas Technology
Institute and the Board of Directors of the Environment and Natural
Resources Program Steering Committee, John F. Kennedy School of
Government, Harvard University. Until 2001, Mr. Curtis was a member of
the Department of Defense Policy Board and Director of EG&G Technical
Services, Inc. (a fossil energy research and development support
company).
Prior to May 1997, Mr. Curtis was Deputy Secretary of Energy. He served
as Chairman of the Federal Energy Regulatory Commission from 1977 to
1981 and has held positions on the staff of the U.S. House of
Representatives, the U.S. Treasury Department, and the Securities and
Exchange Commission.
John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000
Mr. Hill is Vice Chairman and Managing Director of First Reserve
Corporation, a private equity buyout firm that specializes in energy
investments in the diversified worldwide energy industry.
Mr. Hill is a Director of Devon Energy Corporation, TransMontaigne Oil
Company, Continuum Health Partners of New York, and various private
companies controlled by First Reserve Corporation, as well as a Trustee
of TH Lee Putnam Investment Trust (a closed-end investment company). He
is also a Trustee of Sarah Lawrence College.
Prior to acquiring First Reserve Corporation in 1983, Mr. Hill held
executive positions in investment banking and investment management with
several firms and with the federal government, including Deputy
Associate Director of the Office of Management and Budget, and Deputy
Director of the Federal Energy Administration. He is active in various
business associations, including the Economic Club of New York, and
lectures on energy issues in the United States and Europe. Mr. Hill
holds a B.A. degree in Economics from Southern Methodist University and
pursued graduate studies there as a Woodrow Wilson Fellow.
Ronald J. Jackson (12/17/43), Trustee since 1996
Mr. Jackson is a private investor.
Mr. Jackson is President of the Kathleen and Ronald J. Jackson
Foundation (a charitable trust). He is also a member of the Board of
Overseers of WGBH (a public television and radio station) as well as a
member of the Board of Overseers of the Peabody Essex Museum.
Mr. Jackson is the former Chairman, President, and Chief Executive
Officer of Fisher-Price, Inc. (a major toy manufacturer), from which he
retired in 1993. He previously served as President and Chief Executive
Officer of Stride-Rite, Inc. (a manufacturer and distributor of
footwear) and of Kenner Parker Toys, Inc. (a major toy and game
manufacturer). Mr. Jackson was President of Talbots, Inc. (a distributor
of women's apparel) and has held financial and marketing positions with
General Mills, Inc. and Parker Brothers (a toy and game company). Mr.
Jackson is a graduate of the University of Michigan Business School.
Paul L. Joskow (6/30/47), Trustee since 1997
Dr. Joskow is the Elizabeth and James Killian Professor of Economics and
Management, and Director of the Center for Energy and Environmental
Policy Research at the Massachusetts Institute of Technology.
Dr. Joskow serves as a Director of National Grid Transco (a UK-based
holding company with interests in electric and gas transmission and
distribution, and telecommunications infrastructure). He also serves on
the board of the Whitehead Institute for Biomedical Research (a
non-profit research institution) and has been President of the Yale
University Council since 1993. Prior to February 2002, he was a Director
of State Farm Indemnity Company (an automobile insurance company) and
prior to March 2000 he was a Director of New England Electric System (a
public utility holding company).
Dr. Joskow has published five books and numerous articles on topics in
industrial organization, government regulation of industry, and
competition policy. He is active in industry restructuring,
environmental, energy, competition, and privatization policies --
serving as an advisor to governments and corporations worldwide. Dr.
Joskow holds a Ph.D. and M. Phil from Yale University and B.A. from
Cornell University.
Elizabeth T. Kennan (2/25/38), Trustee since 1992
Dr. Kennan is a partner in and Chairman of Cambus-Kenneth Bloodstock,
LLC (cattle and thoroughbred horses). She is President Emeritus of Mount
Holyoke College.
Dr. Kennan serves as a Trustee of Northeast Utilities and is a Director
of Talbots, Inc. She has served as Director on a number of other boards,
including Bell Atlantic, Chastain Real Estate, Shawmut Bank, Berkshire
Life Insurance, and Kentucky Home Life Insurance. She is a Trustee of
Centre College and of Midway College in Midway, Kentucky. She is also a
member of The Trustees of Reservations. Dr. Kennan has served on the
oversight committee of the Folger Shakespeare Library, as President of
Five Colleges Incorporated, as a Trustee of Notre Dame University, and
is active in various educational and civic associations.
As a member of the faculty of Catholic University for twelve years,
until 1978, Dr. Kennan directed the post-doctoral program in Patristic
and Medieval Studies, taught history, and published numerous articles.
Dr. Kennan holds a Ph.D. from the University of Washington in Seattle,
an M.S. from St. Hilda's College at Oxford University, and an A.B. from
Mount Holyoke College. She holds several honorary doctorates.
John H. Mullin, III (6/15/41), Trustee since 1997
Mr. Mullin is the Chairman and CEO of Ridgeway Farm (a limited liability
company engaged in timber and farming).
Mr. Mullin serves as a Director of Alex. Brown Realty, Inc., The Liberty
Corporation (a broadcasting company), Progress Energy, Inc. (a utility
company, formerly known as Carolina Power & Light), and Sonoco Products,
Inc. (a packaging company). Mr. Mullin is Trustee Emeritus of Washington
& Lee University, where he served as Chairman of the Investment
Committee. Prior to May 2001, he was a Director of Graphic Packaging
International Corp.
Mr. Mullin also served as a Director of Dillon, Read & Co., Inc. until
October 1997 and The Ryland Group, Inc. until January 1998. Mr. Mullin
is a graduate of Washington & Lee University and The Wharton Graduate
School, University of Pennsylvania.
Robert E. Patterson (3/15/45), Trustee since 1984
Mr. Patterson is Senior Partner of Cabot Properties, L.P. and Chairman
of Cabot Properties, Inc.
Mr. Patterson serves as Chairman of the Joslin Diabetes Center, as a
Trustee of Sea Education Association, and as a Director of Brandywine
Trust Company. Prior to December 2001, he was President and Trustee of
Cabot Industrial Trust (a publicly traded real estate investment trust).
Prior to February 1998, Mr. Patterson was Executive Vice President and
Director of Acquisitions of Cabot Partners Limited Partnership (a
registered investment advisor involved in institutional real estate
investments). Prior to 1990, he served as Executive Vice President of
Cabot, Cabot & Forbes Realty Advisors, Inc. (the predecessor company of
Cabot Partners) and as a Senior Vice President of the Beal Companies (a
real estate management, investment, and development firm).
Mr. Patterson practiced law and held various positions in state
government, and was the founding Executive Director of the Massachusetts
Industrial Finance Agency. Mr. Patterson is a graduate of Harvard
College and Harvard Law School.
W. Thomas Stephens (9/2/42), Trustee since 1997
Mr. Stephens serves on a number of corporate boards.
Mr. Stephens serves as a Director of Xcel Energy Incorporated (a public
utility company), TransCanada Pipelines Limited, Norske Canada, Inc. (a
paper manufacturer), and Qwest Communications. Until 2003, Mr. Stephens
was a Director of Mail-Well, Inc. (a diversified printing company). He
served as Chairman of Mail-Well until 2001 and as CEO of
MacMillan-Bloedel, Ltd. (a forest products company) until 1999.
Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of
Johns Manville Corporation. He holds B.S. and M.S. degrees from the
University of Arkansas.
W. Nicholas Thorndike (3/28/33), Trustee since 1992
Mr. Thorndike serves on the boards of various corporations and
charitable organizations.
Mr. Thorndike is a Director of Courier Corporation (a book publisher and
manufacturer) and The Providence Journal Co. (a newspaper publisher). He
is also a Trustee of Northeastern University and an honorary Trustee of
Massachusetts General Hospital, where he previously served as Chairman
and President. Prior to September 2000, he was a Director of Bradley
Real Estate, Inc.; prior to April 2000, he was a Trustee of Eastern
Utilities Associates; and prior to December 2001, he was a Trustee of
Cabot Industrial Trust.
Mr. Thorndike has also served as Chairman of the Board and Managing
Partner of Wellington Management Company/Thorndike, Doran, Paine & Lewis
(a registered investment advisor that manages mutual funds and
institutional assets), as a Trustee of the Wellington Group of Funds
(currently The Vanguard Group), and as Chairman and a Director of Ivest
Fund, Inc. Mr. Thorndike is a graduate of Harvard College.
George Putnam, III* (8/10/51), Trustee since 1984 and President
since 2000
Mr. Putnam is President of New Generation Research, Inc. (a publisher of
financial advisory and other research services), and of New Generation
Advisers, Inc. (a registered investment advisor to private funds). Mr.
Putnam founded the New Generation companies in 1986.
Mr. Putnam is a Director of The Boston Family Office, LLC (a registered
investment advisor). He is a Trustee of St. Mark's School, Shore Country
Day School, and until 2002 was a Trustee of the Sea Education
Association.
Mr. Putnam previously worked as an attorney with the law firm of Dechert
Price & Rhoads in Philadelphia. He is a graduate of Harvard College,
Harvard Business School, and Harvard Law School.
A.J.C. Smith* (4/13/34), Trustee since 1986
Mr. Smith is Chairman of Putnam Investments and a Director of Marsh &
McLennan Companies, Inc.
Mr. Smith is also a Director of Trident Corp. (a limited partnership
with over thirty institutional investors). He is also a Trustee of the
Carnegie Hall Society, the Educational Broadcasting Corporation, and the
National Museums of Scotland. He is Chairman of the Central Park
Conservancy and a Member of the Board of Overseers of the Joan and
Sanford I. Weill Graduate School of Medical Sciences of Cornell
University. Prior to May 2000 and November 1999, Mr. Smith was Chairman
and CEO, respectively, of Marsh & McLennan Companies, Inc.
The address of each Trustee is One Post Office Square, Boston, MA 02109.
As of September 30, 2003, there were 102 Putnam Funds.
Each Trustee serves for an indefinite term, until his or her
resignation, retirement at age 72, death, or removal.
* Trustees who are or may be deemed to be "interested persons" (as
defined in the Investment Company Act of 1940) of the fund, Putnam
Management, Putnam Retail Management, or Marsh & McLennan Companies,
Inc., the parent company of Putnam, LLC and its affiliated companies.
Messrs. Putnam, III, and Smith are deemed "interested persons" by virtue
of their positions as officers or shareholders of the fund or Putnam
Management, Putnam Retail Management, or Marsh & McLennan Companies,
Inc. George Putnam, III is the President of your fund and each of the
other Putnam funds. Mr. Smith serves as a Director of Marsh & McLennan
Companies, Inc.
Officers
In addition to George Putnam, III, the other officers of the
fund are shown below:
Charles E. Porter (7/26/38)
Executive Vice President, Treasurer and Principal Financial
Officer
Since 1989
Managing Director, Putnam Investments
and Putnam Management
Patricia C. Flaherty (12/1/46)
Senior Vice President
Since 1993
Senior Vice President, Putnam Investments and Putnam
Management
Karnig H. Durgarian (1/13/56)
Vice President and Principal Executive Officer
Since 2002
Senior Managing Director, Putnam Investments
Steven D. Krichmar (6/27/58)
Vice President and Principal Financial Officer
Since 2002
Managing Director, Putnam Investments. Prior to July 2001,
Partner, PricewaterhouseCoopers LLP
Michael T. Healy (1/24/58)
Assistant Treasurer and Principal
Accounting Officer
Since 2000
Managing Director, Putnam Investments
Beth S. Mazor (4/6/58)
Vice President
Since 2002
Senior Vice President, Putnam Investments
Gordon H. Silver (7/3/47)
Vice President
Since 1990
Senior Managing Director, Putnam Investments, Putnam
Management and Putnam Retail Management
Mark C. Trenchard (6/5/62)
Vice President and BSA Compliance Officer
Since 2002
Senior Vice President, Putnam Investments
William H. Woolverton (1/17/51)
Vice President and Chief Legal Officer
Since 2003
Managing Director, Putnam Investments, Putnam Management and
Putnam Retail Management
Judith Cohen (6/7/45)
Clerk and Assistant Treasurer
Since 1993
Clerk and Assistant Treasurer, The Putnam Funds
The address of each Officer is One Post Office Square, Boston, MA 02109.
Fund information
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Independent Auditors
KPMG LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
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, Treasurer
and Principal Financial Officer
Patricia C. Flaherty
Senior Vice President
Karnig H. Durgarian
Vice President and Principal Executive Officer
Steven D. Krichmar
Vice President and Principal Financial Officer
Michael T. Healy
Assistant Treasurer and Principal Accounting Officer
Beth S. Mazor
Vice President
Gordon H. Silver
Vice President
Mark C. Trenchard
Vice President and BSA Compliance Officer
William H. Woolverton
Vice President and
Chief Legal Officer
Judith Cohen
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam U.S.
Government Income Trust. 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
and Putnam's Quarterly Ranking Summary. For more information or to
request a prospectus, call toll free: 1-800-225-1581. The fund's
Statement of Additional Information contains additional information
about the fund's Trustees and is available without charge upon request
by calling 1-800-225-1581.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
Call 1-800-225-1581 or visit our Web site www.putnaminvestments.com.
AN038-203394 032/885/689/527 11/03
Not FDIC Insured May Lose Value No Bank Guarantee
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ----------------------------------------------------------------------------
Putnam U.S. Government Income Trust
Supplement to Annual Report dated 9/30/03
The following information has been prepared to provide class Y
shareholders with a performance overview specific to their holdings.
Class Y shares are offered exclusively to clients that meet the
eligibility requirements specified in the fund's prospectus for such
shares. Performance of class Y shares, which incur neither a front-end
load, distribution fee, nor contingent deferred sales charge, will
differ from performance of class A, B, C, M, and R shares, which are
discussed more extensively in the annual report.
RESULTS AT A GLANCE
- ----------------------------------------------------------------------------
Total return for periods ended 9/30/03
NAV
1 year 2.73%
5 years 31.25
Annual average 5.59
10 years 81.67
Annual average 6.15
Life of fund (since class A inception, 2/8/84)
Annual average 7.95
Share value: NAV
9/30/02 $13.21
9/30/03 $13.18
- ----------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
12 $0.384 -- $0.384
- ----------------------------------------------------------------------------
Please note that past performance is not indicative of future results.
More recent returns may be more or less than those shown. Returns shown
for class Y shares for periods prior to their inception are derived from
the historical performance of class A shares, and are not adjusted to
reflect the initial sales charge currently applicable to class A shares.
These returns have not been adjusted to reflect differences in operating
expenses which, for class Y shares, typically are lower than the operating
expenses applicable to class A shares. All returns assume reinvestment of
distributions at net asset value. Investment return and principal value
will fluctuate so your shares, when redeemed, may be worth more or less
than their original cost. See full report for information on comparative
benchmarks. If you have questions, please consult your fund prospectus or
call Putnam toll free at 1-800-752-9894.
Item 2. Code of Ethics:
- -----------------------
All officers of the Fund, including its principal executive, financial and
accounting officers, are employees of Putnam Investment Management, LLC,
the Fund's investment manager. As such they are subject to a comprehensive
Code of Ethics adopted and administered by Putnam Investments which is
designed to protect the interests of the firm and its clients. The Fund
has adopted a Code of Ethics which incorporates the Code of Ethics of
Putnam Investments with respect to all of its officers and Trustees who are
employees of Putnam Investment Management, LLC. For this reason, the Fund
has not adopted a separate code of ethics governing its principal
executive, financial and accounting officers.
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
The Funds' Audit and Pricing Committee is comprised solely of Trustees
who are "independent" (as such term has been defined by the Securities
and Exchange Commission ("SEC") in regulations implementing Section 407
of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe
that each of the members of the Audit and Pricing Committee also possess
a combination of knowledge and experience with respect to financial
accounting matters, as well as other attributes, that qualify them for
service on the Committee. In addition, the Trustees have determined
that all members of the Funds' Audit and Pricing Committee meet the
financial literacy requirements of the New York Stock Exchange's rules
and that Mr. Patterson and Mr. Stephens qualify as "audit committee
financial experts" (as such term has been defined by the Regulations)
based on their review of their pertinent experience and education.
Certain other Trustees, although not on the Audit and Pricing Committee,
would also qualify as "audit committee financial experts." The SEC has
stated that the designation or identification of a person as an audit
committee financial expert pursuant to this Item 3 of Form N-CSR does
not impose on such person any duties, obligations or liability that are
greater than the duties, obligations and liability imposed on such
person as a member of the Audit and Pricing Committee and the Board of
Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
Not applicable
Items 5-6. [Reserved]
- ---------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. [Reserved]
- ------------------
Item 9. Controls and Procedures:
- --------------------------------
(a) The registrant's principal executive officer and principal financial
officers have concluded, based on their evaluation of the effectiveness
of the design and operation of the registrant's disclosure controls and
procedures as of a date within 90 days of the filing date of this report
on Form N-CSR, that the design and operation of such procedures are
effective to provide reasonable assurance that information required to
be disclosed by the investment company in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in
the Commission's rules and forms.
(b) Changes in internal control over financial reporting:
Not applicable
Item 10. Exhibits:
- ------------------
(a) The Code of Ethics of The Putnam Funds, which incorporates the
Code of Ethics of Putnam Investments, is filed herewith.
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002
are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: November 25, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Karnig H. Durgarian
---------------------------
Karnig H. Durgarian
Principal Executive Officer
Date: November 25, 2003
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Financial Officer
Date: November 25, 2003
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: November 25, 2003