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
9-30-04
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
During the past several months, Putnam introduced a number of reforms
for the benefit of shareholders, including increasing the amount of
disclosure for our funds. Beginning with this month's reports, we inform
you of any change during the prior year of the Portfolio Leader and
Portfolio Members of your fund's management team. Additionally, we list
the other fund management responsibilities of your fund's Portfolio
Leader and Portfolio Members. This new information, which you can find
following the Outlook for Your Fund, complements the expense, risk, and
portfolio turnover comparisons we added to the reports earlier this
year.
We are also pleased to announce that three new Trustees have joined your
fund's Board of Trustees. Nominated by the independent Trustees, these
individuals have had outstanding careers as leaders in the investment
management industry. Myra R. Drucker is a Vice Chair of the Board of
Trustees of Sarah Lawrence College and serves as Chair of the New York
Stock Exchange (NYSE) Pension Managers Advisory Committee and as a
Trustee of Commonfund, a not-for-profit asset management firm. Richard
B. Worley is Managing Partner of Permit Capital LLC, an investment
management firm. Both Ms. Drucker and Mr. Worley are independent
Trustees (i.e., Trustees who are not "interested persons" of your fund
or its investment advisor). Charles E. Haldeman, Jr., the third new
Trustee, is President and Chief Executive Officer of Putnam Investments.
During the period covered by the following report, Putnam U.S.
Government Income Trust delivered respectable results. In the following
pages, the fund managers discuss fund performance, strategy, and their
outlook for fiscal 2005.
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 17, 2004
Report from Fund Management
Fund highlights
* For the 12 months ended September 30, 2004, Putnam U.S. Government
Income Trust's class A shares returned 2.81% without sales charges and
-2.09% with maximum sales charges reflected.
* The fund's benchmark, the Lehman GNMA Index, returned 4.16%.
* The average return for the fund's Lipper category, GNMA Funds, was
2.82%.
* The fund's dividend was increased to $0.034 per share in July 2004.
See page 5 for details.
* See the Performance Summary beginning on page 8 for additional fund
performance, comparative performance, and Lipper data.
Performance commentary
Over the course of the year ended September 30, 2004, market sentiment
about the direction of interest rates shifted several times, making it a
challenging period for fixed-income investors.
In this environment, we maintained a modestly defensive portfolio
structure for Putnam U.S. Government Income Trust. Although this
strategy detracted from results when rates trended lower, it proved more
beneficial when rates rose. While our emphasis on the strong-performing
mortgage-backed securities (MBS) sector was at the high end of our
target range during the period, the portfolio also held Treasuries and
agencies -- sectors that lagged MBSs. This explains the fund's
underperformance versus its primary benchmark, the Lehman GNMA Index,
which is made up entirely of MBSs. The fund performed in line with its
Lipper peer group, based on results at net asset value (NAV).
TOTAL RETURN FOR
PERIODS ENDED 9/30/04
Class A
(inception 2/8/84) NAV POP
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1 year 2.81% -2.09%
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5 years 32.19 25.89
Annual average 5.74 4.71
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10 years 86.76 77.85
Annual average 6.45 5.93
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Annual average
(life of fund) 7.57 7.32
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Data is historical. Past performance does not guarantee 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. Performance assumes reinvestment of
distributions and does not account for taxes. Returns at NAV do not
reflect a sales charge of 4.75%. For the most recent month-end
performance, visit www.putnaminvestments.com. A 2% short-term trading
fee may be imposed on shares exchanged or sold within 5 days of
purchase.
FUND PROFILE
Putnam U.S. Government Income Trust seeks current income by investing in
obligations of the U.S. government and its agencies and
instrumentalities, 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. Ginnie Maes,
Fannie Maes, and Freddie Macs are generally high quality and can 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
Conflicting signals about the strength of U.S. economic growth drove
bond market performance during the year. While some signs pointed to
expansion -- a strong housing market, reports of solid corporate
profits, and respectable GDP growth -- others, such as disappointing job
growth and low capacity utilization, did not support perceptions of
economic growth. Bond investors watch these signals closely as they can
indicate the likely direction of interest rates, which is determined by
both Federal Reserve Board (Fed) policy and by the sentiment of market
participants. Bond prices move inversely with interest rates, declining
when rates rise and increasing when rates fall.
Interest rates meandered up and down in response to contrasting economic
signals until April 2004 when investors aggressively bid up rates
because they believed that the Fed would need to significantly raise
short-term interest rates to reign in growth. The Fed's approach proved
more gradualist, however, as it raised rates three times in the final
months of the period in modest 0.25% increments. Signs of more modest
growth supported this approach and worked with it to lower bond market
volatility. Yields on securities with shorter maturities rose
significantly while yields at the long end of the maturity spectrum
remained fairly stable, resulting in a flattening in the shape of the
yield curve.
Lower volatility, which resulted from clear guidance on the direction of
interest rates from the Fed, created a favorable environment for MBSs,
enabling them to outperform Treasuries and agencies, the other sectors
in which your fund can invest. Prices of MBSs also benefited from
increased investor demand worldwide, as their higher yields, and
generally high credit quality, proved especially attractive in a
low-rate environment.
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MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 9/30/04
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Bonds
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Lehman GNMA Index (Government National Mortgage Association
bonds) 4.16%
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Lehman Aggregate Bond Index (broad bond market) 3.68%
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Lehman Municipal Bond Index (tax-exempt bonds) 4.59%
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JP Morgan Global High Yield Index (global high-yield
corporate bonds) 13.13%
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Equities
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S&P 500 Index (broad stock market) 13.87%
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Russell 1000 Growth Index (large-company growth stocks) 7.51%
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Russell 1000 Value Index (large-company value stocks) 20.52%
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These indexes provide an overview of performance in different market
sectors for the 12 months ended 9/30/04.
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Strategy overview
There are six key strategy decisions that we make in managing the fund.
The first is called term structure and reflects our views of the
direction of interest rates based on factors such as economic
indicators, Fed statements and strategy, and market sentiment. We also
analyze the shape of the yield curve and strive to position your fund's
portfolio to benefit from expected movements.
Our second strategic decision involves sector allocation. We seek to
determine the relative attractiveness among the sectors in which your
fund can invest -- Treasuries, agencies, and MBSs -- and then position
your fund's portfolio to take advantage of our sector preferences. We
also weigh the relative attractiveness among the various programs in the
MBS market: Government National Mortgage Association certificates
(Ginnie Maes), Federal National Mortgage Association certificates
(Fannie Maes), and Federal Home Loan Mortgage Corporation certificates
(Freddie Macs).
We make three other strategic decisions related to MBSs: We seek to
determine what maturity is most attractive (e.g., 30-year, 15-year, or
adjustable-rate); we assess what coupon level (e.g., 5.5%, 6.5%, 7%,
etc.) or what combination of coupons provides the best risk/return trade
off. Seasoning is our fifth consideration, as mortgages with the same
coupon level may vary in issue date and an older or more "seasoned"
mortgage is typically less likely to be prepaid.
Our sixth strategic decision concerns out-of-benchmark exposure; we
consider the relative attractiveness of securities that are not in your
primary benchmark, but are allowable within your fund's guidelines.
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
9/30/03 3/31/04 9/30/04
Average effective
maturity in years 3.4 3.6 5.2
Duration in years 1.9 2.1 2.2
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.
How sector allocations and fund holdings affected performance
With rates at historic lows and key indicators pointing toward faster
economic growth, we believed that the most likely direction for interest
rates was higher. Therefore, the portfolio's duration, which is a
measure of interest-rate sensitivity, was kept modestly shorter, or
defensive, in comparison to its benchmark through most of the period.
This aspect of our term-structure decision proved detrimental to
performance as interest rates defied expectations and generally declined
through mid-period. Regarding the shape of the yield curve, it was our
expectation that short-term rates would rise more quickly than long-term
rates, resulting in yield-curve flattening. This proved true and your
fund's portfolio was positioned to benefit from the shift.
Generally, our sector allocation strategy had a positive impact on
performance. Believing that mortgage-backed securities (MBSs) were
attractive on a relative basis, we emphasized this sector over agency
and Treasury securities -- the other sectors in which your fund invests.
The fund benefited from this strategy on an absolute basis. Among the
various programs within the MBS market, our strategy included exposure
to securities issued by the Federal National Mortgage Association
(Fannie Maes) and the Federal Home Loan Mortgage Corporation (Freddie
Macs) as well as a significant position in the standard pass-through
securities issued by the Government National Mortgage Association
(Ginnie Maes), as our valuation analysis showed that investors were
being well rewarded with higher yields for the marginal additional risks
posed by Fannie- and Freddie-issued securities. Fannie Mae and Freddie
Mac are not represented in your fund's benchmark so these allocations
represent an out-of-benchmark exposure. Our program strategy detracted
from results as Ginnie Maes marginally outperformed securities issued by
the other programs based on strong overseas demand from Asia. Ginnie
Maes were attractive to overseas investors as they are backed by the
full faith and credit of the U.S. government, while the other MBSs are
backed only by the credit of the issuing agency.
[GRAPHIC OMITTED: horizontal bar chart PORTFOLIO COMPOSITION AS OF 9/30/04]
PORTFOLIO COMPOSITION AS OF 9/30/04
Ginnie Mae Fannie Mae Freddie Mac
U.S. government
and agency
obligations 71.8% 9.9% 1.9%
Short-term
investments 20.4%
Collateralized
mortgage
obligations 8.9%
Footnote reads:
Weightings are shown as a percentage of net assets. Holdings will vary
over time. A portion of short-term investments reflects amounts used to
settle TBA purchase commitments.
Our strategy of emphasizing higher-coupon MBSs was rewarded during the
period, as this market segment outperformed. Likewise, our decision to
favor seasoned or older mortgages also worked to the fund's advantage as
these securities proved less subject to prepayments. Our maturity
decision -- an emphasis on 30-year maturities -- also contributed to
relative results.
Regarding other out-of-benchmark exposures, the fund continued to hold a
type of collateralized mortgage obligation (CMO) known as interest-only
strips. These are high-quality investments that typically offer slightly
higher yields than conventional mortgage-backed securities in exchange
for increased sensitivity to prepayments. We believe that the market is
currently offering a greater yield on these securities than is warranted
by the prepayment risk. In addition, late in the period we took
advantage of what we believed were attractive prices to initiate a
position in adjustable-rate mortgages (ARMs).
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
Your fund's dividend depends on yields available on the types of
fixed-income securities in which your fund invests. Modestly rising
yields on Treasury and mortgage-backed securities resulted in a dividend
increase from $0.028 to $0.034 per share for class A shares in July
2004.
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 believe that interest rates will continue to rise as the Fed seeks to
manage the pace of economic growth with steady, modest rate increases
and as rates continue to rebound from abnormally low levels. Therefore,
your portfolio remains conservatively positioned with a modestly short
duration in an effort to protect principal value. We have moved to a
more neutral stance with regard to yield curve positioning because,
although we expect the curve to continue to flatten, we believe that the
market has already anticipated much of this flattening.
Given the strong performance recorded by MBSs over the past year, we
believe they are currently overpriced. Therefore, we have reduced the
fund's MBSs exposure in favor of short-term fixed income securities.
Within the MBS sector, we continue to favor Fannie Maes and Freddie Macs
over Ginnie Maes, because we believe that investors are being well
compensated for the slight additional risks they carry. We also think
that many investors have overreacted to the negative headlines about the
management of these programs. In addition, the market for Fannie Maes is
much larger and more liquid than either the market for Ginnie Maes or
Freddie Macs, offering greater flexibility in trading and more
opportunities in coupons and seasoning. We believe that the more tools
we have at our disposal, the more opportunities we have to add value. We
currently favor higher-coupon issues as we believe the market is
currently overcompensating investors for the higher prepayment risk
posed by these securities. Where available, we are also seeking out more
seasoned issues.
We will continue to employ our multi-step strategy in pursuit of high
current income that is also consistent with preservation of capital.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Mutual funds that
invest in bonds are subject to certain risks, including interest-rate
risk, credit risk, and inflation risk. As interest rates rise, the
prices of bonds fall. Long-term bonds are more exposed to interest-rate
risk than short-term bonds. Unlike bonds, bond funds have ongoing fees
and expenses. Mutual funds that invest in government securities are not
guaranteed. Mortgage-backed securities are subject to prepayment risk.
Your fund's management
Your fund is managed by the members of the Putnam Core Fixed-Income
Team. Kevin Cronin is the Portfolio Leader and Rob Bloemker is a
Portfolio Member of your fund. The Portfolio Leader and Portfolio Member
coordinate the team's management of the fund.
For a complete listing of the members of the Putnam Core Fixed-Income
Team, including those who are not Portfolio Leaders or Portfolio Members
of your fund, visit Putnam's Individual Investor Web site at
www.putnaminvestments.com.
Other funds managed by the Portfolio Leader and Portfolio Members
Kevin Cronin is also a Portfolio Leader of Putnam American Government
Income Fund, Putnam Global Income Trust, Putnam Intermediate U.S.
Government Income Fund, and Putnam Income Fund. He is a Portfolio Member
of The George Putnam Fund of Boston and Putnam Equity Income Fund.
Rob Bloemker is also a Portfolio Member of Putnam American Government
Income Fund, Putnam Intermediate U.S. Government Income Fund, and Putnam
Income Fund.
Kevin Cronin and Rob Bloemker may also manage other accounts advised by
Putnam Management or an affiliate.
Changes in your fund's Portfolio Leader and Portfolio Members
Your fund's Portfolio Leader and Portfolio Member did not change during
the year ended September 30, 2004.
Performance summary
This section shows your fund's performance during its fiscal year, which
ended September 30, 2004. Performance should always be considered in
light of a fund's investment strategy. Data represents past performance.
Past performance does not guarantee 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. For the most recent month-end performance, please visit
www.putnaminvestments.com.
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TOTAL RETURN FOR PERIODS ENDED 9/30/04
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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 2.81% -2.09% 2.12% -2.89% 2.08% 1.08% 2.61% -0.71% 2.54%
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5 years 32.19 25.89 27.37 25.37 27.46 27.46 30.60 26.36 30.60
Annual average 5.74 4.71 4.96 4.63 4.97 4.97 5.48 4.79 5.48
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10 years 86.76 77.85 73.20 73.20 73.29 73.29 82.13 76.16 82.29
Annual average 6.45 5.93 5.65 5.65 5.65 5.65 6.18 5.83 6.19
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Annual average
(life of fund) 7.57 7.32 6.68 6.68 6.77 6.77 7.22 7.05 7.31
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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 (which
for class A shares does not reflect a reduction in sales charges that
went into effect on January 28, 2004; if this reduction had been in
place for all periods indicated, returns would have been higher). 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.
A 2% short-term trading fee may be imposed on shares exchanged or sold
within 5 days of purchase.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/04
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Lipper
GNMA Funds
Lehman category
GNMA Index average*
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1 year 4.16% 2.82%
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5 years 39.20 34.02
Annual average 6.84 6.02
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10 years 105.73 89.61
Annual average 7.48 6.60
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Annual average
(life of fund) 9.20 8.13
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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 9/30/04, there were 67, 49,
and 30 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, 9/30/94 to 9/30/04
Fund's class A Lehman GNMA
Date shares at POP Index
9/30/94 9,525 10,000
9/30/95 10,724 11,407
9/30/96 11,187 12,078
9/30/97 12,277 13,318
9/30/98 13,352 14,435
9/30/99 13,453 14,780
9/30/00 14,319 15,919
9/30/01 15,858 17,816
9/30/02 16,874 19,129
9/30/03 17,300 19,752
9/30/04 $17,785 $20,573
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 $17,320 and $17,329, 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 $18,213 ($17,616
at public offering price). A $10,000 investment in the fund's class R
shares would have been valued at $18,229. See first page of performance
section for performance calculation method.
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PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 9/30/04
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Class A Class B Class C Class M Class R
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Distributions (number) 12 12 12 12 12
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Income $0.324 $0.224 $0.221 $0.288 $0.290
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Capital gains -- -- -- -- --
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Total $0.324 $0.224 $0.221 $0.288 $0.290
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Share value: NAV POP NAV NAV NAV POP NAV
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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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9/30/04 13.24 13.86* 13.17 13.22 13.23 13.67 13.24
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Current return
(end of period)
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Current dividend rate 1 3.08% 2.94% 2.37% 2.36% 2.81% 2.72% 2.99%
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Current 30-day
SEC yield 2 3.77 3.60 3.02 3.02 3.51 3.44 3.55
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* Reflects a reduction in sales charges that took effect on January 28,
2004.
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.
Understanding your
fund's expenses
As a mutual fund investor, you pay ongoing expenses, such as management
fees, distribution fees (12b-1 fees), and other expenses. Using the
information below, you can estimate how these expenses affect your
investment and compare them with the expenses of other funds. You may
also pay one-time transaction expenses, including sales charges (loads)
and redemption fees, which are not shown in this section and would have
resulted in higher total expenses. For more information, see your fund's
prospectus or talk to your financial advisor.
Review your fund's expenses
The table below shows the expenses you would have paid on a $1,000
investment in Putnam U.S. Government Income Trust from April 1, 2004, to
September 30, 2004. It also shows how much a $1,000 investment would be
worth at the close of the period, assuming actual returns and expenses.
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming actual returns for the 6 months ended 9/30/04
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Class A Class B Class C Class M Class R
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Expenses paid per $1,000* $4.82 $8.58 $8.58 $6.08 $6.08
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Ending value
(after expenses) $1,009.70 $1,005.90 $1,006.70 $1,009.10 $1,008.70
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* Expenses for each share class are calculated using the fund's
annualized expense ratio for each class, which represents the ongoing
expenses as a percentage of net assets for the six months ended 9/30/04.
The expense ratio may differ for each share class (see the table at the
bottom of the next page). Expenses are calculated by multiplying the
expense ratio by the average account value for the period; then
multiplying the result by the number of days in the period; and then
dividing that result by the number of days in the year.
Estimate the expenses you paid
To estimate the ongoing expenses you paid for the six months ended
September 30, 2004, use the calculation method below. To find the value
of your investment on April 1, 2004, go to www.putnaminvestments.com and
log on to your account. Click on the "Transaction History" tab in your
Daily Statement and enter 04/01/2004 in both the "from" and "to" fields.
Alternatively, call Putnam at 1-800-225-1581.
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HOW TO CALCULATE THE EXPENSES YOU PAID
- -----------------------------------------------------------------------------
Total
Value of your Expenses paid expenses
investment on 4/1/04 [DIV] $1,000 X per $1,000 = paid
- -----------------------------------------------------------------------------
Example Based on a $10,000 investment in class A shares of your fund.
$10,000 [DIV] $1,000 X $4.82 (see table above) = $48.20
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Comparing your fund's expenses with those of other funds
Using the SEC's method to compare expenses
The Securities and Exchange Commission (SEC) has established guidelines
to help investors assess fund expenses. Per these guidelines, the table
below shows your fund's expenses based on a $1,000 investment, assuming
a hypothetical 5% annualized return. You can use this information to
compare the ongoing expenses (but not transaction expenses or total
costs) of investing in the fund with those of other funds. All mutual
fund shareholder reports will provide this information to help you make
this comparison. Please note that you cannot use this information to
estimate your actual ending account balance and expenses paid during the
period.
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming a hypothetical 5% annualized return for the 6 months ended 9/30/04
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Class A Class B Class C Class M Class R
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Expenses paid per $1,000* $4.85 $8.62 $8.62 $6.11 $6.11
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Ending value
(after expenses) $1,020.20 $1,016.45 $1,016.45 $1,018.95 $1,018.95
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* Expenses for each share class are calculated using the fund's
annualized expense ratio for each class, which represents the ongoing
expenses as a percentage of net assets for the six months ended 9/30/04.
The expense ratio may differ for each share class (see the table at the
bottom of this page). Expenses are calculated by multiplying the expense
ratio by the average account value for the period; then multiplying the
result by the number of days in the period; and then dividing that
result by the number of days in the year.
Using industry averages to compare expenses
You can also compare your fund's expenses with industry averages, as
determined by Lipper, an independent fund-rating agency that ranks funds
relative to others that Lipper considers to have similar investment
styles or objectives. The expense ratio for each share class shown below
indicates how much of your fund's net assets have been used to pay
ongoing expenses during the period.
EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA
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Class A Class B Class C Class M Class R
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Your fund's annualized
expense ratio+ 0.96% 1.71% 1.71% 1.21% 1.21%
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Average annualized expense
ratio for Lipper peer group++ 1.01% 1.76% 1.76% 1.26% 1.26%
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+ For the fund's most recent fiscal half year; may differ from expense
ratios based on one-year data in the financial highlights.
++ For class A shares, expenses shown represent the average of the expenses of
front-end load funds viewed by Lipper as having the same investment
classification or objective as the fund, calculated in accordance with
Lipper's standard reporting methodology for comparing expenses within a
given universe. All Lipper data is for the most recent fiscal periods
available as of 9/30/04. For class B, C, M and R shares, Putnam has
adjusted the Lipper total expense average to reflect higher 12b-1 fees
incurred by these classes of shares. The peer group may include funds that
are significantly larger or smaller than the fund, which may limit the
comparability of the fund's expenses to the Lipper average.
Understanding your fund's
portfolio turnover
Putnam funds are actively managed by teams of experts who buy and sell
securities based on intensive analysis of companies, industries,
economies, and markets. Portfolio turnover is a measure of how often a
fund's managers buy and sell securities for your fund. A portfolio
turnover of 100%, for example, means that the managers sold and replaced
securities valued at 100% of a fund's assets within a one-year period.
Funds with high turnover may be more likely to generate capital gains
and dividends that must be distributed to shareholders as taxable
income. High turnover may also cause a fund to pay more brokerage
commissions and other transaction costs, which may detract from performance.
Funds that invest in bonds may have higher turnover than funds that
invest only in stocks. Short-term bond funds tend to have higher
turnover than longer-term bond funds, because shorter-term bonds will
mature or be sold more frequently than longer-term bonds. You can use
the table below to compare your fund's turnover with the average
turnover for funds in its Lipper category.
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TURNOVER COMPARISONS
percentage of holdings that change every year
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2004 2003 2002 2001 2000
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Putnam U.S. Government
Income Trust 198% 332% 277% 157% 133%
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Lipper GNMA Funds Average 313% 286% 257% 221% 209%
- ------------------------------------------------------------------------------
Turnover data for the fund is calculated based on the fund's fiscal-year
period, which ends on September 30. Turnover data for the fund's Lipper
category is calculated based on the average of the turnover of each fund
in the category for its fiscal year ended during the indicated year.
Fiscal years vary across funds in the Lipper category, which may limit
the compatibility of the fund's portfolio turnover rate to the Lipper
average. Comparative data for 2004 is based on information available as
of 9/30/04.
Risk comparison
As part of new initiatives to enhance disclosure, we are including a
risk comparison to help you understand how your fund compares with other
funds. The comparison utilizes a risk measure developed by Morningstar,
an independent fund-rating agency. This risk measure is referred to as
the fund's Overall Morningstar Risk.
[GRAPHIC OMITTED: chart MORNINGSTAR [REGISTRATION MARK] RISK]
MORNINGSTAR [REGISTRATION MARK] RISK
Fund's Overall
Morningstar Risk 0.07
Taxable bond
fund average 0.31
0% INCREASING RISK 100%
Your fund's Overall Morningstar Risk is shown alongside that of the
average fund in its broad asset class, as determined by Morningstar. The
risk bar broadens the comparison by translating the fund's Overall
Morningstar Risk into a percentile, which is based on the fund's ranking
among all funds rated by Morningstar as of September 30, 2004. A higher
Overall Morningstar Risk generally indicates that a fund's monthly
returns have varied more widely.
Morningstar determines a fund's Overall Morningstar Risk by assessing
variations in the fund's monthly returns -- with an emphasis on downside
variations -- over 3-, 5-, and 10-year periods, if available. Those
measures are weighted and averaged to produce the fund's Overall
Morningstar Risk. The information shown is provided for the fund's class
A shares only; information for other classes may vary. Overall
Morningstar Risk is based on historical data and does not indicate
future results. Morningstar does not purport to measure the risk
associated with a current investment in a fund, either on an absolute
basis or on a relative basis. Low Overall Morningstar Risk does not mean
that you cannot lose money on an investment in a fund. Copyright 2004
Morningstar, Inc. All Rights Reserved. The information contained herein
(1) is proprietary to Morningstar and/or its content providers; (2) may
not be copied or distributed; and (3) is not warranted to be accurate,
complete, or timely. Neither Morningstar nor its content providers are
responsible for any damages or losses arising from any use of this
information.
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. NAV
is calculated by dividing the net assets of each class of shares by the
number of outstanding shares in the class.
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 (since reduced to 4.50%) 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 charge or CDSC and
are available only to certain defined contribution plans.
Comparative indexes
JP Morgan Global High Yield Index is an unmanaged index used to mirror
the investable universe of the U.S. dollar global high-yield corporate
debt market of both developed and emerging markets.
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 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.
Proxy voting
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. The Putnam funds' proxy voting guidelines and
procedures, as well as information regarding how your fund voted proxies
relating to portfolio securities during the 12-month period ended June
30, 2004, are available on the Putnam Individual Investor Web site,
www.putnaminvestments.com/individual, and on the SEC's Web site,
www.sec.gov. If you have questions about finding forms on the SEC's Web
site, you may call the SEC at 1-800-SEC-0330. You may also obtain the
Putnam funds' proxy voting guidelines and procedures at no charge by
calling Putnam's Shareholder Services at 1-800-225-1581.
Fund portfolio holdings
For periods ending on or after July 9, 2004, the fund will file a
complete schedule of its portfolio holdings with the SEC for the first
and third quarters of each fiscal year on Form N-Q. Shareholders may
obtain the fund's Forms N-Q on the SEC's Web site at www.sec.gov. In
addition, the fund's Forms N-Q may be reviewed and copied at the SEC's
public reference room in Washington, D.C. You may call the SEC at
1-800-SEC-0330 for information about the SEC's Web site or the operation
of the public reference room.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
preceded by the Report of Independent Registered Public Accounting Firm,
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 the fund's net investment gain or loss, by distributions to
shareholders, and by changes in the number of the fund's shares. It
lists distributions and their sources (net investment income or realized
capital gains) over the current reporting period and the most recent
fiscal year-end. The distributions listed here may not match the sources
listed in the Statement of operations because the distributions are
determined on a tax basis and may be paid in a different period from the
one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment
income ratios, and portfolio turnover in one summary table, reflecting
the five most recent reporting periods. In a semiannual report, the
highlight table also includes the current reporting period. For open-end
funds, a separate table is provided for each share class.
Report of Independent Registered Public Accounting Firm
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, 2004, 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 periods presented. 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 the standards of the Public
Company Accounting Oversight Board (United States). 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, 2004 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, 2004, 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 periods
presented, in conformity with U.S. generally accepted accounting
principles.
KPMG LLP
Boston, Massachusetts
November 5, 2004
The fund's portfolio
September 30, 2004
U.S. government and agency mortgage obligations (92.3%) (a)
Principal amount Value
U.S. Government Guaranteed Mortgage Obligations (71.8%)
- -------------------------------------------------------------------------------
$36,555,047 Government National Mortgage
Association Adjustable Rate
Mortgages 4 1/2s, August 20, 2034 $36,837,270
Government National Mortgage
Association Graduated Payment
Mortgages
9,566 13 3/4s, November 20, 2014 11,800
26,887 13 1/2s, April 15, 2011 31,949
19,187 13 1/4s, December 20, 2014 23,432
59,553 12 3/4s, with due dates from
November 15, 2013 to December 20,
2014 71,682
13,110 12 1/2s, June 15, 2010 15,150
123,737 12 1/4s, with due dates from
September 15, 2013 to January 15,
2015 147,254
234,633 11 1/4s, with due dates from
September 15, 2015 to January 15,
2016 275,602
12,108 10 3/4s, February 15, 2016 14,088
87,278 10s, with due dates from November
15, 2009 to December 15, 2009 96,209
110,211 9 1/4s, with due dates from April
15, 2016 to May 15, 2016 122,479
Government National Mortgage
Association Pass-Through
Certificates
533,044 8 1/2s, with due dates from December
15, 2004 to December 15, 2019 541,880
64,602,260 8s, with due dates from May 15, 2024
to August 15, 2032 70,914,687
4,266,259 8s, with due dates from January 15,
2008 to November 15, 2009 4,503,069
63,566,056 7 1/2s, with due dates from October
15, 2021 to November 15, 2032 68,738,538
55,097 7 1/2s, with due dates from March
15, 2017 to May 15, 2017 59,471
77,971,635 7s, with due dates from March 15,
2022 to May 15, 2032 83,795,601
3,860,804 7s, with due dates from October 15,
2007 to August 15, 2012 4,127,358
53,460,022 6 1/2s, with due dates from May 15,
2023 to July 15, 2034 56,678,492
134,066,000 6 1/2s, TBA, October 1, 2034 141,313,943
36,284,267 6s, with due dates from November 15,
2023 to June 15, 2034 37,716,005
50,998,162 5 1/2s, with due dates from January
15, 2032 to December 15, 2033 52,036,054
765,672,867 5s, with due dates from January 15,
2033 to May 15, 2034 764,256,906
--------------
1,322,328,919
U.S. Government Agency Mortgage Obligations (20.5%)
- -------------------------------------------------------------------------------
Federal Home Loan Mortgage
Corporation
35,234,045 5s, with due dates from May 1, 2034
to May 1, 2034 34,917,487
Federal National Mortgage
Association Pass-Through
Certificates
7,371,891 7s, with due dates from January 1,
2024 to July 1, 2032 7,840,666
111,111,155 6 1/2s, with due dates from
September 1, 2023 to August 1, 2034 116,728,439
80,988 6 1/2s, with due dates from
September 1, 2014 to March 1, 2016 85,381
152,700,000 6 1/2s, TBA, November 1, 2034 159,786,227
Federal National Mortgage
Association Pass-Through
Certificates
53,100,000 6 1/2s, TBA, October 1, 2034 55,688,625
454,784 6s, November 1, 2017 477,327
2,673 5s, August 1, 2033 2,652
1,814,238 4 1/2s, June 1, 2034 1,748,614
--------------
377,275,418
--------------
Total U.S. government and agency
mortgage obligations
(cost $1,667,309,952) $1,699,604,337
Collateralized mortgage obligations (8.9%) (a)
Principal amount Value
- -------------------------------------------------------------------------------
Fannie Mae
$943,126 Ser. 02-26, Class A2, 7 1/2s, 2048 $1,023,487
5,671,919 Ser. 04-T3, Class 1A4, 7 1/2s, 2044 6,150,240
5,677,909 Ser. 04-W9, Class 2A3, 7 1/2s, 2044 6,159,694
3,476,801 Ser. 02-T18, Class A4, 7 1/2s, 2042 3,773,041
11,183,792 Ser. 03-W3, Class 1A3, 7 1/2s, 2042 12,138,065
25,374 Ser. 02-T16, Class A3, 7 1/2s, 2042 27,536
13,404,494 Ser. 03-W2, Class 1A3, 7 1/2s, 2042 14,554,770
39,346 Ser. 02-W6, Class 2A, 7 1/2s, 2042 42,579
316,716 Ser. 02-W1, Class 2A, 7 1/2s, 2042 341,406
1,133,890 Ser. 02-14, Class A2, 7 1/2s, 2042 1,226,825
7,190,308 Ser. 01-T10, Class A2, 7 1/2s, 2041 7,751,695
529,023 Ser. 02-T4, Class A3, 7 1/2s, 2041 571,836
773,234 Ser. 01-T12, Class A2, 7 1/2s, 2041 835,882
1,970,969 Ser. 01-T8, Class A1, 7 1/2s, 2041 2,128,337
18,039,503 Ser. 01-T7, Class A1, 7 1/2s, 2041 19,457,549
2,686,951 Ser. 01-T3, Class A1, 7 1/2s, 2040 2,897,139
7,701,450 Ser. 01-T1, Class A1, 7 1/2s, 2040 8,325,431
3,215,092 Ser. 99-T2, Class A1, 7 1/2s, 2039 3,474,482
708,001 Ser. 03-W10, Class 1A1, 7 1/2s, 2032 768,413
7,427,149 Ser. 02-T1, Class A3, 7 1/2s, 2031 8,023,289
1,629,072 Ser. 00-T6, Class A1, 7 1/2s, 2030 1,757,130
586,469 Ser. 02-W7, Class A5, 7 1/2s, 2029 636,369
7,598,326 Ser. 01-T4, Class A1, 7 1/2s, 2028 8,234,287
2,647,388 Ser. 02-W3, Class A5, 7 1/2s, 2028 2,870,544
39,936,303 Ser. 338, Class 2, IO, 5 1/2s, 2033 9,035,588
78,279,227 Ser. 329, Class 2, IO, 5 1/2s, 2033 17,123,581
4,576,524 Ser. 03-W10, Class 1A1, 1.701s, 2032 4,562,223
Federal Home Loan Mortgage Corp.
Structured Pass-Through Securities
18,258,632 Ser. T-58, Class 4A, 7 1/2s, 2043 19,734,212
210,824 Ser. T-42, Class A5, 7 1/2s, 2042 228,076
7,728 Ser. T-41, Class 3A, 7 1/2s, 2032 8,341
--------------
Total Collateralized mortgage
obligations (cost $169,941,660) $163,862,047
Short-term investments (20.4%) (a)
Principal amount Value
- -------------------------------------------------------------------------------
$236,600,000 Interest in $350,000,000 tri-party
repurchase agreement dated September
30, 2004 with Goldman Sachs & Co.
due October 1, 2004 with respect to
various U.S. Government obligations
-- maturity value of $236,612,422
for an effective yield of 1.89% $236,600,000
119,000,000 Federal National Mortgage
Association for an effective yield
of 1.79%, November 15, 2004 118,733,737
20,000,000 Federal National Mortgage
Association for an effective yield
of 1.54%, October 12, 2004 19,990,589
--------------
Total Short-term investments
(cost $375,324,326) $375,324,326
- -------------------------------------------------------------------------------
Total Investments
(cost $2,212,575,938) $2,238,790,710
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,842,114,686.
TBA after the name of a security represents to be announced securities
(Note 1).
TBA sale commitments outstanding at September 30, 2004
(proceeds receivable $160,028,004)
Principal Settlement
Agency Amount Date Value
- -------------------------------------------------------------------------------
FNMA, 6 1/2s, October 1, 2034 $152,700,000 10/14/04 $160,144,125
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities
September 30, 2004
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$2,212,575,938) (Note 1) $2,238,790,710
- -------------------------------------------------------------------------------
Cash 1,176,908
- -------------------------------------------------------------------------------
Interest and other receivables 8,246,424
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,329,058
- -------------------------------------------------------------------------------
Receivable for securities sold 161,196,934
- -------------------------------------------------------------------------------
Total assets 2,410,740,034
Liabilities
- -------------------------------------------------------------------------------
Payable for securities purchased 393,692,688
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 9,966,396
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,216,090
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 919,557
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 228,776
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,687
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,212,376
- -------------------------------------------------------------------------------
TBA sales commitments, at value (proceeds receivable
$160,028,004) (Note 1) 160,144,125
- -------------------------------------------------------------------------------
Other accrued expenses 240,653
- -------------------------------------------------------------------------------
Total liabilities 568,625,348
- -------------------------------------------------------------------------------
Net assets $1,842,114,686
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,862,220,575
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 17,470,854
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (63,675,394)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 26,098,651
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $1,842,114,686
- -------------------------------------------------------------------------------
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,441,252,230 divided by 108,830,170 shares) $13.24
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.50 of $13.24)* $13.86
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($297,158,968 divided by 22,563,295 shares)** $13.17
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($26,181,141 divided by 1,980,825 shares)** $13.22
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($50,648,807 divided by 3,829,356 shares) $13.23
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $13.23)* $13.67
- -------------------------------------------------------------------------------
Net asset value, offering price and redemption price per
class R share ($44,106 divided by 3,331 shares) $13.24
- -------------------------------------------------------------------------------
Net asset value, offering price and redemption price per
class Y share ($26,829,434 divided by 2,029,267 shares) $13.22
- -------------------------------------------------------------------------------
* 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, 2004
Interest income $88,841,450
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 9,810,474
- -------------------------------------------------------------------------------
Investor servicing fees (Note 2) 3,549,632
- -------------------------------------------------------------------------------
Custodian fees (Note 2) 749,066
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 58,310
- -------------------------------------------------------------------------------
Administrative services (Note 2) 27,366
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 4,072,909
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 3,808,700
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 349,449
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 291,700
- -------------------------------------------------------------------------------
Distribution fees -- Class R (Note 2) 17
- -------------------------------------------------------------------------------
Other 589,171
- -------------------------------------------------------------------------------
Non-recurring costs (Notes 2 and 5) 89,352
- -------------------------------------------------------------------------------
Costs assumed by Manager (Notes 2 and 5) (89,352)
- -------------------------------------------------------------------------------
Total expenses 23,306,794
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (156,334)
- -------------------------------------------------------------------------------
Net expenses 23,150,460
- -------------------------------------------------------------------------------
Net investment income 65,690,990
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 9,880,551
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments and TBA sale
commitments during the year (23,919,353)
- -------------------------------------------------------------------------------
Net loss on investments (14,038,802)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $51,652,188
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of changes in net assets
Year ended September 30
Decrease in net assets 2004 2003
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $65,690,990 $62,295,542
- -------------------------------------------------------------------------------
Net realized gain on investments 9,880,551 46,234,630
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments (23,919,353) (39,553,805)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 51,652,188 68,976,367
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From net investment income
Class A (39,396,084) (61,194,325)
- -------------------------------------------------------------------------------
Class B (6,241,917) (12,773,580)
- -------------------------------------------------------------------------------
Class C (556,126) (1,145,143)
- -------------------------------------------------------------------------------
Class M (1,259,734) (3,223,065)
- -------------------------------------------------------------------------------
Class R (49) (14)
- -------------------------------------------------------------------------------
Class Y (1,151,865) (1,748,493)
- -------------------------------------------------------------------------------
Redemption fees (Note 1) 1,795 --
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (891,633,786) (679,849,720)
- -------------------------------------------------------------------------------
Total decrease in net assets (888,585,578) (690,957,973)
Net assets
- -------------------------------------------------------------------------------
Beginning of year 2,730,700,264 3,421,658,237
- -------------------------------------------------------------------------------
End of year (including undistributed net
investment income of $17,470,854 and
$385,639, respectively) $1,842,114,686 $2,730,700,264
- -------------------------------------------------------------------------------
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 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.20 $13.22 $13.10 $12.55 $12.57
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .42 .28 .62 .75 .79
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.06) .05 .19 .56 (.02)
- ---------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .36 .33 .81 1.31 .77
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net
investment income (.32) (.35) (.69) (.76) (.79)
- ---------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- -- (e)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.32) (.35) (.69) (.76) (.79)
- ---------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (e) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.24 $13.20 $13.22 $13.10 $12.55
- ---------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 2.81 2.52 6.41 10.74 6.43
- ---------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,441,252 $2,022,134 $2,432,891 $2,256,218 $1,929,653
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .94 .88 .85 .86 .87
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.24 2.12 4.74 5.87 6.40
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 198.47 331.95 (d) 277.25 (d) 156.53 (d) 133.29
- ---------------------------------------------------------------------------------------------------------------------------
(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 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.12 $13.15 $13.04 $12.49 $12.51
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .32 .18 .51 .65 .70
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.05) .04 .20 .56 (.02)
- ---------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .27 .22 .71 1.21 .68
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net
investment income (.22) (.25) (.60) (.66) (.70)
- ---------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- -- (e)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.25) (.60) (.66) (.70)
- ---------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (e) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.17 $13.12 $13.15 $13.04 $12.49
- ---------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 2.12 1.67 5.59 9.98 5.65
- ---------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $297,159 $529,386 $691,467 $500,366 $574,087
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.69 1.63 1.60 1.61 1.62
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.46 1.38 3.96 5.15 5.64
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 198.47 331.95 (d) 277.25 (d) 156.53 (d) 133.29
- ---------------------------------------------------------------------------------------------------------------------------
(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
- ---------------------------------------------------------------------------------------------------------------------------
Per-share Year ended September 30
operating performance 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.17 $13.20 $13.08 $12.53 $12.55
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .32 .18 .50 .64 .70
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.05) .04 .21 .58 (.02)
- ---------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .27 .22 .71 1.22 .68
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net
investment income (.22) (.25) (.59) (.67) (.70)
- ---------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- -- (e)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.25) (.59) (.67) (.70)
- ---------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (e) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.22 $13.17 $13.20 $13.08 $12.53
- ---------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 2.08 1.70 5.64 9.99 5.67
- ---------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $26,181 $53,235 $54,880 $27,512 $7,329
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.69 1.63 1.60 1.61 1.62
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.44 1.34 3.93 5.07 5.67
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 198.47 331.95 (d) 277.25 (d) 156.53 (d) 133.29
- ---------------------------------------------------------------------------------------------------------------------------
(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 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.18 $13.20 $13.08 $12.52 $12.55
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .39 .27 .57 .71 .76
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.05) .02 .21 .57 (.03)
- ---------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .34 .29 .78 1.28 .73
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net
investment income (.29) (.31) (.66) (.72) (.76)
- ---------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- -- (e)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.29) (.31) (.66) (.72) (.76)
- ---------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (e) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.23 $13.18 $13.20 $13.08 $12.52
- ---------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 2.61 2.25 6.14 10.56 6.09
- ---------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $50,649 $73,355 $171,975 $144,285 $95,090
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.19 1.13 1.10 1.11 1.12
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.99 2.03 4.47 5.60 6.15
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 198.47 331.95 (d) 277.25 (d) 156.53 (d) 133.29
- ---------------------------------------------------------------------------------------------------------------------------
(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
Year period
ended Jan, 21, 2003+
Per-share Sept. 30 to Sept. 30
operating performance 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.20 $13.22
- --------------------------------------------------------------------------------------------------------------------
Investment operations:
- --------------------------------------------------------------------------------------------------------------------
Net investment income (a) .39 .18
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.06) (.02)
- --------------------------------------------------------------------------------------------------------------------
Total from
investment operations .33 .16
- --------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------
From net
investment income (.29) (.18)
- --------------------------------------------------------------------------------------------------------------------
Total distributions (.29) (.18)
- --------------------------------------------------------------------------------------------------------------------
Redemption fees -- (d) --
- --------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.24 $13.20
- --------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 2.54 1.23*
- --------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $44 $1
- --------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.19 .78*
- --------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.98 1.30*
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 198.47 331.95
- --------------------------------------------------------------------------------------------------------------------
+ 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) 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 Y
- ---------------------------------------------------------------------------------------------------------------------------
Per-share Year ended September 30
operating performance 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $13.18 $13.21 $13.09 $12.54 $12.56
- --------------------------------------------------------------------------------------------------------------------------
Investment operations:
- --------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .46 .31 .62 .78 .82
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.06) .04 .23 .56 (.02)
- --------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .40 .35 .85 1.34 .80
- --------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------
From net
investment income (.36) (.38) (.73) (.79) (.82)
- --------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- -- (e)
- --------------------------------------------------------------------------------------------------------------------------
Total distributions (.36) (.38) (.73) (.79) (.82)
- --------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (e) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.22 $13.18 $13.21 $13.09 $12.54
- --------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 3.09 2.73 6.71 11.05 6.71
- --------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $26,829 $52,590 $70,445 $43,306 $31,871
- --------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .69 .63 .60 .61 .62
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.45 2.39 4.92 6.11 6.66
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 198.47 331.95 (d) 277.25 (d) 156.53 (d) 133.29
- --------------------------------------------------------------------------------------------------------------------------
(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, 2004
Note 1
Significant accounting policies
Putnam U.S. Government Income Trust (the "fund"), a Massachusetts
business trust, 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. Class A shares are sold with a maximum front-end sales charge of
4.50%. Prior to January 28, 2004, the maximum front-end sales charge for
class A shares was 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 eight 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 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.
Effective April 19, 2004 a 2.00% redemption fee may apply to any shares
that are redeemed (either by selling or exchanging into another fund)
within 5 days of purchase. The redemption fee is accounted for as an
addition to paid-in-capital.
Investment income, realized and unrealized gains and losses and expenses
of the fund are borne pro-rata based on the relative net assets of each
class to the total net assets of the fund, except that each class bears
expenses unique to that class (including the distribution fees
applicable to such classes. 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 at fair value 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 fair value of the underlying
securities, 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.
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 fair 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, if any, 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 of 1986 (the "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 Code, 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, 2004, the fund had a capital loss carryover of
$63,668,213 available to the extent allowed by the Code to offset future
net capital gain, if any. The amount of the carryover and the expiration
dates are:
Loss Carryover Expiration
- -----------------------------------
$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 sales 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, 2004, the fund reclassified $42,025,303 to
decrease paid-in-capital, with a decrease to accumulated net realized
losses of $42,025,303.
The tax basis components of distributable earnings and the federal tax
cost as of period end were as follows:
Unrealized appreciation $34,943,401
Unrealized depreciation (8,735,810)
------------
Net unrealized appreciation 26,207,591
Undistributed ordinary
income 17,470,854
Capital loss carryforward (63,668,213)
Cost for federal income
tax purposes $2,212,583,119
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.
Effective January 28, 2004, Putnam Management has agreed to limit its
compensation (and, to the extent necessary, bear other expenses) through
September 30, 2005, to the extent that the fund's net expenses as a
percentage of average net assets exceed the average expense ratio for
the fund's Lipper peer group of front-end load funds. For the year
ended September 30, 2004, Putnam Management did not waive any of its
management fee to the fund.
For the year ended September 30, 2004, Putnam Management has assumed
$89,352 of legal, shareholder servicing and communication, audit and
Trustee fees incurred by the fund in connection with certain legal and
regulatory matters (including those described in Note 5).
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. Putnam
Investor Services, a division of PFTC, provides investor servicing agent
functions to the fund. During the year ended September 30, 2004, the
fund paid PFTC $3,051,408 for these services.
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, 2004,
the fund's expenses were reduced by $156,334 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $2,236, as a quarterly retainer, 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 Trustees have terminated the Pension Plan with
respect to any Trustee first elected after 2003.
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 in distributing shares of the
fund. The Plans provide for payments by the fund to Putnam Retail
Management at an annual rate of 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, 2004, Putnam Retail Management, acting
as underwriter, received net commissions of $58,223 and $4,660 from the
sale of class A and class M shares, respectively, and received
$1,404,442 and $18,166 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, 2004, Putnam Retail Management, acting as underwriter,
received $10,300 and no monies on class A and class M redemptions,
respectively.
Note 3
Purchases and sales of securities
During the year ended September 30, 2004, cost of purchases and proceeds
from sales of U.S. government securities and agency obligations other
than short-term investments aggregated $3,718,713,057 and
$4,566,312,727, respectively.
Note 4
Capital shares
At September 30, 2004, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended September 30, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 11,347,759 $149,278,616
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 2,405,479 31,613,429
- ----------------------------------------------------------------
13,753,238 180,892,045
Shares repurchased (58,172,060) (764,678,837)
- ----------------------------------------------------------------
Net decrease (44,418,822) $(583,786,792)
- ----------------------------------------------------------------
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, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 2,299,674 $30,054,012
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 395,617 5,173,173
- ----------------------------------------------------------------
2,695,291 35,227,185
Shares repurchased (20,474,276) (267,775,073)
- ----------------------------------------------------------------
Net decrease (17,778,985) $(232,547,888)
- ----------------------------------------------------------------
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, 2004
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 472,007 $6,181,187
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 34,343 450,759
- ----------------------------------------------------------------
506,350 6,631,946
Shares repurchased (2,569,060) (33,698,582)
- ----------------------------------------------------------------
Net decrease (2,062,710) $(27,066,636)
- ----------------------------------------------------------------
Year ended September 30, 2003
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 2,836,586 $37,286,071
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 69,627 914,935
- ----------------------------------------------------------------
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, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 678,463 $8,929,446
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 20,566 270,006
- ----------------------------------------------------------------
699,029 9,199,452
Shares repurchased (2,437,251) (32,024,627)
- ----------------------------------------------------------------
Net decrease (1,738,222) $(22,825,175)
- ----------------------------------------------------------------
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, 2004
- ----------------------------------------------------------------
Class R Shares Amount
- ----------------------------------------------------------------
Shares sold 3,250 $43,063
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4 49
- ----------------------------------------------------------------
3,254 43,112
Shares repurchased --* (3)
- ----------------------------------------------------------------
Net increase 3,254 $43,109
- ----------------------------------------------------------------
*Amount represents less than 1 share.
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, 2004
- ----------------------------------------------------------------
Class Y Shares Amount
- ----------------------------------------------------------------
Shares sold 571,639 $7,514,754
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of dividends 87,753 1,151,865
- ----------------------------------------------------------------
659,392 8,666,619
Shares repurchased (2,621,223) (34,117,023)
- ----------------------------------------------------------------
Net decrease (1,961,831) $(25,450,404)
- ----------------------------------------------------------------
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)
- ----------------------------------------------------------------
At September 30, 2004, Putnam, LLC owned 78 class R shares of
the fund (2.0% of class R shares outstanding), valued at $1,038.
Note 5
Regulatory matters and litigation
On April 8, 2004, Putnam Management entered into agreements with the
Securities and Exchange Commission ("SEC") and the Massachusetts
Securities Division representing a final settlement of all charges
brought against Putnam Management by those agencies on October 28, 2003
in connection with excessive short-term trading by Putnam employees and,
in the case of the charges brought by the Massachusetts Securities
Division, by participants in some Putnam-administered 401(k) plans. The
settlement with the SEC requires Putnam Management to pay $5 million in
disgorgement plus a civil monetary penalty of $50 million, and the
settlement with the Massachusetts Securities Division requires Putnam
Management to pay $5 million in restitution and an administrative fine
of $50 million. The settlements also leave intact the process
established under an earlier partial settlement with the SEC under which
Putnam Management agreed to pay the amount of restitution determined by
an independent consultant, which may exceed the disgorgement and
restitution amounts specified above, pursuant to a plan to be developed
by the independent consultant.
Putnam Management, and not the investors in any Putnam fund, will bear
all costs, including restitution, civil penalties and associated legal
fees stemming from both of these proceedings. The SEC's and
Massachusetts Securities Division's allegations and related matters also
serve as the general basis for numerous lawsuits, including purported
class action lawsuits filed against Putnam Management and certain
related parties, including certain Putnam funds. Putnam Management has
agreed to bear any costs incurred by Putnam funds in connection with
these lawsuits. Based on currently available information, Putnam
Management believes that the likelihood that the pending private
lawsuits and purported class action lawsuits will have a material
adverse financial impact on the fund is remote, and 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. The fund may experience increased redemptions as a result
of these matters, which could result in increased transaction costs and
operating expenses.
Federal tax information
(Unaudited)
The Form 1099 you receive in January 2005 will show the tax status of
all distributions paid to your account in calendar 2004.
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).
From August 1997 to December 1999, Mr. Curtis was a Partner at Hogan &
Hartson L.L.P., a Washington, D.C. law firm. 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 SEC.
Myra R. Drucker (1/16/48)
Ms. Drucker is a Vice Chair of the Board of Trustees of Sarah Lawrence
College, a Trustee of Commonfund (a not-for-profit firm specializing in
asset management for educational endowments and foundations) and a
member of the Investment Committee of the Kresge Foundation (a
charitable trust). She is also Chair of the New York Stock Exchange
(NYSE) Pension Managers Advisory Committee and a member of the Executive
Committee of the Committee on Investment of Employee Benefit Assets.
Until August 31, 2004, Ms. Drucker was Managing Director and a member of
the Board of Directors of General Motors Asset Management and Chief
Investment Officer of General Motors Trust Bank. Ms. Drucker also served
as a member of the NYSE Corporate Accountability and Listing Standards
Committee and the NYSE/NASD IPO Advisory Committee.
Prior to joining General Motors Asset Management in 2001, Ms. Drucker
held various executive positions in the investment management industry.
Ms. Drucker served as Chief Investment Officer of Xerox Corporation (a
technology and service company in the document industry), where she was
responsible for the investment of the company 's pension assets. Ms.
Drucker was also Staff Vice President and Director of Trust Investments
for International Paper (a paper, paper distribution, packaging and
forest products company) and previously served as Manager of Trust
Investments for Xerox Corporation. Ms. Drucker received a B.A. degree in
Literature and Psychology from Sarah Lawrence College and pursued
graduate studies in economics, statistics and portfolio theory at Temple
University.
John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000
Mr. Hill is Vice Chairman 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
advised by an affiliate of Putnam Management). 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 Michigan State University 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) and TransCanada
Corporation (an energy company focused on natural gas transmission and
power services). 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 of Cambus-Kenneth Farm (thoroughbred horse and
cattle breeding). She is President Emeritus of Mount Holyoke College.
Dr. Kennan served as Chairman and is now Lead Director 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 the National Trust for Historic
Preservation, 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 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 The National
Humanities Center and 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. Prior to February
2004, he was a Director of Alex Brown Realty, Inc.
Mr. Mullin is also a past Director of Adolph Coors Company; ACX
Technologies, Inc.; Crystal Brands, Inc.; Dillon, Read & Co., Inc.;
Fisher-Price, Inc.; and The Ryland Group, Inc. 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. (a private equity firm investing in commercial
real estate).
Mr. Patterson serves as Chairman of the Joslin Diabetes Center and as a
Director of Brandywine Trust Company. Prior to June 2003, he was a
Trustee of Sea Education Association. Prior to December 2001, he was
President and Trustee of Cabot Industrial Trust (a publicly traded real
estate investment trust). Prior to February 1998, he was Executive Vice
President and Director of Acquisitions of Cabot Partners Limited
Partnership (a registered investment adviser 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.
Effective November 2004, Mr. Stephens is expected to become Chief
Executive Officer of Boise Cascade, L.L.C. (a paper, forest products and
timberland assets company). Mr. Stephens serves as a Director of
TransCanada Pipelines Limited. Until 2004, Mr. Stephens was a Director
of Xcel Energy Incorporated (a public utility company), Qwest
Communications, and Norske Canada, Inc. (a paper manufacturer). 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.
Richard B. Worley (11/15/45)
Mr. Worley is Managing Partner of Permit Capital, LLC, an investment
management firm.
Mr. Worley serves on the Executive Committee of the University of
Pennsylvania Medical Center, is a Trustee of The Robert Wood Johnson
Foundation (a philanthropic organization devoted to health care issues)
and is a Director of The Colonial Williamsburg Foundation (a historical
preservation organization). Mr. Worley also serves on the investment
committees of Mount Holyoke College and World Wildlife Fund (a wildlife
conservation organization).
Prior to joining Permit Capital LLC in 2002, Mr. Worley served as Chief
Strategic Officer of Morgan Stanley Investment Management. He previously
served as President, Chief Executive Officer and Chief Investment
Officer of Morgan Stanley Dean Witter Investment Management and as a
Managing Director of Morgan Stanley, a financial services firm. Mr.
Worley also was the Chairman of Miller Anderson & Sherrerd, an
investment management firm.
Mr. Worley holds a B.S. degree from University of Tennessee and pursued
graduate studies in economics at the University of Texas.
Charles E. Haldeman, Jr.* (10/29/48)
Mr. Haldeman is President and Chief Executive Officer of Putnam, LLC
("Putnam Investments"). He is a member of Putnam Investments' Executive
Board of Directors and Advisory Council. Prior to November 2003, Mr.
Haldeman served as Co-Head of Putnam Investments' Investment Division.
Prior to joining Putnam Investments in 2002, Mr. Haldeman held executive
positions in the investment management industry. He previously served as
Chief Executive Officer of Delaware Investments and President & Chief
Operating Officer of United Asset Management. Mr. Haldeman was also a
partner and director of Cooke & Bieler, Inc. (an investment management
firm).
Mr. Haldeman currently serves as a Trustee of Dartmouth College and as
Emeritus Trustee of Abington Memorial Hospital. He is a graduate of
Dartmouth College, Harvard Law School and Harvard Business School. Mr.
Haldeman is also a Chartered Financial Analyst (CFA) charterholder.
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 adviser). 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
LLP (formerly known as 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 the Chairman of Putnam Investments and Director of and
Consultant to 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, 2004, there were 102 Putnam Funds. All Trustees
other than Ms. Drucker and Messrs. Worley and Haldeman serve as Trustees
of all Putnam funds. Ms. Drucker and Messrs. Worley and Haldeman
currently serve as Trustees of 81 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. Haldeman, Putnam, III, and Smith are deemed "interested persons"
by virtue of their positions as officers of the fund, Putnam Management,
Putnam Retail Management or Marsh & McLennan Companies, Inc. and as
shareholders of Marsh & McLennan Companies, Inc. Mr. Putnam, III is the
President of your fund and each of the other Putnam funds. Mr. Haldeman
is President and Chief Executive Officer of Putnam Investments. Mr.
Smith serves as a Director of and Consultant to Marsh & McLennan
Companies, Inc. and as Chairman of Putnam Investments.
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,
Associate Treasurer and Principal
Executive Officer
Since 1989
Managing Director, Putnam Investments
and Putnam Management
Jonathan S. Horwitz (6/4/55)
Senior Vice President and Treasurer
Since 2004
Managing Director, Putnam Investments
Steven D. Krichmar (6/27/58)
Vice President and
Principal Financial Officer
Since 2002
Senior 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
Daniel T. Gallagher (2/27/62)
Vice President and Legal and Compliance Liaison Officer
Since 2004
Vice President, Putnam Investments. Prior to 2004,
Associate, Ropes & Gray LLP; prior to 2000, Law Clerk,
Massachusetts Supreme Judicial Court
Francis J. McNamara, III (8/19/55)
Vice President and Chief Legal Officer
Since 2004
Senior Managing Director, Putnam
Investments, Putnam Management and
Putnam Retail Management. Prior to 2004, General Counsel,
State Street Research & Management Company
James P. Pappas (2/24/53)
Vice President
Since 2004
Managing Director, Putnam Investments and Putnam Management.
From 2001 to 2002, Chief Operating Officer, Atalanta/Sosnoff
Management Corporation; prior to 2001, President and Chief
Executive Officer, UAM Investment Services, Inc.
Richard S. Robie, III (3/30/60)
Vice President
Since 2004
Senior Managing Director, Putnam
Investments, Putnam Management and
Putnam Retail Management. Prior to 2003, Senior Vice
President, United Asset Management Corporation
Charles A. Ruys de Perez (10/17/57)
Vice President and Chief Compliance Officer
Since 2004
Managing Director, Putnam Investments
Mark C. Trenchard (6/5/62)
Vice President and BSA Compliance Officer
Since 2002
Senior Vice President, Putnam Investments
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 Registered Public Accounting Firm
KPMG LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Myra R. Drucker
Charles E. Haldeman, Jr.
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
Richard B. Worley
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Associate Treasurer and Principal Executive
Officer
Jonathan S. Horwitz
Senior Vice President and Treasurer
Steven D. Krichmar
Vice President and
Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Beth S. Mazor
Vice President
Daniel T. Gallagher
Vice President and Legal and
Compliance Liaison Officer
James P. Pappas
Vice President
Richard S. Robie, III
Vice President
Mark C. Trenchard
Vice President and BSA Compliance Officer
Francis J. McNamara, III
Vice President and Chief Legal Officer
Charles A. Ruys de Perez
Vice President and Chief Compliance 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, the most recent copy
of Putnam's Quarterly Performance Summary, and Putnam's Quarterly
Ranking Summary. For more recent performance, please visit
www.putnaminvestments.com. Investors should carefully consider the
investment objective, risks, charges, and expenses of a fund, which are
described in its prospectus. For this and other information or to
request a prospectus, call 1-800-225-1581 toll free. Please read the
prospectus carefully before investing. 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.
AN038-216512 11/04
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 9/30/04
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 do not incur a
front-end load, a distribution fee, or a contingent deferred sales
charge, will differ from the 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 9/30/04
NAV
1 year 3.09%
5 years 33.92
Annual average 6.02
10 years 91.45
Annual average 6.71
Life of fund (since class A inception, 2/8/84)
Annual average 7.71
Share value: NAV
9/30/03 $13.18
9/30/04 $13.22
- ----------------------------------------------------------------------------
Distributions: No. Income Capital gains Total
12 $0.36 -- $0.36
- ----------------------------------------------------------------------------
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 (4/11/94) 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.
Please see pages 10 and 11 of the accompanying shareholder report
for a discussion of the information appearing in the tables below:
- ----------------------------------------------------------------------------
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming actual returns for the 6 months ended 9/30/04
Class Y
Expenses paid per $1,000* $3.57
Ending value (after expenses) $1,011.10
- ----------------------------------------------------------------------------
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming a hypothetical 5% annualized return for the 6 months ended 9/30/04
Class Y
Expenses paid per $1,000* $3.59
Ending value (after expenses) $1,021.45
- ----------------------------------------------------------------------------
EXPENSE RATIO COMPARISON USING ANNUALIZED DATA
Your fund's annualized expense ratio+ 0.71%
Average annualized expense ratio for Lipper peer group++ 0.77%
++ For class Y shares, Putnam has adjusted the Lipper total expense average
to reflect that class Y shares do not incur 12b-1 fees.
- ----------------------------------------------------------------------------
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:
- -----------------------------------------------
The following table presents fees billed in each of the last two
fiscal years for services rendered to the fund by the fund's
independent auditors:
Audit Audit-Related Tax All Other
Fiscal year ended Fees Fees Fees Fees
- ----------------- ---------- ------------- ------- ---------
September 30, 2004 $35,734* $-- $3,000 $535
September 30, 2003 $30,100 $-- $2,800 $5,250
*Includes fees of $2,734 billed by the fund's independent auditor
to the fund for audit procedures necessitated by regulatory and
litigation matters. These fees were reimbursed to the fund by
Putnam.
For the fiscal years ended September 30, 2004 and September 30,
2003, the fund's independent auditors billed aggregate non-audit
fees in the amounts of $3,535 and $8,050, respectively, to the
fund, Putnam Management and any entity controlling, controlled by or
under common control with Putnam Management that provides ongoing
services to the fund.
Audit Fees represents fees billed for the fund's last two fiscal
years.
Audit-Related Fees represents fees billed in the fund's last two
fiscal years for services traditionally performed by the fund's
auditor, including accounting consultation for proposed transactions
or concerning financial accounting and reporting standards and other
audit or attest services not required by statute or regulation.
Tax Fees represent fees billed in the fund's last two fiscal years
for tax compliance, tax planning and tax advice services. Tax
planning and tax advice services include assistance with tax audits,
employee benefit plans and requests for rulings or technical advice
from taxing authorities.
All Other Fees Fees represent fees billed for services relating
relating interfund trading and the registration of securities in
Japan.
Pre-Approval Policies of the Audit and Pricing Committee. The Audit
and Pricing Committee of the Putnam funds has determined that, as a
matter of policy, all work performed for the funds by the funds'
independent auditors will be pre-approved by the Committee and will
generally not be subject to pre-approval procedures.
Under certain circumstances, the Audit and Pricing Committee
believes that it may be appropriate for Putnam Investment
Management, LLC ("Putnam Management") and certain of its affiliates
to engage the services of the funds' independent auditors, but only
after prior approval by the Committee. Such requests are required
to be submitted in writing to the Committee and explain, among other
things, the nature of the proposed engagement, the estimated fees,
and why this work must be performed by that particular audit firm.
The Committee will review the proposed engagement at its next
meeting.
Since May 6, 2003, all work performed by the independent auditors
for the funds, Putnam Management and any entity controlling,
controlled by or under common control with Putnam Management that
provides ongoing services to the fund was pre-approved by the
Committee or a member of the Committee pursuant to the pre-approval
policies discussed above. Prior to that date, the Committee had a
general policy to pre-approve the independent auditor's engagements
for non-audit services with the funds, Putnam Management and any
entity controlling, controlled by or under common control with
Putnam Management that provides ongoing services to the fund.
The following table presents fees billed by the fund's principal
auditor for services required to be approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X.
Audit-Related Tax All Other Total Non-
Fiscal year ended Fees Fees Fees Audit Fees
- ----------------- ------------- ---- --------- ----------
September 30, 2004 $-- $-- $-- $--
September 30, 2003 $-- $-- $-- $--
Item 5. Audit Committee: Not applicable
- -------------------------
Item 6. Schedule of Investments: Not applicable
- --------------------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. Purchases of Equity Securities by Closed-End Management Investment
- --------------------------------------------------------------------------
Companies and Affiliated Purchasers: Not applicable
------------------------------------
Item 9. Submission of Matters to a Vote of Security Holders:
- ------------------------------------------------------------
Not applicable
Item 10. Controls and Procedures:
- --------------------------------
(a) The registrant's principal executive officer and principal
financial officer 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 generally 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 11. 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 30, 2004
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/Charles E. Porter
---------------------------
Charles E. Porter
Principal Executive Officer
Date: November 30, 2004
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: November 30, 2004