PUTNAM
U.S.
GOVERNMENT
INCOME TRUST
[GRAPHIC OMITTED:
art work]
SEMIANNUAL REPORT
MARCH 31, 1996
[LOGO:
BOSTON O LONDON O TOKYO]
<PAGE>
FUND HIGHLIGHTS
O "PUTNAM U.S. GOVERNMENT INCOME TRUST HAS EXHIBITED EXCELLENT RETURNS OVER THE
TRAILING ONE- AND THREE-YEAR PERIODS, AND HAS ACHIEVED SUCH RESULTS WITHOUT
EXCESSIVE VOLATILITY. THIS, COMBINED WITH ITS ABOVE-AVERAGE YIELD, [MAY] MAKE
THE FUND ATTRACTIVE TO CONSERVATIVE INVESTORS SEEKING A DERIVATIVE-FREE
PORTFOLIO OF U.S. GOVERNMENT SECURITIES."
-- THE VALUE LINE MUTUAL FUND SURVEY, FEBRUARY 20, 1996
CONTENTS
4 REPORT FROM PUTNAM MANAGEMENT
8 FUND PERFORMANCE SUMMARY
12 PORTFOLIO HOLDINGS
15 FINANCIAL STATEMENTS
<PAGE>
FROM THE CHAIRMAN
[GRAPHIC OMITTED:
Photo of
George Putnam]
(C) Karsh, Ottawa
Dear Shareholder:
For most of the first half of Putnam U.S. Government Income Trust's current
fiscal year -- the six months ended March 31, 1996 -- bonds enjoyed one of the
most vibrant markets in recent memory, only to turn abruptly downward toward the
end of the period. Interest rates rose markedly, causing losses in most sectors
of the market.
The bond market was reacting to concern over the possibility of rising prices
resulting from an accelerating economy. Foreseeing such volatility, Fund
Managers Michael Martino and Diane Wheeler shifted to bonds with shorter
durations to limit exposure to those sectors hit hardest by the downturn. As the
period came to a close, Mike and Diane were preparing to tilt your fund's
portfolio allocation more heavily toward mortgage-backed securities in order to
take advantage of higher interest rates.
Your fund's managers believe the market environment may remain somewhat
unsettled over the next few months. They provide a full discussion of your
fund's performance and outlook in the report that follows.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
May 15, 1996
<PAGE>
REPORT FROM THE FUND MANAGERS
MICHAEL MARTINO, LEAD MANAGER
DIANE D.F. WHEELER
The first half of Putnam U.S. Government Income Trust's 1996 fiscal year, the
six months ended March 31, spanned a sharply changing environment in the
fixed-income markets. Through the first three months of the period, the bond
market continued the strong performance that capped off a successful calendar
1995. Signs of weakness began to appear during January and February, however,
culminating in a substantial selloff on March 8 in the wake of February's
stronger-than-expected employment figures.
The convincing employment report led investors to conclude that the Federal
Reserve Board would be unlikely to reduce short-term interest rates again any
time in the near future. Moreover, in the often contrary logic of the bond
markets, investors frequently react negatively to indications of economic
strength out of fear that inflation could re-emerge, which would erode the
value of investments with fixed income streams. Despite these market
dislocations, your fund posted respectable results for the period, while
continuing to focus on strategies for seeking high current income. (Please
refer to the tables on pages 8 and 9 for complete performance information.)
O ACTIVE MANAGEMENT OF INTEREST-RATE EXPOSURE WAS KEY TO PERIOD'S RESULTS
Perhaps the key determinant of your fund's performance over the period was
active management of the portfolio's duration. Duration is the principal
measure of interest-rate sensitivity for a given portfolio of bonds. The
longer the duration, the more sensitive a portfolio is to a given change in
rates. When rates are falling, as was the case during the first three months
of the fiscal period, bond prices rise, and a relatively long duration
enables the fund to capture a greater portion of that price appreciation.
Accordingly, we maintained a duration of nearly five years over much of the
first three months of the period.
When interest rates rise, however, a long duration has the opposite effect,
causing the portfolio's value to decline more rapidly for a
<PAGE>
given change in rates. Beginning in mid-January, rates started moving higher
amid growing concern about an accelerating economy, potential inflationary
pressures, and disappointment over the lack of progress in federal budget
negotiations. Fortunately, we had shortened duration to just under four years
by the beginning of January, and we maintained it at this level through the
March market decline. Although this strategy did not fully insulate the fund
from the market's downturn, shortening duration in a timely fashion did
provide some shelter for the portfolio when rates began their ascent.
O U.S. TREASURY HOLDINGS BOOST EARLY-PERIOD PERFORMANCE
Given that calendar 1995's bond rally was led by U.S. Treasury securities,
your fund's allocation to Treasuries, which ranged from 19% of the portfolio
at the beginning of the semiannual period to approximately 22% at the end,
generally bolstered performance, especially early in the fiscal period.
During the second half of the period, we shifted away from our earlier
strategy of concentrating holdings in shorter-term Treasuries (those with
maturities of three to five years). Such a maturity structure tends to
perform best when the Fed is actively reducing short-term rates. Since the
expectation of further Fed easing waned late in the period, we believed this
positioning was unlikely to perform satisfactorily going forward.
[GRAPHIC OMITTED: horizontal bar chart EFFECTIVE MATURITY BREAKDOWN (3/31/96)
showing:
0-1 Years 8.6%
1-5 Years 14.7%
5-10 Years 76.7%
10+ Years 0.0%
Caption reads:
This chart illustrates the distribution of effective bond maturities in the
portfolio. The fund's emphasis on controlling exposure to interest-rate
fluctuations is demonstrated by the fact that, at the end of the fiscal period,
all of the fund's assets were concentrated in bonds with effective maturities
of 10 years or less. Percentages are of total market value of assets as of
3/31/96. Effective maturity is derived from calculations that incorporate
assumptions about prepayment rates and cash flows of mortgage-backed
securities. Measures of effective maturity and the assumptions on which they
are based will vary over time.]
<PAGE>
Consequently, by the end of the period, we had spread the fund's Treasury
holdings somewhat more evenly across the maturity spectrum. Moreover, in
keeping with our close monitoring of the fund's interest-rate sensitivity, we
reduced the average effective maturity of the overall portfolio from 10.5
years on September 30 to just over 6 years on March 31.
Consistent with our normal approach, we kept the majority of the fund's
portfolio invested in Ginnie Maes* throughout the period. Ginnie Maes are
mortgage-backed securities that typically provide a higher yield than
Treasuries of comparable maturity but generally underperform Treasuries in
periods of rising or falling rates.
All told, while we adjusted the fund's weightings to capitalize on the market
sector that we believed offered the best opportunities, we balanced these
efforts with an unrelenting focus on managing interest-rate risk as much as
possible.
O GINNIE MAES FAVORED IN THE FACE OF MARKET UNCERTAINTY
While we cannot provide assurances, we believe it's likely the bond market
may move within a narrow range over the next few months. Further signs of
economic strength, Treasury note auctions that will continue into May, and
rising commodity prices -- oil being the most visible -- may put pressure on
the market over the near term.
Based on this outlook, our current plan calls for favoring mortgage-backed
securities over Treasuries. Mortgage-backed securities typically outperform
Treasuries of similar maturities in periods when market volatility is
relatively low. And while we can't make predictions about the level of
fluctuation in the market, we still believe mortgages are likely to perform
well simply because they yield more than Treasuries.+ Accordingly, we are
currently targeting an increase to upward of 80% to 85% of the portfolio in
mortgage securities, with Ginnie Maes representing the bulk of the
allocation.
* Bonds issued by the Government National Mortgage Association.
+ It is important to remember, however, that mortgage-backed securities are
subject to prepayment risk, which is the risk that an investor's principal
will be returned in full at some point prior to the security's stated maturity
date. Such prepayment may cause an investor's actual rate of return to differ
from the expected rate of return.
<PAGE>
[GRAPHIC OMITTED: pie chart PORTFOLIO ALLOCATIONS (3/31/96)* showing:
Mortgage-backed securities 73.8%
U.S. Treasury securities 21.7%
Cash and short-term investments 4.5%
with a footnote of:
*Based on total market value of assets. The allocation to mortgage-backed
securities is primarily concentrated in bonds issued by the Government
National Mortgage Association (Ginnie Mae). Allocations will vary over time.]
In general, we expect to maintain a slightly defensive approach to the market
until the economy's direction and interest-rate trends become clearer. This
will likely entail keeping duration near the Ginnie Mae fund group average+
-- that is, neither more aggressively nor more conservatively positioned
relative to similar funds -- while increasing the weighting in Ginnie Maes
for their yield advantages.
+ Lipper Analytical Services categorizes the fund as a Ginnie Mae fund.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 3/31/96, there is no guarantee the fund will continue to hold
these securities in the future.
<PAGE>
PERFORMANCE SUMMARY
PERFORMANCE SHOULD ALWAYS BE CONSIDERED IN LIGHT OF A FUND'S INVESTMENT
STRATEGY. PUTNAM U.S. GOVERNMENT INCOME TRUST IS DESIGNED FOR INVESTORS SEEKING
CURRENT INCOME CONSISTENT WITH CAPITAL PRESERVATION. THE FUND PRIMARILY INVESTS
IN SECURITIES BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES
GOVERNMENT, AND IN REPURCHASE AGREEMENTS AND FORWARD COMMITMENTS WITH RESPECT TO
THESE SECURITIES.
This section provides, at a glance, information about your fund's performance.
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 3/31/96
CLASS A CLASS B CLASS M
(INCEPTION DATE) (2/8/84) (4/27/92) (2/6/95)
NAV POP NAV CDSC NAV POP
- --------------------------------------------------------------------------------
6 months 2.21% -2.68% 1.82% -3.12% 2.01% -1.34%
- --------------------------------------------------------------------------------
1 year 9.74 4.55 8.84 3.84 9.54 5.97
- --------------------------------------------------------------------------------
5 years 37.77 31.21 -- -- -- --
Annual average 6.62 5.58 -- -- -- --
- --------------------------------------------------------------------------------
10 years 112.23 102.18 -- -- -- --
Annual average 7.82 7.29 -- -- -- --
- --------------------------------------------------------------------------------
Life of class B -- -- 22.16 19.36 -- --
Annual average -- -- 5.22 4.60 -- --
- --------------------------------------------------------------------------------
Life of class M -- -- -- -- 12.77 9.13
Annual average -- -- -- -- 11.01 7.89
- --------------------------------------------------------------------------------
Performance data represent past results, do not reflect future performance, and
will differ for each share class. They do not take into account any adjustment
for taxes payable on reinvested distributions or, for class A shares,
distribution fees prior to implementation of the class A distribution plan in
1990. Investment returns and net asset value will fluctuate so that an
investor's shares, when sold, may be worth more or less than their original
cost. POP assumes 4.75% maximum sales charge for class A shares and 3.25% for
class M shares. CDSC for class B shares assumes the applicable sales charge.
with the maximum being 5%.
<PAGE>
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/96
LEHMAN BROS.
MORTGAGE-BACKED CONSUMER
SECURITIES INDEX PRICE INDEX
- --------------------------------------------------------------------------------
6 months 2.86% 1.63%
- --------------------------------------------------------------------------------
1 year 10.49 2.84
- --------------------------------------------------------------------------------
5 years 46.87 15.33
Annual average 7.99 2.89
- --------------------------------------------------------------------------------
10 years 137.88 43.11
Annual average 9.05 3.65
- --------------------------------------------------------------------------------
Life of class B 30.60 11.61
Annual average 7.05 2.84
- --------------------------------------------------------------------------------
Life of class M 13.85 3.59
Annual average 11.79 3.12
- --------------------------------------------------------------------------------
Performance data represent past results, do not reflect future performance, and
will differ for each share class. They do not take into account any adjustment
for taxes payable on reinvested distributions. Investment returns and net asset
value will fluctuate so that an investor's shares, when sold, may be worth more
or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 3/31/96
CLASS A CLASS B CLASS M
- --------------------------------------------------------------------------------
Distribution (number) 6 6 6
- --------------------------------------------------------------------------------
Income $0.446 $0.395 $0.431
- --------------------------------------------------------------------------------
TOTAL $0.446 $0.395 $0.431
- --------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- --------------------------------------------------------------------------------
9/30/95 $12.95 $13.60 $12.91 $12.96 $13.40
- --------------------------------------------------------------------------------
3/31/96 12.79 13.43 12.75 12.79 13.22
- --------------------------------------------------------------------------------
Current return
End of period NAV POP NAV NAV POP
- --------------------------------------------------------------------------------
Current dividend rate(1) 6.85% 6.52% 6.02% 6.57% 6.35%
- --------------------------------------------------------------------------------
Current 30-day SEC yield(2) 5.78 5.50 5.02% 5.53 5.35
- --------------------------------------------------------------------------------
(1)Income portion of most recent distribution, annualized and divided by NAV or
POP at end of period. (2)Based on investment income, calculated using SEC
guidelines.
<PAGE>
TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial sales charge.
CLASS B SHARES may be subject to a sales charge upon redemption.
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.
NET ASSET VALUE (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including any
initial or contingent deferred sales charge.
PUBLIC OFFERING PRICE (POP) is the price of a mutual fund share plus the maximum
sales charge levied at the time of purchase. POP performance figures shown here
assume the maximum 4.75% sales charge for class A shares and 3.25% for class M
shares.
CONTINGENT DEFERRED SALES CHARGE (CDSC) is a charge applied at the time of the
redemption of class B shares and assumes redemption at the end of the period.
Your fund's 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.
COMPARATIVE BENCHMARKS
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged list of GNMA
bonds. This index assumes reinvestment of all distributions and interest
payments, does not take into account brokerage commissions or other costs, may
include bonds different from those in the fund, and may pose different risks
than the fund.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of inflation; it does not
represent an investment return.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PUTNAM GROWTH FUNDS PUTNAM TAX-FREE INCOME FUNDS
Asia Pacific Growth Fund Intermediate Tax Exempt Fund
Capital Appreciation Fund Municipal Income Fund
Diversified Equity Trust Tax Exempt Income Fund
Europe Growth Fund Tax-Free High Yield Fund
Global Growth Fund Tax-Free Insured Fund
Health Sciences Trust STATE TAX-FREE INCOME FUNDS**
International New Opportunities Fund Arizona, California, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, New York,
Investors Fund Ohio, and Pennsylvania
Natural Resources Trust
LIFESTAGES(SM) FUNDS
New Opportunities Fund
Putnam Asset Allocation Funds--three
OTC Emerging Growth Fund investment portfolios that spread your
money across a variety of stocks,
Overseas Growth Fund bonds, and money market investments
to help maximize your return and
Vista Fund reduce your risk.
Voyager Fund The three portfolios:
Voyager II Fund Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative Portfolio
PUTNAM GROWTH AND INCOME FUNDS
Putnam Asset Allocation: Growth Portfolio
Balanced Retirement Fund*
Convertible Income-Growth Trust MOST CONSERVATIVE INVESTMENTS+
Equity Income Fund PUTNAM MONEY MARKET FUNDS:
The George Putnam Fund of Boston California Tax Exempt Money Market Fund
The Putnam Fund for Growth and Income Money Market Fund
Growth and Income Fund II New York Tax Exempt Money Market Fund
New Value Fund Tax Exempt Money Market Fund
Utilities Growth and Income Fund CDS AND SAVINGS ACCOUNTS++
PUTNAM INCOME FUNDS * Formerly Putnam Managed Income Trust
American Government Income Fund ** Not available in all states.
Diversified Income Trust + Relative to above.
Federal Income Trust ++ Not offered by Putnam Investments.
Certificates of deposit offer a fixed
Global Governmental Income Trust rate of return and may be insured, up
to certain limits, by federal/state
High Yield Advantage Fund agencies. Savings accounts may also be
insured up to certain limits.
High Yield Trust
Please call your financial advisor or
Income Fund Putnam at 1-800-225-1581 to obtain a
prospectus for any Putnam fund. It
Intermediate U.S. Government Income Fund contains more complete information,
including charges and expenses.
Preferred Income Fund Please read it carefully before you
invest or send money.
U.S. Government Income Trust
</TABLE>
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (99.4%)*
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------
U.S. AGENCY MORTGAGE PASS-THROUGHS (76.8%)
- ----------------------------------------------------------------------------------------
<C> <S> <C>
Government National Mortgage Association
$ 264,390 16s, with various due dates from October 15, 2011
to December 15, 2011 $ 311,732
460,578 15s, with various due dates from July 15, 2011 to
March 15, 2013 558,019
357,567 14s, with various due dates from July 14, 2014 to
August 15, 2014 432,544
1,533,419 13 1/2s, with various due dates from September 20, 2014
to June 20, 2015 1,824,769
1,584,120 13s, with various due dates from October 20, 2013 to
October 20, 2015 1,860,351
877,251 12 1/2s, with various due dates from November 20, 2013
to November 20, 2015 1,018,159
710,219 12s, with various due dates from April 20, 2014 to
November 20, 2015 813,423
4,725,671 11 1/2s, with various due dates from June 15, 2010 to
November 15, 2019 5,348,818
4,218,254 11s, with various due dates from November 20, 2013
to June 20, 2019 4,716,535
97,989 11s, Midgets, July 15, 2000 103,623
264,660 10 7/8s, February 15, 2010 289,803
40,342,092 10 1/2s, with various due dates from April 15, 2010
to November 15, 2021 44,246,923
1,730,121 10s, with various due dates from July 15, 2009 to
January 20, 2021 1,881,800
144,413,302 9 1/2s, with various due dates from August 15, 2009 to
April 15, 2023 157,689,218
179,144,784 9s, with various due dates from August 15, 2004 to
January 15, 2025 191,436,055
2,487,481 9s, Project Loans, June 15, 2021 2,612,632
4,957,701 8.58s, Project Loans, July 15, 2024 5,038,264
5,788,366 8 1/2s, Project Loans, with various due dates from
September 15, 2024 to March 15, 2027 6,045,225
211,808,130 8 1/2s , with various due dates from April 15, 2021
to June 15, 2025 224,630,459
21,358,426 8 1/2s, Midgets, with various due dates from
May 15, 2001 to April 15, 2008 22,372,951
66,330,031 8s, Midgets, with various due dates from
April 15, 2008 to October 15, 2009 68,755,223
313,141,285 8s, with various due dates from October 15, 2007 to
August 15, 2025 323,103,196
200,000,000 8s, TBA, April 16, 2026+++ 204,125,000
719,260,836 7 1/2s, with various due dates from November 15, 2023
to December 15, 2025 720,671,178
699,485,821 7s, with various due dates from October 15, 2022 to
September 15, 2025 681,342,908
<PAGE>
<CAPTION>
CORPORATE BONDS AND NOTES
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------
U.S. AGENCY MORTGAGE PASS-THROUGHS (continued)
- ----------------------------------------------------------------------------------------
$678,168,319 6 1/2s, with various due dates from
December 1, 2010 to September 15, 2025 $ 642,352,555
Government National Mortgage Association
Graduated Payment Mortgages
92,767 15s, with various due dates from May 15, 2012 to
September 15, 2012 111,900
77,625 13 3/4s, with various due dates from September 20, 2014
to November 20, 2014 90,918
302,786 13 1/2s, with various due dates from June 15, 2010
to November 15, 2012 356,152
147,736 13 1/4s, with various due dates from April 15, 2011
to November 15, 2014 254,153
78,115 13s, with various due dates from November 15, 2010
to December 15, 2010 91,687
1,734,209 12 3/4s, with various due dates from January 20, 2014
to July 15, 2015 2,029,753
330,683 12 1/2s, with various due dates from February 20, 2014
to June 15, 2010 382,759
1,497,963 12 1/4s, with various due dates from August 15, 2013
to July 15, 2015 1,732,902
2,526,635 11 1/4s, with various due dates from July 15, 2013
to January 15, 2016 2,832,200
495,052 10 3/4s, with various due dates from January 15, 2015
to February 15, 2016 552,447
101,673 10 1/4s, with various due dates from March 15, 2016
to December 15, 2020 1,212,529
2,063,474 10s, with various due dates from November 15, 2009
to May 15, 2010 2,271,111
2,466,879 9 1/4s, with various due dates from April 15, 2016 to
February 15, 2020 2,597,125
--------------
$3,328,096,999
<CAPTION>
U.S. TREASURY OBLIGATIONS (22.6%) VALUE
- ----------------------------------------------------------------------------------------
U. S. Treasury Notes
$119,000,000 9 1/8s, May 15, 1999 $ 129,449,390
167,000,000 8 7/8s, November 15, 1998 178,846,980
100,000,000 7 7/8s, August 15, 2001 107,750,000
150,000,000 7 1/2s, May 15, 2002 159,774,000
200,000,000 7 1/4s, May 15, 2004 210,906,000
5,000,000 5 3/4s, October 31, 2000 4,927,350
25,000,000 5 5/8s, February 15, 2006 23,711,000
10,000,000 5 1/4s, December 31, 1997 9,917,200
115,000,000 5 1/8s, February 28, 1998 113,670,600
40,000,000 5s, January 31, 1998 39,468,800
--------------
$ 978,421,320
- ----------------------------------------------------------------------------------------
TOTAL U. S. GOVERNMENT AND AGENCY OBLIGATIONS
(cost $ 4,339,402,949) $4,306,518,319
- ----------------------------------------------------------------------------------------
<PAGE>
SHORT-TERM INVESTMENTS (4.7%)*
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------
$ 54,422,000 Interest in $ 844,579,000 joint repurchase agreement
dated March 29, 1996, with Morgan (J.P.) & Co., Inc.,
due April 1, 1996 with respect to various U.S. Treasury
obligations-maturity value of $ 54,446,489 for an
effective yield of 5.40%. $ 54,446,489
150,000,000 Interest in $750,000,000 joint repurchase agreement
dated March 29, 1996, with Goldman Sachs Inc.,
due April 1, 1996 with respect to various
U.S. Treasury obligations-maturity value of $150,066,875
for an effective yield of 5.35%. 150,066,875
--------------
TOTAL SHORT TERM INVESTMENTS
(cost $204,513,364) $ 204,513,364
- ----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (cost $ 4,543,916,313)*** $4,511,031,683
- ----------------------------------------------------------------------------------------
<FN>
*Percentages indicated are based on net assets of $4,333,369,031.
+++TBAs are mortgage backed securities traded under delayed delivery commitments settling
after March 31, 1996. Although the unit price for the trades has been established, the
principal value has not been finalized. However, the amount of the commitments will
not fluctuate more than 2.0% from the principal amount. The cost of TBA purchases at
March 31, 1996 is $204,234,375.
***The aggregate identified cost on a tax cost basis is $4,543,916,313, resulting in
gross unrealized appreciation and depreciation of $54,954,653 and $87,839,283,
respectively, or net unrealized depreciation of $32,884,630.
</FN>
<CAPTION>
TBA SALE COMMITMENTS OUTSTANDING AT MARCH 31, 1996
(PROCEEDS RECEIVABLE $ 380,562,500)
- ----------------------------------------------------------------------------------------
PRINCIPAL DELIVERY COUPON MARKET
AGENCY AMOUNT MONTH RATE VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA $400,000,000 April 6.50% $378,872,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996 (Unaudited)
<S> <C>
ASSETS
- ----------------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $4,543,916,313) (Note 1) $4,511,031,683
- ----------------------------------------------------------------------------------------------------------------------
Cash 14,877,886
- ----------------------------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 39,366,927
- ----------------------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,494,599
- ----------------------------------------------------------------------------------------------------------------------
Receivable for securities sold 382,561,496
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 4,950,332,591
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------
Payable for securities purchased 219,867,699
- ----------------------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 8,376,249
- ----------------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 4,655,778
- ----------------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 1,467,188
- ----------------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 4,242
- ----------------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 11,572
- ----------------------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 3,126,390
- ----------------------------------------------------------------------------------------------------------------------
TBA sale commitments, at value (proceeds receivable $380,562,500) 378,872,000
- ----------------------------------------------------------------------------------------------------------------------
Other accrued expenses 582,442
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 616,963,560
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS $4,333,369,031
- ----------------------------------------------------------------------------------------------------------------------
REPRESENTED BY
- ----------------------------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $4,681,800,342
- ----------------------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (11,330,897)
- ----------------------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (305,906,284)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (31,194,130)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL-REPRESENTING NET ASSETS APPLICABLE TO CAPITAL SHARES OUTSTANDING $4,333,369,031
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
- ----------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share ($2,727,795,468 divided by 213,275,636 shares) $12.79
- ----------------------------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $12.79)* $13.43
- ----------------------------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share ($1,597,115,891 divided by 125,260,789 shares)+ $12.75
- ----------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share ($5,303,019 divided by 414,753 shares) $12.79
- ----------------------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $12.79)* $13.22
- ----------------------------------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share ($3,154,653 divided by
246,511 shares) $12.80
- ----------------------------------------------------------------------------------------------------------------------
* 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.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF OPERATIONS
Six months ended March 31, 1996 (Unaudited)
INTEREST INCOME $162,619,605
- -------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 9,463,454
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 4,245,855
- -------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 54,055
- -------------------------------------------------------------------------------
Administrative services (Note 2) 22,229
- -------------------------------------------------------------------------------
Distribution fees-Class A (Note 2) 3,581,943
- -------------------------------------------------------------------------------
Distribution fees-Class B (Note 2) 8,245,153
- -------------------------------------------------------------------------------
Distribution fees-Class M (Note 2) 9,628
- -------------------------------------------------------------------------------
Reports to shareholders 60,754
- -------------------------------------------------------------------------------
Registration fees 225
- -------------------------------------------------------------------------------
Auditing 78,921
- -------------------------------------------------------------------------------
Legal 34,426
- -------------------------------------------------------------------------------
Postage 222,720
- -------------------------------------------------------------------------------
Other 5,379
- -------------------------------------------------------------------------------
TOTAL EXPENSES 26,024,742
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (968,928)
- -------------------------------------------------------------------------------
NET EXPENSES 25,055,814
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME 137,563,791
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 45,795,066
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments and TBA sale
commitments during the period (86,328,927)
- -------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS (40,533,861)
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 97,029,930
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
MONTHS ENDED YEAR ENDED
MARCH 31 SEPTEMBER 30
1996* 1995
- -------------------------------------------------------------------------------
DECREASE IN NET ASSETS
- -------------------------------------------------------------------------------
OPERATIONS:
- -------------------------------------------------------------------------------
Net investment income $137,563,791 $317,769,287
- -------------------------------------------------------------------------------
Net realized gain (loss) on
investment transactions 45,795,066 (99,396,679)
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investment transactions (86,328,927) 316,729,443
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 97,029,930 535,102,051
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
- -------------------------------------------------------------------------------
From net investment income
- -------------------------------------------------------------------------------
Class A (97,957,377) (199,250,498)
- -------------------------------------------------------------------------------
Class B (50,022,788) (98,392,028)
- -------------------------------------------------------------------------------
Class M (121,352) (29,669)
- -------------------------------------------------------------------------------
Class Y (793,171) (1,724,058)
- -------------------------------------------------------------------------------
From return of capital (Note 1)
- -------------------------------------------------------------------------------
Class A -- (19,291,284)
- -------------------------------------------------------------------------------
Class B -- (9,526,242)
- -------------------------------------------------------------------------------
Class M -- (2,873)
- -------------------------------------------------------------------------------
Class Y -- (166,922)
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (207,509,923) (599,626,772)
- -------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (259,374,681) (392,908,295)
- -------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------
Beginning of period 4,592,743,712 4,985,652,007
- -------------------------------------------------------------------------------
END OF PERIOD (including distributions
in excess of net investment income of
$11,330,897 and $0, respectively) $4,333,369,031 $4,592,743,712
- -------------------------------------------------------------------------------
*Unaudited.
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
FEBRUARY 6, 1995
SIX MONTHS (COMMENCEMENT SIX MONTHS
ENDED OF OPERATIONS) TO ENDED YEAR ENDED
MARCH 31 SEPTEMBER 30 MARCH 31 SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------------------------------
1996*+ 1995 1996*+ 1995
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS M CLASS Y
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $12.96 $12.29 $12.98 $12.38
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .40 .61 .46 .90
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.14) .66 (.17) .64
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS .26 1.27 .29 1.54
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income (.43) (.55) (.47) (.86)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain on
investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital (a) -- (.05) -- (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.43) (.60) (.47) (.94)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.79 $12.96 $12.80 $12.98
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET
ASSET VALUE (%) (b) 2.01(c) 10.54(c) 2.19(c) 13.07
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(in thousands) $5,303 $2,609 $3,155 $43,196
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) (d) .57(c) .79(c) .31(c) .65
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.08(c) 4.14(c) 3.21(c) 7.16
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 102.99(c) 195.45 102.99(c) 195.45
- ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
APRIL 11, 1994
(COMMENCEMENT SIX MONTHS
OF OPERATIONS) TO ENDED
SEPTEMBER 30 MARCH 31 YEAR ENDED SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1996*+ 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS Y CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF PERIOD $12.68 $12.91 $12.33 $13.60 $13.93
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .39 .36 .79 .64 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.30) (.12) .61 (1.05) (.35)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS .09 .24 1.40 (.41) .65
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income (.30) (.40) (.75) (.67) (.98)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain on
investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital (a) (.09) -- (.07) (.19) --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.39) (.40) (.82) (.86) (.98)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.38 $12.75 $12.91 $12.33 $13.60
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET
ASSET VALUE (%) (b) .11(c) 1.82(c) 11.82 (3.16) 4.85
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(in thousands) $19,337 $1,597,116 $1,643,923 $1,752,887 $2,232,219
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) (d) .29(c) .81(c) 1.65 1.60 1.61
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.63(c) 2.80(c) 6.33 6.55 7.11
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 209.00 102.99(c) 195.45 209.00 295.88
- ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS
(continued)
APRIL 27, 1992
(COMMENCEMENT SIX MONTHS
OF OPERATIONS) TO ENDED
SEPTEMBER 30 MARCH 31
- ------------------------------------------------------------------------------------------------------------------------------------
1992+ 1996*+
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS B CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $13.64 $12.95
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .48 .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .28 (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS .76 .29
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income (.47) (.45)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain on
investments -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital (a) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.47) (.45)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.93 $12.79
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET
ASSET VALUE (%) (b) 5.67(c) 2.21(c)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(in thousands) $660,515 $2,727,795
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) (d) .77(c) .44(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.10(c) 3.17(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 293.36 102.99(c)
- ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
YEAR ENDED SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $12.37 $13.63 $13.96 $13.89 $13.51
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .88 .69 1.10 1.19 1.34
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .61 (1.00) (.36) .12 .35
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 1.49 (.31) .74 1.31 1.69
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income (.83) (.74) (1.07) (1.21) (1.31)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain on
investments -- -- -- (.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Return of capital (a) (.08) (.21) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.91) (.95) (1.07) (1.24) (1.31)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.95 $12.37 $13.63 $13.96 $13.89
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET
ASSET VALUE (%) (b) 12.62 (2.35) 5.55 9.92 13.10
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(in thousands) $2,903,016 $3,213,428 $4,797,481 $4,465,162 $2,540,541
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) (d) .90 .85 .88 1.01 .91
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.09 7.31 7.92 8.44 9.67
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 195.45 209.00 295.88 293.36 118.96
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* Unaudited
+ Weighted average share method
(a) Distributions of capital for the year ended September 30, 1995 and September 30, 1994 have been calculated in accordance with
Statement of Position 93-2 "Determination, Disclosure and Financial Statement Presentation of Income, Capital Gains, and Return
of Capital Distributions by Investment Companies."
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Not annualized.
(d) The ratio of expenses to average net assets for the year ended September 30, 1995 and thereafter, includes amounts paid through
brokerage service and expense offset arrangements. Prior period ratios exclude these amounts. (See Note 2.)
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1996 (Unaudited)
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The fund is registered under the Investment Company Act of 1940, as amended, as
a diversified, open-end management investment company. The fund's investment
objective is to seek as high a level of current income as is consistent with
preservation of capital by investing exclusively in securities backed by the
full faith and credit of the United States and in repurchase agreements and
forward commitments with respect to those securities.
The fund offers class A, class B, class M and class Y shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge but pay a higher ongoing distribution fee than class A
shares, and may be subject to a contingent deferred sales charge, if those
shares are redeemed within approximately six years of purchase. 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
shares. Class Y shares, which are sold at net asset value, are generally subject
to the same expenses as class A shares and class B shares, but do not bear a
distribution fee. Class Y shares are sold to defined contribution plans that
initially invest at least $250 million in a combination of Putnam Funds.
Expenses of the trust are borne pro-rata by the holders of each class of shares,
except that each class bears expenses unique to that class (including the
distribution fees applicable to such class). Each class votes as a class only
with respect to its own distribution plan or other matters on which a class vote
is required by law or determined by the Trustees. Shares of each class would
receive their pro-rata share of the net assets of the fund, if that fund were
liquidated. In addition, the Trustees declare separate dividends on each class
of shares.
The following is a summary of significant accounting policies followed by the
fund in the preparation of its financial statements. The preparation of
financial statements is in conformity with generally accepted accounting
principles and requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities. Actual results could differ from
those estimates.
A SECURITY VALUATION Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of some
securities traded over-the-counter -- the last reported bid price, except that
certain U.S. government obligations are stated at the mean between the bid and
asked prices. Short-term investments having remaining maturities of 60 days or
less are stated at amortized cost, which approximates market, and other
investments are stated at fair value following procedures approved by the
Trustees.
B JOINT TRADING ACCOUNT Pursuant to an exemptive order issued by the Securities
and Exchange Commission, the fund may transfer uninvested cash balances into a
joint trading account along with the cash of other registered investment
companies managed by Putnam Investment Management, Inc. ("Putnam Management"),
the fund's Manager, a wholly-owned subsidiary of
<PAGE>
Putnam Investments, Inc. and certain other accounts. These balances may be
invested in one or more repurchase agreements and/or short-term money market
instruments.
C REPURCHASE AGREEMENTS The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
102% of the resale price, including accrued interest. Putnam Management is
responsible for determining that the value of these underlying securities is at
all times at least equal to 102% of the resale price, including accrued
interest.
D SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are
accounted for on the trade date (date the order to buy or sell is executed).
Interest income is recorded on the accrual basis.
E TBA PURCHASE COMMITMENTS The fund, may enter into "TBA" (to be announced)
purchase commitments to purchase securities for a fixed unit price at a future
date beyond customary settlement time. Although the unit price has been
established, the principal value has not been finalized. However, the amount of
the commitments will not fluctuate more than 2.0% from the principal amount. The
fund holds, and maintains until settlement date, cash or high-grade debt
obligations in an amount sufficient to meet the purchase price, or the fund may
enter into offsetting contracts for the forward sale of other securities it
owns. Income on the securities will not be earned until settlement date. TBA
purchase commitments may be considered securities in themselves, and involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the fund's other assets. Unsettled TBA purchase commitments are valued at the
current market value of the underlying securities, generally according to the
procedures described under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with the
intention of acquiring securities for their portfolio or for delivery pursuant
to options contracts it has entered into, the fund may dispose of a commitment
prior to settlement if Putnam Management deem it appropriate to do so.
F TBA SALE COMMITMENTS The fund may enter into TBA sale commitments to hedge its
portfolio positions or to sell mortgage-backed securities it owns under delayed
delivery arrangements. Proceeds of TBA sale commitments are not received until
the contractual settlement date. During the time a TBA sale commitment is
outstanding, equivalent deliverable securities, or an offsetting TBA purchase
commitment deliverable on or before the sale commitment date, are held as
"cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Security valuation" above. The contract is "marked-to-market" daily and the
change in market value is recorded by a 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 on the underlying
security. 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.
G FEDERAL TAXES It is the policy of the fund to distribute all of its taxable
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distrib-
<PAGE>
ute an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has been made
for federal taxes on income, capital gains or unrealized appreciation on
securities held and for excise tax on income and capital gains.
At September 30, 1995, the fund had a capital loss carryover of approximately
$277,035,906 available to offset future capital gains, if any. The amount of the
carryover and the expiration dates are:
LOSS CARRYOVER EXPIRATION
- ------------------------------------------------------
$ 1,685,556 September 30, 1999
9,296,752 September 30, 2002
266,053,598 September 30, 2003
- ------------------------------------------------------
H DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders are recorded by
the fund on the ex-dividend date. At certain times, the fund may pay
distributions at a level rate even though, as a result of market conditions or
investment decisions, the fund may not achieve projected investment results for
a given period. The amount and character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. Reclassifications are made to the
fund's capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations.
NOTE 2
MANAGEMENT FEE, ADMINISTRATIVE SERVICES, AND OTHER TRANSACTIONS
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such fee
is based on the following annual rates: 0.57% 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% of any amount over $1.5 billion and by the amount of certain
brokerage commissions and fees (less expenses) received by affiliates of Putnam
Management on the fund's portfolio transactions.
The fund reimburses Putnam Management for the compensation and related expenses
of certain officers of the fund and their staff who provide administrative
services to the fund. The aggregate amount of all such reimbursements is
determined annually by the Trustees.
Trustees of the fund receive an annual Trustees fee of $5,320 and an additional
fee for each Trustee's meeting attended. Trustees who are not interested persons
of Putnam Management and who serve on committees of the Trustees receive
additional fees for attendance at certain committee meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows the
Trustees to defer the receipt of all or a portion of Trustees Fees payable on or
after July 1, 1995. The deferred fees remain in the fund and are invested in the
fund or in other Putnam funds until distribution in accordance with the Plan.
Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust
Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the six months ended March 31, 1996, fund expenses were reduced by $968,928
under expense offset arrangements with PFTC. Investor servicing and custodian
fees reported in the Statement of operations exclude these credits. The fund
could have invested the assets utilized in connection with the expense offset
arrangements in an income producing asset if it had not entered into such
arrangements.
The fund has adopted distribution plans (the "Plans") with respect to its class
A, class B and class M shares pursuant to Rule 12b-1 under the Investment
<PAGE>
Company Act of 1940. The purpose of the Plans is to compensate Putnam Mutual
Funds Corp., a wholly-owned subsidiary of Putnam Investments Inc., for services
provided and expenses incurred by it in distributing shares of the fund. The
Plans provide for payments by the fund to Putnam Mutual Funds Corp. at an annual
rate up to 0.35%, 1.00% and 1.00% of the average net assets attributable to
class A, class B and class M shares, respectively. The Trustees have approved
payment by the fund at an annual rate of 0.25%, 1.00% and .50% of the average
net assets attributable to class A, class B and class M shares respectively.
For the six months ended March 31, 1996, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $193,914 and $3,194 from the sale of
class A and class M shares, respectively and received $1,696,450 in contingent
deferred sales charges from redemptions of class B shares. A deferred sales
charge of up to 1% is assessed on certain redemptions of class A shares. For the
six months ended March 31, 1996, Putnam Mutual Funds Corp., acting as
underwriter received $11,898 on class A redemptions.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the period ended March 31, 1996, purchases and sales of U.S. government
obligations other than short-term investments aggregated $4,491,538,832, and
$5,288,005,200, respectively. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
NOTE 4
CAPITAL SHARES
At March 31, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31 YEAR ENDED SEPTEMBER 30
1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------
Shares sold 9,425,149 $122,670,075 20,513,586 $256,364,519
- ----------------------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,583,718 59,454,893 10,581,956 131,699,356
- ----------------------------------------------------------------------------------------
14,008,867 182,124,968 31,095,542 388,063,875
- ----------------------------------------------------------------------------------------
Shares repurchased (24,912,477) (324,476,987) (66,744,399) (831,363,423)
- ----------------------------------------------------------------------------------------
NET DECREASE (10,903,610) $(142,352,019) (35,648,857) $(443,299,548)
- ----------------------------------------------------------------------------------------
SIX MONTHS ENDED MARCH 31 YEAR ENDED SEPTEMBER 30
1996 1995
- ----------------------------------------------------------------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------
Shares sold 9,117,589 $118,278,054 15,354,943 $191,981,320
- ----------------------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,457,215 31,787,796 5,507,748 68,384,864
- ----------------------------------------------------------------------------------------
11,574,804 150,065,850 20,862,691 260,366,184
- ----------------------------------------------------------------------------------------
Shares repurchased (13,669,031) (177,357,863) (35,657,194) (442,144,853)
- ----------------------------------------------------------------------------------------
NET DECREASE (2,094,227) $(27,292,013) (14,794,503) $(181,778,669)
- ----------------------------------------------------------------------------------------
<PAGE>
SIX MONTHS ENDED MARCH 31 YEAR ENDED SEPTEMBER 30
1996 1995
- ----------------------------------------------------------------------------------------
CLASS Y SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------
Shares sold 179,701 $2,334,583 2,236,635 $28,839,492
- ----------------------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 61,095 793,171 150,768 1,890,972
- ----------------------------------------------------------------------------------------
240,796 3,127,754 2,387,403 30,730,464
- ----------------------------------------------------------------------------------------
Shares repurchased (3,322,342) (43,774,323) (621,380) (7,851,105)
- ----------------------------------------------------------------------------------------
NET INCREASE
(DECREASE) (3,081,546) $(40,646,569) 1,766,023 $22,879,359
- ----------------------------------------------------------------------------------------
FOR THE PERIOD
FEBRUARY 6, 1995
(COMMENCEMENT OF
OPERATIONS) TO
SIX MONTHS ENDED MARCH 31 SEPTEMBER 30
1996 1995
- ----------------------------------------------------------------------------------------
CLASS M SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------
Shares sold 271,133 $3,530,418 215,216 $2,752,612
- ----------------------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,714 99,995 2,262 28,915
- ----------------------------------------------------------------------------------------
278,847 3,630,413 217,478 2,781,527
- ----------------------------------------------------------------------------------------
Shares repurchased (65,422) (849,735) (16,150) (209,441)
- ----------------------------------------------------------------------------------------
NET INCREASE 213,425 $2,780,678 201,328 $2,572,086
- ----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FUND INFORMATION
INVESTMENT MANAGER OFFICERS
Putnam Investment George Putnam
Management, Inc. President
One Post Office Square
Boston, MA 02109 Charles E. Porter
Executive Vice President
MARKETING SERVICES
Putnam Mutual Funds Corp. Patricia C. Flaherty
One Post Office Square Senior Vice President
Boston, MA 02109
John D. Hughes
CUSTODIAN Senior Vice President and Treasurer
Putnam Fiduciary Trust Company
Lawrence J. Lasser
LEGAL COUNSEL Vice President
Ropes & Gray
Gordon H. Silver
TRUSTEES Vice President
George Putnam, Chairman
Gary N. Coburn
William F. Pounds, Vice Chairman Vice President
Jameson Adkins Baxter Alan J. Bankart
Vice President
Hans H. Estin
Michael Martino
John A. Hill Vice President and Fund Manager
Elizabeth T. Kennan Diane D.F. Wheeler
Vice President and Fund Manager
Lawrence J. Lasser
William N. Shiebler
Robert E. Patterson Vice President
Donald S. Perkins John R. Verani
Vice President
George Putnam, III
Paul M. O'Neil
Eli Shapiro Vice President
A.J.C. Smith Beverly Marcus
Clerk and Assistant Treasurer
W. Nicholas Thorndike
This report is for the information of shareholders of Putnam U.S. Government
Income Trust Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives, and operating policies of the fund, and the most recent
copy of Putnam's Quarterly Performance Summary. For more information, or to
request a prospectus, call toll-free: 1-800-225-1581.
SHARES OF MUTUAL FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
<PAGE>
------------
[LOGO: PUTNAM INVESTMENTS] Bulk Rate
U.S. Postage
THE PUTNAM FUNDS PAID
One Post Office Square Putnam
Boston, Massachusetts 02109 Investments
------------
24524-032/885/689 5/96
<PAGE>
PUTNAM INVESTMENTS [LOGO]
- -------------------------------------------------------------------------------
PUTNAM U.S. GOVERNMENT INCOME TRUST
Supplement to the Semiannual Report dated March 31, 1996
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 defined contribution plans investing $250 million or more in one
or more of Putnam's funds or private accounts. Performance of class Y shares,
which incur neither a front-end load, distribution fee, nor contingent deferred
sales charge, will differ from performance of class A, B, and M shares, which
are discussed more extensively in the semiannual report.
SEMIANNUAL RESULTS AT A GLANCE
- -------------------------------------------------------------------------------
TOTAL RETURN: NAV
Six months ended 3/31/96 2.19%
One year ended 3/31/96 9.94
Life of class (since 4/4/94 inception date) 16.39
Annual average 7.93
- -------------------------------------------------------------------------------
SHARE VALUE: NAV
9/30/95 $12.98
3/31/96 12.67
- -------------------------------------------------------------------------------
DISTRIBUTIONS: NO. INCOME TOTAL
6 $0.464 $0.464
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CURRENT RETURN (END OF PERIOD) TOTAL
Current dividend rate(1) 7.13%
Current 30-day SEC yield(2) 6.04
(1)Income portion of most recent distribution, annualized and divided by NAV
at end of period.
(2)Based on investment income only, calculated using SEC guidelines.
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Please note that past performance does not indicate future results. Investment
returns and net asset value will fluctuate so that 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.
