Putnam
U.S.
Government
Income Trust
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Putnam U.S. Government Income Trust's simple style has made it a steady
performer....Overall, this offering's performance has been
solid....Investors looking for a predictable fund with a decent
risk/reward profile will be fine here."
-- Morningstar Mutual Funds, July 8, 1998
* "Putnam U.S. Government Income Trust provided strong competitive
performance over the past year. For the 12 months ended September 30,
1998, the fund's class A shares were ranked 13 out of 50 GNMA funds,
according to Lipper Analytical Services, placing it in the top 26% of
similar funds based on total return.*
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
17 Financial statements
* Past performance is not indicative of future results. Lipper rankings
are based on total return performance, vary over time, and do not reflect
the effects of sales charges. The fund's class A, class B, and class M
shares were ranked 13, 42, and 20, respectively, out of 50 GNMA funds for
1-year performance through 9/30/98. The fund's class A and class B shares
were ranked 17 and 27, respectively, out of 30 GNMA funds for 5-year
performance through 9/30/98. The fund's class A shares were ranked 18 out
of 23 GNMA funds for 10-year performance through 9/30/98. Class B and
class M shares were not ranked over this period.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Rarely have events beyond the boundaries of the United States had as
dramatic an impact on the performance of U.S. Treasury securities as they
did during the fiscal year that just ended for Putnam U.S. Government
Income Trust.
The period began with the fund's portfolio in a decidedly defensive
position against the possibility of an inflation-quashing rise in interest
rates. It ended with the fund an indisputable beneficiary of the flight of
global investors to the safety of U.S. government securities. As this
striking change in circumstances unfolded, Fund Manager Michael Martino
made several astute portfolio shifts, which he describes in the following
report and which are clearly reflected in the fund's fiscal '98 results.
Shortly after the fiscal year's close, Kevin Cronin joined Mike on the
fund's management team. Kevin, who is also chief investment officer of the
Mortgage and Asset-Backed team, joined Putnam in 1997. He was previously
with MFS Investment Management and Liberty Mutual Insurance Company. He
has 10 years of investment experience.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 18, 1998
Report from the Fund Manager
Michael Martino
Well-timed shifts in fund structure and strategy helped Putnam U.S.
Government Income Trust post a strong return for its 1998 fiscal year. The
fund's class A shares delivered a total return of 8.75% at net asset value
for the 12 months ended September 30, 1998, edging slightly ahead of its
benchmark index, the Lehman Brothers Mortgage-Backed Securities Index,
which returned 8.63% during the same period. In addition, the fund
outperformed most of its peers; the 50 GNMA funds tracked by Lipper
Analytical Services had an average total return of 8.46% for the 12-month
period. Class A shares returned 3.58% at public offering price. Please see
pages 9 and 10 for more performance information, including the results for
class B and class M shares.
* FUND BENEFITS FROM U.S. TREASURY RALLY
Ongoing turmoil characterized the global capital markets for most of the
period, especially over the past six months. A string of negative economic
results and currency fluctuations raised fears that global economic health
would continue to erode. Doubts persisted about the pace of economic
recovery in Asia mainly because Japan was slow to enact reforms in its
banking industry that might have helped the country regain its role as the
engine for growth in the region. Fiscal, economic, and political problems
brewed in Russia and fears arose that the trend would spread to Latin
America.
The global turbulence made more and more investors risk averse and
prompted a continuing outflow of capital from emerging markets to the
developed world. Investors also shifted from stocks to bonds in a flight
to quality that benefited dollar-denominated assets in general and U.S.
Treasury securities in particular. Treasury bonds attracted investors
looking for liquidity and the shelter they offer; U.S. Treasuries are
considered among the strongest credits in the world because they are
backed by the full faith and credit of the U.S. government. In this
environment, your fund profited from some adroit structural changes,
including a move to underweight bonds issued by the Government National
Mortgage Association (GNMA), relative to other funds in its category.
Assets from the sale of GNMAs that had performed well were shifted to
Treasuries as the rally continued. On the last day of the fiscal year, the
yield on 30-year Treasuries fell to 4.954%, the first time since 1967 that
it dropped below 5%. Remember that when bond yields drop, their prices
rise; 30-year Treasuries proved to be among the best performers in the
bond market during the period.
* STRATEGY SHIFTS BOOST FUND PERFORMANCE
Mortgage-backed securities performed exceptionally well during the first
half of the year, and your fund's focus on this sector contributed
substantially to performance. We began the fiscal year with an increased
focus on GNMA mortgage-backed securities. However, when interest rates
started dropping rapidly, mortgages started to lag comparable Treasuries
because of fears of increased prepayments. In this scenario, mortgage
holders seek to pay off their loans before maturity in order to refinance
at lower rates. Investors in mortgage-backed securities are then left to
reinvest the principal at current rates that are lower than the yields on
the prepaid mortgages. Anticipating the increase in prepayments, we
reduced the fund's position in GNMA mortgage-backed securities in the
second quarter of 1998. We re-positioned the assets to Treasuries, which
not only reduced prepayment exposure but increased the fund's ability to
take advantage of the Treasury market rally.
[GRAPHIC OMITTED: vertical bar chart of AVERAGE EFFECTIVE MATURITY AND
DURATION]
AVERAGE EFFECTIVE MATURITY AND DURATION
9/30/97 3/31/98 9/30/98
Average effective maturity 7.1 7.0 5.0
Duration 3.0 3.1 1.8
Footnote reads:
This chart depicts the fund's average effective maturity and duration
at 6-month intervals over the 12 months ended 9/30/98. Average effective
maturity and duration, stated in years, are derived from calculations
that incorporate assumptions about prepayment rates and cash flows of
mortgage-backed securities. Measures of effective maturity duration and
the assumptions on which they are based will vary over time.
In structuring the GNMA portion of the portfolio, we sought to invest in
securities with as little prepayment risk as possible. To that end, we
focused on securities with stated interest rates, or coupons, reflecting
current market rates. These types of mortgages, whose coupons generally
fell in the 6% to 7% range, were unlikely to be prepaid over the near
term. Because these mortgages were less likely to be prepaid, they tended
to move up in price to a greater extent than those carrying higher
coupons. We also invested in seasoned mortgages, those held by homeowners
who have had several opportunities to prepay in the past but have chosen
not to for one reason or another. These securities are perceived to carry
reduced prepayment risk in a falling interest-rate environment.
Your fund also began its fiscal year with a slightly defensive duration
posture. Duration is a measure of the portfolio's interest-rate
sensitivity; the longer the duration, the more sensitive the fund will be
to a change in rates. During the first six months of the period, we were
prepared for the possibility of an interest-rate increase growing out of
strong economic growth and mounting indications that inflationary
pressures would build. Consequently, we pursued a defensive,
shorter-duration strategy to protect the value of the portfolio.
As we entered the second quarter of 1998, however, increased evidence that
deteriorating global economic conditions would damage the U.S. economy
pointed toward a stronger potential for slower growth, benign inflation,
and falling interest rates. To take advantage of this backdrop, we
increased the fund's duration. That added sensitivity to the beneficial
effects of falling interest rates helped the fund to take full advantage
of the bond market's rally.
[GRAPHIC OMITTED: pie chart of PORTFOLIO ALLOCATIONS (9/30/98)]
PORTFOLIO ALLOCATIONS (9/30/98)*
U.S. Treasury
securities -- 15.0%
Cash and short-term
investments -- 6.8%
Mortgage-backed
securities --78.2%
Footnote reads:
*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 (GNMA). Allocations will vary over time.
In addition, we pursued a barbell strategy with the Treasury portion of
the portfolio -- concentrating investments at the long and short ends of
the maturity spectrum -- that added to your fund's solid performance. On
one side of the barbell, the fund benefited from investments in 30-year
Treasuries. These long-term securities were among the best performers in
the market because long-term interest rates fell (and bond prices rose)
more dramatically than short-term rates. On the shorter end, your fund
profited from the added income provided by short-term cash investments
because these securities furnished higher yields than investments on the
rest of the yield curve. To illustrate, a key short-term rate, the federal
funds rate set by the Federal Reserve Board, stayed at a relatively high
level of 5.50% during most of the period. It was only at the end of the
period that the Fed, in a long-anticipated move, lowered this rate to
5.25% to try to sustain economic growth in the United States (Shortly
after the end of the fiscal year, the rate was lowered again to 5.00%.)
* MORTGAGE-BACKED POSITION MAY RISE AGAIN IN FISCAL '99
Overall we anticipate an unchanged or falling trend for interest rates as
the U.S. economy works through the challenges brought on by an uncertain
global economic and investing climate. The Fed has certainly demonstrated
its willingness to adjust interest rates to avert a further weakening of
the U.S. economy. In this type of environment, we expect your fund to do
relatively well. Looking more closely at fund strategy, we anticipate
increasing the fund's allocation to GNMA mortgage-backed securities. After
seeing such a marked drop in interest rates in the Treasury market and
with mortgage-backed securities offering an attractive yield advantage to
comparable Treasuries, we want to take full advantage of their potential
to perform better than alternatives in the Treasury market.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 9/30/98, there is no guarantee the fund will
continue to hold these securities in the future. While U.S. government
backing of individual securities does not insure your principal, which
will fluctuate with market conditions, it does guarantee that the fund's
government-backed holdings will make timely payments of interest and
principal.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its 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 U.S. government and
in repurchase agreements and forward commitments with respect to these
securities.
TOTAL RETURN FOR PERIODS ENDED 9/30/98
Class A Class B Class M
(inception date) (2/8/84) (4/27/92) (2/6/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 8.75% 3.58% 7.82% 2.82% 8.38% 4.83%
- ------------------------------------------------------------------------------
5 years 36.92 30.41 31.67 29.73 35.03 30.63
Annual average 6.49 5.45 5.66 5.34 6.19 5.49
- ------------------------------------------------------------------------------
10 years 113.80 103.64 97.37 97.37 107.53 100.83
Annual average 7.89 7.37 7.04 7.04 7.57 7.22
- ------------------------------------------------------------------------------
Life of fund 238.82 222.77 198.44 198.44 221.24 210.83
Annual average 8.69 8.33 7.75 7.75 8.30 8.05
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/98
Lehman Bros.
Mortgage-Backed Consumer
Securities Index Price Index
- ------------------------------------------------------------------------------
1 year 8.63% 1.36%
- ------------------------------------------------------------------------------
5 years 41.93 12.61
Annual average 7.26 2.40
- ------------------------------------------------------------------------------
10 years 137.97 36.39
Annual average 9.06 3.15
- ------------------------------------------------------------------------------
Life of fund 332.64 60.35
Annual average 10.50 3.27
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. Returns for class A
and class M shares reflect the current maximum initial sales charges of
4.75% and 3.25% respectively. Class B share returns for the 1-, 5-, and
10-year (where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. Returns
shown for class B and class M shares for periods prior to their inception
are derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M shares,
the higher operating expenses applicable to such shares. All returns
assume reinvestment of distributions at NAV. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
9/30/88
Lehman Bros.
Fund's class A Mortgage-backed Consumer Price
Date shares at POP Securities-Index Index
9/30/88 9,525 10,000 10,000
9/30/89 10,444 11,110 10,434
9/30/90 11,335 12,187 11,077
9/30/91 12,820 14,174 11,452
9/30/92 14,091 15,722 11,795
9/30/93 14,872 16,769 12,112
9/30/94 14,524 16,578 12,470
9/30/95 16,356 18,821 12,787
9/30/96 17,062 19,913 13,171
9/30/97 18,725 21,910 13,454
9/30/98 $20,364 $23,797 $13,639
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $19,737 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $20,753 ($20,083 at public offering price). See first page of
performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.828 $0.731 $0.801
- ------------------------------------------------------------------------------
Capital gains -- -- --
- ------------------------------------------------------------------------------
Total $0.828 $0.731 $0.801
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
9/30/97 $13.01 $13.66 $12.97 $13.00 $13.44
- ------------------------------------------------------------------------------
9/30/98 13.28 13.94 13.22 13.25 13.70
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 6.23% 5.94% 5.45% 5.98% 5.78%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 5.99 5.70 5.24 5.74 5.55
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
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.
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 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B 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. It is not possible to invest directly
in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Quality Bond Fund [DBL. DAGGER]
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, New York,
Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds-three investment portfolios that spread
your money across a variety of stocks, bonds, and money market investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
*Formerly Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
**An investment in a money market fund is neither insured nor guaranteed
by the U.S. government. These funds are managed to maintain a price of
$1.00 per share, although there is no assurance that this price will
be maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
Report of independent accountants
For the fiscal year ended September 30, 1998
To the Trustees and Shareholders of
Putnam U. S. Government Income Trust
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements
of operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Putnam
U. S. Government Income Trust (the "fund") at September 30, 1998, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the fund's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of investments owned at September 30, 1998, by
correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 11, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1998
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (97.8%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (82.1%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Government National Mortgage Association
$ 4,182,545 8s, with due dates from May 15, 2024 to
August 15, 2027 $ 4,359,187
600,253 7 1/2s, May 15, 2026 622,199
71,620,338 7s, with due dates from January 15, 2026 to
July 15, 2028 73,925,084
62,648,909 6 1/2s, November 15, 2027 64,116,773
200,000,000 6 1/2s, TBA, October 15, 2028 204,436,000
Government National Mortgage Association
Pass-Through Certificates
88,003 16s, with due dates from October 15, 2011 to
November 15, 2011 105,768
169,395 15s, with due dates from July 15, 2011 to
March 15, 2013 204,812
124,436 14s, with due dates from July 15, 2014 to
January 20, 2015 146,683
957,985 13 1/2s, with due dates from May 15, 2011 to
June 20, 2015 1,126,553
767,090 13s, with due dates from October 20, 2013 to
September 20, 2015 892,239
432,646 12 1/2s, with due dates from June 15, 2010 to
November 20, 2015 495,190
416,514 12s, with due dates from April 20, 2014 to
March 20, 2016 469,620
2,306,336 11 1/2s, with due dates from April 15, 2010 to
November 15, 2019 2,591,727
2,302,653 11s, with due dates from November 20, 2013 to
June 20, 2019 2,541,548
34,383 11s, Midget, July 15, 2000 37,487
168,763 10 7/8s, February 15, 2010 184,683
19,655,901 10 1/2s, with due dates from April 15, 2010 to
November 15, 2021 21,548,163
404,353 10 1/4s, with due dates from March 15, 2016 to
December 15, 2020 442,132
31,524,048 9 1/2s, with due dates from June 15, 2009 to
April 15, 2023 34,163,095
92,160,527 9s, with due dates from November 15, 2004 to
January 15, 2025 98,787,004
128,150,272 8 1/2s, with due dates from August 15, 2004 to
March 15, 2027 136,168,535
10,549,665 8 1/2s, Midget, with due dates from May 15, 2001 to
January 15, 2008 11,116,713
452,315,811 8s, with due dates from January 15, 2001 to
January 15, 2028 472,404,919
38,946,354 8s, Midget, with due dates from November 15, 2001 to
November 15, 2009 40,284,942
531,525,370 7 1/2s, with due dates from March 15, 2001 to
October 15, 2027 551,248,008
814,001,545 7s, with due dates from March 15, 2022 to
July 15, 2028 840,435,915
129,081,194 7s, Midget, with due dates from October 15, 2007
to November 15, 2022 133,034,856
277,085,544 6 1/2s, with due dates from May 15, 2023 to
February 15, 2028 283,327,705
68,866 5 1/2s, May 15, 2017 72,361
Government National Mortgage Association
Graduated Payment Mortgages
57,472 15s, with due dates from May 15, 2012 to
September 15, 2012 68,086
47,817 13 3/4s, with due dates from September 20, 2014 to
November 20, 2014 54,974
117,993 13 1/2s, with due dates from May 15, 2011 to
June 20, 2012 136,245
147,349 13 1/4s, with due dates from October 15, 2014 to
January 20, 2015 168,805
27,891 13s, December 15, 2010 31,976
663,402 12 3/4s, with due dates from October 15, 2013 to
July 20, 2015 761,521
618,655 12 1/4s, with due dates from August 15, 2013 to
May 15, 2015 702,737
1,189,059 11 1/4s, with due dates from June 15, 2013 to
January 15, 2016 1,310,558
184,990 10 3/4s, with due dates from January 15, 2016 to
February 15, 2016 205,280
1,840,839 10s, with due dates from October 15, 2009 to
January 20, 2021 2,043,984
1,154,483 9 1/4s, with due dates from April 15, 2016 to
November 15, 2019 1,217,981
--------------
2,985,992,048
U.S. Treasury Obligations (15.7%)
- --------------------------------------------------------------------------------------------------------------------------
50,000,000 U.S. Treasury Bonds 5 1/2s, August 15, 2028 54,047,000
U.S. Treasury Notes
50,000,000 6 1/8s, August 15, 2007 55,968,500
22,500,000 5 3/4s, October 31, 2002 23,649,525
54,630,000 5 5/8s, May 15, 2008 59,751,563
50,000,000 5 5/8s, December 31, 2002 52,437,500
191,980,000 5 1/2s, May 31, 2003 201,398,496
100,000,000 5 1/2s, January 31, 2003 104,484,000
19,000,000 5 3/8s, June 30, 2000 19,302,860
--------------
571,039,444
--------------
Total U.S. Government and Agency Obligations
(cost $3,436,774,693) $3,557,031,492
SHORT-TERM INVESTMENTS (7.1%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$130,137,000 Interest in $750,000,000 joint tri-party repurchase
agreement dated September 30, 1998 with
Goldman Sachs & Co. due October 1, 1998
with respect to various U.S. Treasury obligations --
maturity value of $130,156,701 for an effective yield
of 5.45% $ 130,156,701
129,393,000 Interest in $458,140,000 joint repurchase agreement
dated September 30, 1998 with Swiss Bank due
October 1, 1998 with respect to various U.S. Treasury
obligations -- maturity value of $129,412,768 for an
effective yield of 5.50% 129,412,768
--------------
Total Short-Term Investments (cost $259,569,469) $ 259,569,469
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $3,696,344,162) (b) $3,816,600,961
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $3,635,524,719.
(b) The aggregate identified cost on a tax basis is $3,698,764,757, resulting in gross unrealized appreciation and
depreciation of $119,329,741 and $1,493,537, respectively, or net unrealized appreciation of $117,836,204.
TBA after the name of a security represents to be announced securities (Note 1).
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $3,696,344,162) (Note 1) $3,816,600,961
- -----------------------------------------------------------------------------------------------
Cash 952
- -----------------------------------------------------------------------------------------------
Interest receivable 25,772,666
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 11,586,712
- -----------------------------------------------------------------------------------------------
Total assets 3,853,961,291
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 203,434,122
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 7,884,216
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 3,786,854
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 421,277
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 89,433
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 7,882
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 2,610,521
- -----------------------------------------------------------------------------------------------
Other accrued expenses 202,267
- -----------------------------------------------------------------------------------------------
Total liabilities 218,436,572
- -----------------------------------------------------------------------------------------------
Net assets $3,635,524,719
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,837,175,473
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (321,907,553)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 120,256,799
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $3,635,524,719
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($2,130,979,823 divided by 160,493,591 shares) $13.28
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $13.28)* $13.94
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,334,041,170 divided by 100,902,723 shares)** $13.22
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($163,075,501 divided by 12,305,014 shares) $13.25
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $13.25)* $13.70
- -----------------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per class Y share
($7,428,225 divided by 559,663 shares) $13.27
- -----------------------------------------------------------------------------------------------
* 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.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30, 1998
<S> <C>
Interest income $247,167,364
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 15,162,940
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 5,987,761
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 64,122
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 31,593
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 5,308,788
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 12,622,923
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 696,858
- -----------------------------------------------------------------------------------------------
Reports to shareholders 119,239
- -----------------------------------------------------------------------------------------------
Legal 25,459
- -----------------------------------------------------------------------------------------------
Postage 397,866
- -----------------------------------------------------------------------------------------------
Other 202,517
- -----------------------------------------------------------------------------------------------
Total expenses 40,620,066
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (1,015,470)
- -----------------------------------------------------------------------------------------------
Net expenses 39,604,596
- -----------------------------------------------------------------------------------------------
Net investment income 207,562,768
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 30,743,304
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 46,178,335
- -----------------------------------------------------------------------------------------------
Net gain on investments 76,921,639
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $284,484,407
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
-----------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 207,562,768 $ 231,536,114
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments 30,743,304 8,446,279
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 46,178,335 90,992,659
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 284,484,407 330,975,052
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (129,683,505) (145,145,530)
- ---------------------------------------------------------------------------------------------------------------
Class B (68,119,252) (77,035,760)
- ---------------------------------------------------------------------------------------------------------------
Class M (8,147,157) (430,429)
- ---------------------------------------------------------------------------------------------------------------
Class Y (399,595) (293,133)
- ---------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A (4,562,519) --
- ---------------------------------------------------------------------------------------------------------------
Class B (2,396,568) --
- ---------------------------------------------------------------------------------------------------------------
Class M (286,633) --
- ---------------------------------------------------------------------------------------------------------------
Class Y (14,059) --
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) from
capital share transactions (Note 4) 111,513,142 (573,463,157)
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 182,388,261 (465,392,957)
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 3,453,136,458 3,918,529,415
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $-- and $3,424,640, respectively) $3,635,524,719 $3,453,136,458
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $13.01 $12.63 $12.95 $12.37 $13.63
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .81(c) .85 .84(c) .88 .69
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .29 .34 (.30) .61 (1.00)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.10 1.19 .54 1.49 (.31)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.80) (.81) (.81) (.83) (.74)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.03) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.05) (.08) (.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.83) (.81) (.86) (.91) (.95)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.28 $13.01 $12.63 $12.95 $12.37
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.75 9.75 4.32 12.62 (2.35)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,130,980 $2,147,326 $2,450,376 $2,903,016 $3,213,428
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .87 .89 .88 .90 .85
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.15 6.58 6.55 7.09 7.31
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 294.74 125.80 138.97 195.45 209.00
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended September 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.97 $12.59 $12.91 $12.33 $13.60
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .70(c) .75 .74(c) .79 .64
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .28 .35 (.30) .61 (1.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .98 1.10 .44 1.40 (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.71) (.72) (.72) (.75) (.67)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.02) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.04) (.07) (.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.73) (.72) (.76) (.82) (.86)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.22 $12.97 $12.59 $12.91 $12.33
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.82 8.95 3.52 11.82 (3.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,334,041 $1,291,901 $1,458,848 $1,643,923 $1,752,887
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.62 1.64 1.63 1.65 1.60
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.42 5.83 5.80 6.33 6.55
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 294.74 125.80 138.97 195.45 209.00
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended September 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Feb. 6, 1995+
operating performance Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $13.00 $12.63 $12.96 $12.29
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .80(c) .80 .82(c) .61
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .25 .35 (.32) .66
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.05 1.15 .50 1.27
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.77) (.78) (.78) (.55)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.05) (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.80) (.78) (.83) (.60)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.25 $13.00 $12.63 $12.96
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.38 9.39 3.99 10.54*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $163,076 $7,850 $6,116 $2,609
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.12 1.14 1.14 .79*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.91 6.32 6.37 4.14*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 294.74 125.80 138.97 195.45
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended September 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS Y
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Apr. 11, 1994+
operating performance Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $13.01 $12.63 $12.98 $12.38 $12.68
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .83(c) .89(c) .88(c) .90 .39
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .29 .34 (.34) .64 (.30)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.12 1.23 .54 1.54 .09
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.83) (.85) (.84) (.86) (.30)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.03) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.05) (.08) (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.86) (.85) (.89) (.94) (.39)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.27 $13.01 $12.63 $12.98 $12.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.98 10.05 4.34 13.07 .11*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $7,428 $6,061 $3,190 $43,196 $19,337
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .62 .64 .62 .65 .29*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.42 6.83 6.51 7.16 3.63*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 294.74 125.80 138.97 195.45 209.00
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended September 30, 1995 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
Notes to financial statements
September 30, 1998
Note 1
Significant accounting policies
Putnam U.S. Government Income Trust (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund's investment objective is to seek
as high a level of current income as is consistent with preservation of
capital by investing 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 are subject to a contingent deferred sales
charge, if those shares are redeemed within 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, class B, and class M
shares, but do not bear a distribution fee. Class Y shares are sold to
defined contribution plans that invest at least $250 million in a
combination of Putnam Funds and other accounts managed by affiliates of
Putnam Management, Inc. ("Putnam Management"), the fund's manager, a
wholly-owned subsidiary of Putnam Investments, Inc.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if 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 consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of
some securities traded over-the-counter -- the last reported bid price.
Short-term investments having remaining maturities of 60 days or less are
stated at amortized cost, which approximates market, 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 and certain other accounts managed by
Putnam Investment Management. These balances may be invested in one or
more repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the market
value of which at the time of purchase is required to be in an amount at
least equal to the resale price, including accrued interest. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Securities purchased or sold on a when-issued or delayed delivery basis
may be settled a month or more after the trade date; interest income is
accrued based on the terms of the security. Losses may arise due to
changes in the market value of the underlying securities or if the
counterparty does not perform under the contract.
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 1.0%
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, according to the
procedures described under "Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with
the intention of acquiring securities for their portfolio or for delivery
pursuant to options contracts it has entered into, the fund may dispose of
a commitment prior to settlement if Putnam Management deems it appropriate
to do so.
F) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated investment
companies. It is also the intention of the fund to distribute an amount
sufficient to avoid imposition of any excise tax under Section 4982 of the
Internal Revenue Code of 1986, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
At September 30, 1998, the fund had a capital loss carryover of
approximately $319,487,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- ---------------- ----------------
$258,710,000 September 30, 2003
51,884,000 September 30, 2004
8,893,000 September 30, 2005
G) 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. These differences include temporary and permanent differences
of losses on wash sale transactions, post-October loss deferrals and
paydown gains and losses on mortgage backed securities. Reclassifications
are made to the fund's capital accounts to reflect income and gains
available for distribution (or available capital loss carryovers) under
income tax regulations. For the year ended September 30, 1998, the fund
reclassified $2,621,880 to increase undistributed net investment income
and $7,260,185 to decrease paid-in-capital, with a decrease to accumulated
net realized losses of $4,638,305. The calculation of net investment
income per share in the financial highlights table excludes these
adjustments.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.57% of the first $500
million, 0.475% of the next $500 million, 0.4275% of the next $500
million, and 0.38% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended September 30, 1998, fund expenses were reduced by
$1,015,470 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $2,190
has been allocated to the fund, 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 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
in the fund and are 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 Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
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 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 Band class M shares,
respectively. The Trustees have approved payment by the fund at an annual
rate of 0.25%, 1.00%, and 0.50% of the average net assets attributable to
class A, class B and class M shares respectively.
For the year ended September 30, 1998, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $236,243 and $635,378 from the
sale of class A and class M shares, respectively and received $1,968,193
in contingent deferred sales charges from redemptions of class B shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of
class A shares. For the year ended September 30, 1998, Putnam Mutual Funds
Corp., acting as underwriter received $40,183 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended September 30, 1998, purchases and sales of U.S.
government and agency obligations other than short-term investments
aggregated $10,094,730,508 and $9,915,440,003, 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 September 30, 1998, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 59,973,385 $ 785,402,534
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,642,555 86,591,930
- -----------------------------------------------------------------------------
66,615,940 871,994,464
Shares
repurchased (71,219,827) (931,308,277)
- -----------------------------------------------------------------------------
Net decrease (4,603,887) $ (59,313,813)
- -----------------------------------------------------------------------------
Year ended
September 30, 1997
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 20,634,802 $264,582,822
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,097,769 90,680,551
- -----------------------------------------------------------------------------
27,732,571 355,263,373
Shares
repurchased (56,635,571) (725,708,140)
- -----------------------------------------------------------------------------
Net decrease (28,903,000) $(370,444,767)
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 29,712,925 $387,310,922
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,653,269 47,450,098
- -----------------------------------------------------------------------------
33,366,194 434,761,020
Shares
repurchased (32,107,152) (418,121,195)
- -----------------------------------------------------------------------------
Net increase 1,259,042 $ 16,639,825
- -----------------------------------------------------------------------------
Year ended
September 30, 1997
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 9,650,117 $ 123,220,626
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,950,482 50,333,817
- -----------------------------------------------------------------------------
13,600,599 173,554,443
Shares
repurchased (29,814,937) (380,815,087)
- -----------------------------------------------------------------------------
Net decrease (16,214,338) $(207,260,644)
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 19,378,067 $ 253,347,903
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 43,951 572,328
- -----------------------------------------------------------------------------
19,422,018 253,920,231
Shares
repurchased (7,720,736) (100,941,489)
- -----------------------------------------------------------------------------
Net increase 11,701,282 $ 152,978,742
- -----------------------------------------------------------------------------
Year ended
September 30, 1997
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 675,663 $ 8,653,771
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 27,221 347,797
- -----------------------------------------------------------------------------
702,884 9,001,568
Shares
repurchased (583,426) (7,466,778)
- -----------------------------------------------------------------------------
Net increase 119,458 $ 1,534,790
- -----------------------------------------------------------------------------
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 682,330 $8,902,590
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 31,752 413,654
- -----------------------------------------------------------------------------
714,082 9,316,244
Shares
repurchased (620,409) (8,107,856)
- -----------------------------------------------------------------------------
Net increase 93,673 $1,208,388
- -----------------------------------------------------------------------------
Year ended
September 30, 1997
- -----------------------------------------------------------------------------
Class Y Shares Amount
- -----------------------------------------------------------------------------
Shares sold 324,814 $ 4,141,239
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 22,938 293,133
- -----------------------------------------------------------------------------
347,752 4,434,372
Shares
repurchased (134,245) (1,726,908)
- -----------------------------------------------------------------------------
Net increase 213,507 $ 2,707,464
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
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Now you can use your PC to get up-to-date information about your funds,
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Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Steven M. Oristaglio
Vice President
David L. Waldman
Vice President
Michael Martino
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam U.S.
Government Income Trust. It may also be used as sales literature when
preceded or accompanied by the current prospectus, which gives details of
sales charges, investment objectives, and operating policies of the fund,
and the most recent copy of Putnam's Quarterly Performance Summary. For
more information or to request a prospectus, call toll free:
1-800-225-1581. You can also learn more at Putnam Investments' website:
http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
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BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
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AN038 47011 032/885/689/527 11/98
PUTNAM INVESTMENTS [SCALE LOGO OMITTED]
- ----------------------------------------------------------------------------
Putnam U.S. Government Income Trust
Supplement to Annual Report dated September 30, 1998
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
and B shares, which are discussed more extensively in the annual report.
FISCAL 1997 ANNUAL RESULTS AT A GLANCE
- ----------------------------------------------------------------------------
4/11/94 to 9/30/98 Annualized Cumulative
Inception date to end of
Annual fiscal period 8.25% 42.53%
9/30/97 to 9/30/98
Annual fiscal period -- 8.98%
- ----------------------------------------------------------------------------
Share value NAV
4/11/94 (Inception date) $12.68
9/30/97 $13.01
9/30/98 $13.27
- ----------------------------------------------------------------------------
Distributions No. Income Return of capital Total
9/30/97 to 9/30/98 12 $0.8104 $0.0536 $0.864
- ----------------------------------------------------------------------------
Please note that past performance does not indicate future results.
Investment return and principal value will fluctuate so your shares, when
redeemed, may be worth more or less than their original cost. See full
Annual 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.
