Putnam
American
Government
Income Fund
ANNUAL REPORT
September 30, 1994
Balance Scales logo
BOSTON LONDON TOKYO
Performance highlights
> According to Lipper Analytical Services, an industry research firm, the
fund's class A share total return for the 12 months ended September 30,
1994, surpassed nearly 70% of all general U.S. government funds.*
> Performance should always be considered in light of a fund's investment
strategy. Putnam American Government Income Fund is designed for investors
seeking high current income
primarily through U.S. government securities.
FISCAL 1994 RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Class A Class B
Total return NAV POP NAV CDSC
<S> <C> <C> <C> <C>
............................................................................................
(Change in value during
period plus reinvested
distributions)
12 months ended 9/30/94 -4.06% -8.62% -- --
Since 5/20/94(1) -- -- -0.52% -5.38%
Share value NAV POP NAV
............................................................................................
9/30/93 $9.21 $9.67 --
5/20/94(1) -- -- $8.43
9/30/94 8.21 8.62 8.19
Distributions No. Income Total
............................................................................................
Class A 12 $0.637 $0.637
Class B 4 0.197 0.197
Current return NAV POP NAV
............................................................................................
End of period
Current dividend rate(2) 7.45% 7.10% 6.89%
Current 30-day SEC yield(3) 6.07 5.78 5.30
</TABLE>
Performance data represent past results. For performance over longer periods,
see pages 8 and 9. POP assumes 4.75% maximum sales charge. CDSC assumes 5%
maximum contingent deferred sales charge. (1)Commencement of operations for
class B shares. (2)Income portion of most recent distribution, annualized and
divided by NAV or POP at end of period. (3)Based only on investment income,
calculated using SEC guidelines.
*Rankings by Lipper, an industry research firm, vary over time and do not
include the effects of sales charges. The firm ranked the fund 44th out of
143, 92nd out of 97, and 76th out of 81 funds for the 1-, 3- and 5-year
periods, respectively. Past performance is not indicative of future results.
<PAGE>
From the Chairman
Dear Shareholder:
[Photo of George Putnam]
(c) Karsh, Ottawa
A prolonged period of bond market volatility has given fixed-income
investors more than their share of anxiety over the past several months.
Putnam American Government Income Fund's performance during the fiscal year
ended September 30, 1994, reflects this unsettled environment.
After declining sharply in the spring, bond prices have begun to stabilize,
although the market remains volatile. The disparity between yields on
short-term and longer-term securities, which widened as the market declined,
has begun to narrow.
We may yet see further increases in short-term interest rates as the Federal
Reserve Board adamantly sticks to its policy of keeping inflation in check.
The result is likely to be further bond market uncertainty. This, in turn,
could translate into continued price volatility over the next few months.
Your fund's management team has positioned the portfolio with this prospect
in mind. In the report that follows, Fund Manager Michael Martino discusses
the fund's performance and prospects in the context of this investment
climate.
Respectfully yours,
(Signature of George Putnam)
George Putnam
Chairman of the Trustees
November 9, 1994
<PAGE>
Report from the fund manager
Michael Martino
The beginning of Putnam American Government Income Fund's 1994 fiscal year
coincided with the end of one of the longest fixed-income market advances in
history. The U.S. bond markets reached their peak in October 1993 as economic
growth accelerated, spawning fears of renewed inflation and rising interest
rates. Those fears were realized early in calendar 1994 as word of 1993's
very strong fourth quarter gross domestic product confirmed the economy's
strength. This, in turn, prompted the Federal Reserve Board to shift to a
tighter stance on U.S. monetary policy by initiating a series of increases in
short-term interest rates. The now well-documented effect of those increases
on the bond market, in concert with continuing fears of rising inflation,
produced a difficult environment for all fixed-income funds.
Despite these challenging conditions, your fund's total return for the fiscal
year ended September 30, 1994, surpassed the majority of U.S. government
securities funds. We attribute this relative outperformance to a
higher-than-normal allocation to Government National Mortgage Association
(GNMA) securities and a shorter duration than the average U.S. government
fund.
> GNMA POSITION INCREASED FOLLOWING
MARKET SELL-OFF
Since bond prices fall when interest rates rise, it's understandable why the
prices of all government bonds declined precipitously during the first
quarter of calendar 1994. Mortgage-backed securities declined even more than
Treasuries as hedge funds -- aggressively managed private partnerships --
sold off their highest-quality, most-liquid investments to try to cover
losses in less-liquid positions.
The resulting supply increase made bond prices more attractive, and provided
us with the chance to purchase high-quality GNMA securities with substantial
yield advantages over U.S. Treasuries. We quickly increased the fund's GNMA
allocation to over 40% of assets. This proved extremely rewarding as GNMAs
<PAGE>
went on to outperform long-term Treasuries for the calendar year through
September 30, 1994.
> DURATION KEPT SHORTER THAN GROUP AVERAGE
We tempered our opportunistic approach to market volatility with a measure of
defensiveness by keeping the portfolio's duration shorter than the group
average for general U.S. government funds. Duration is a mathematical formula
that indicates how much bond prices will move up or down with each
percentage-point shift in interest rates. Like maturity, with which it is
often confused, duration is measured in years. The shorter the duration, the
less volatility you can expect from the portfolio. In a rising interest rate
environment, keeping the portfolio's average duration relatively short can be
instrumental in protecting its value.
> CMO HOLDINGS REDUCED; AGGRESSIVE DERIVATIVES AVOIDED
The fund's investment in collateralized mortgage obligations (CMOs) was
reduced from approximately 25% of assets early in 1994 to 11% at the end of
September. CMOs are mortgage derivatives that split the cash flows from pools
of mortgage loans into
[TABULAR REPRESENTATION OF LINE GRAPH]
U.S. TREASURY VERSUS GNMA SECURITIES
Lehman Lehman
Long-Term GNMA
Treasury Index Index
10/93 0.72 0.17
11/93 -2.56 -0.14
12/93 0.32 0.93
1/94 2.40 0.79
2/94 -4.10 -0.50
3/94 -4.39 -2.70
4/94 -1.18 -0.68
5/94 -0.66 0.29
6/94 -0.95 -0.15
7/94 3.39 1.95
8/94 -0.73 0.31
9/94 -3.15 -1.41
This chart, which reflects monthly total returns, illustrates the significant
performance advantage and lower relative volatility offered by GNMA
securities versus long-term Treasury bonds for the year ended September 30,
1994.
<PAGE>
short-, medium- and long-term time frames. While CMOs can enhance the
fund's income stream, they may involve certain additional risks.
Consequently, we intend to further reduce the fund's CMOs in favor of
securities offering maximum liquidity -- namely, mortgage-backed securities
and U.S. Treasuries.
Given this year's market sell-off, our avoidance of the more speculative
mortgage derivatives has served the fund well. Pricing inaccuracies and
subsequent security devaluations that beset certain other funds with
significant mortgage derivative holdings did not present any problems for
your fund.
Dividend aligned with portfolio earnings. The class A share dividend
reduction from $0.056 to $0.051 per share that went into effect in March, has
enabled the fund to bring its income distributions into line with current
portfolio earnings. Our objective is to pay a competitive dividend that does
not compromise the fund's net asset value. Even with the dividend cut, the
fund's current dividend rate of 7.45% for class A shares at net asset value,
surpassed 87% of the 164 U.S. government funds tracked by Lipper Analytical
Services as of September 30, 1994. The fund's class B share dividend rate of
6.89% at net asset value on September 30, 1994, is also quite competitive. By
taking the balanced approach of providing competitive yields while attempting
to bolster the fund's total return, we believe the fund's performance will be
more predictable and understandable for shareholders.
> REDUCING GNMAs MODERATELY AS TREASURIES GROW MORE ATTRACTIVE
The fund's typical asset allocation is about one-third mortgage-backed
securities and two-thirds Treasuries. GNMA prices have risen significantly
relative to Treasuries and thus are not as compelling a value as they were
earlier this year. Some realloca- tion from GNMAs to Treasuries is now
appropriate. We began this reallocation process late in the fiscal year and, as
it is accomplished, we anticipate that the fund's mortgage-backed securities
position will return to a more normal level.
We will continue to manage the fund's interest-rate sensitivity to be
comparable with that of an intermediate-term five- to seven- year note. With
the five-year Treasury offering over 90% of the
[TABULAR REPRESENTATION OF VERTICAL BAR GRAPH]
PORTFOLIO ALLOCATION*
9/30/93 3/31/94 9/30/94
U.S. Treasury securities 66.70% 52.70% 57.40%
Mortgage-backed securities 8.70 21.80 26.00
Collateralized mortgage obligations 16.90 11.40 10.80
Cash and short-term investments 7.70 14.10 4.70
*Based on percentage of net assets.
30-year Treasury's yield at only a fraction of the duration, we believe that
this part of the yield curve offers perhaps the best risk/return trade-off.
The interest rate environment that investors have endured this year was one
of the worst on record. However, out of volatility comes opportunity. Long-term
Treasury rates have risen by just over two percentage points since October 1993,
and real yields -- yields minus inflation -- are approaching 5%. Consequently,
the yields available with government securities are once again competitive with
medium-grade corporate bonds and other fixed-income securities that are subject
to various additional risk factors. We think this bodes well for government
funds in general, and for your fund in particular.
The views expressed in this report are exclusively those of Putnam
Management, and are not meant as investment advice. Although the described
holdings were viewed favorably as of September 30, 1994, there is no
guarantee the fund will continue to hold these securities in the future.
<PAGE>
Performance summary
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 back into the fund. We show total return in two
ways: on a cumulative long-term basis and on average how the fund might have
grown each year over varying periods. For comparative purposes, we show how
the fund performed relative to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDED 9/30/94
<TABLE>
<CAPTION>
Lehman Bros.
Class A Class B Intermediate
Treasury
NAV POP NAV CDSC Index CPI
- ----------------- -------- -------- -------- -------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
1 year -4.06% -8.62% -- -- -1.51% 2.96%
- ----------------- ------ ------ ------ ------ ------------ -----
5 years 32.71 26.42 -- -- 47.02 19.52
Annual average 5.82 4.80 -- -- 8.01 3.63
- ----------------- ------ ------ ------ ------ ------------ -----
Life of class A 102.31 92.66 -- -- 134.12 40.94
Annual average 7.63 7.08 -- -- 9.28 3.65
- ----------------- ------ ------ ------ ------ ------------ -----
Life of class B -- -- -0.52% -5.38% 0.85 1.36
- ----------------- ------ ------ ------ ------ ------------ -----
</TABLE>
Fund performance data do not take into account any adjustment for taxes
payable on reinvested distributions. The fund began operations on March 1,
1985 offering shares now known as class A. Effective May 20, 1994 the fund
began offering class B shares. Performance data represent past results and
will differ for each share class. Investment returns and net asset value will
fluctuate so an investor's shares, when sold, may be worth more or less than
their original cost.
COMPARATIVE BENCHMARKS
Lehman Brothers Intermediate Treasury Index is an unmanaged list of Treasury
bonds; it is used as a general gauge of the market for intermediate-term
fixed-income securities. The index 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. Since the fund's holdings
largely consist of Treasury securities, with mortgage-backed securities
generally comprising a smaller percentage of assets, it is Putnam
Management's opinion that this index is a more appropriate benchmark than the
Lehman Mortgage Bond Index, used in previous fiscal years.
<PAGE>
[TABULAR REPRESENTATION OF LINE GRAPH]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 3/1/85
<TABLE>
<CAPTION>
3/1/85 9/85 9/86 9/87 9/88 9/89 9/90 9/91 9/92 9/93 9/94
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund's class A shares at POP 9,525 10,378 12,335 11,786 13,197 14,517 15,209 17,414 18,731 20,080
19,266
Lehman Brothers Intermediate
Treasury Index 10,000 11,119 12,967 13,154 14,529 15,925 17,275 19,611 22,077 23,71
23,412
Consumer Price Index 10,000 10,217 10,396 10,849 11,302 11,792 12,519 12,943 13,330 13,689
14,094
</TABLE>
Past performance is no assurance of future results. A $10,000 investment in
the fund's class B shares at inception on 5/20/94 would have been valued at
$9,948 on 9/30/94 ($9,472 with a redemption at the end of the period). A
$10,000 investment in the Lehman Mortgage Bond Index, formerly used as a
benchmark, would have grown to $26,626 by the end of the period.
Consumer Price Index (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including any
initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance figures
shown here assume the maximum 4.75% sales charge.
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.
<PAGE>
The Putnam Fund Selector(TM)
The Putnam Fund Selector shows the many opportunities for investors within
every investment strategy. All investors should first accumulate a base of
conservative, cash-equivalent investments. Then, with the help of your
investment advisor, diversify your portfolio by investing in the Putnam
Family of Funds.font
[PYRAMID GRAPHIC]
Risk/Reward
PUTNAM GROWTH FUNDS
PUTNAM GROWTH AND INCOME FUNDS
PUTNAM INCOME OR TAX-FREE FUNDS
MOST CONSERVATIVE INVESTMENTS
<PAGE>
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Health Sciences Trust
Investors Fund
Natural Resources Fund*
New Opportunities Fund
OTC Emerging Growth Fund
Overseas Growth Fund
Vista Fund
Voyager Fund
PUTNAM GROWTH AND INCOME FUNDS
Convertible Income-Growth Trust
Dividend Growth Fund
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Managed Income Trust
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Adjustable Rate U.S. Government Fund
American Government Income Fund
Balanced Government Fund
Corporate Asset Trust
Diversified Income Trust
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
FUNDS
Intermediate Tax Exempt Fund
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free funds+
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New Jersey,
New York, Ohio, and Pennsylvania
LIFESTAGE(SM) FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread your
money across a variety of stocks, bonds, and money market investments to help
maximize your return and reduce your risk.
The three portfolios:
Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative Portfolio
Putnam Asset Allocation: Growth Portfolio
MOST CONSERVATIVE
INVESTMENTS++
Putnam money market funds:
Money Market Fund(section symbol)
Tax Exempt Money Market Fund
California Tax Exempt Money Market Fund
New York Tax Exempt Money Market Fund
CDs and savings accounts**
* Formerly Energy-Resources Trust.
+ Not available in all states.
++ Relative to above.
(section symbol) Formerly Daily Dividend Trust.
** Not offered by Putnam Investments. Certificates of deposit offer a fixed
rate of return and may be insured, up to certain limits, by federal/state
agencies. Savings accounts may also be insured up to certain limits.
Please call your financial advisor or Putnam to obtain a prospectus for any
Putnam fund. It contains more complete information, including charges and
expenses. Read it carefully before you invest or send money.
<PAGE>
Report of Independent Accountants
For the Year Ended September 30, 1994
To the Trustees and Shareholders of Putnam American
Government Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Putnam American
Government Income Fund (the "fund") at September 30, 1994, 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, 1994 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
November 14, 1994
<PAGE>
Portfolio of investments owned
September 30, 1994
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (83.4%)(a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------- ----------------
<S> <C> <C>
Government National Mortgage Association
$ 99,280,125 9s, with various due dates to July 1, 2024 $102,452,682
164,145,866 8s, with various due dates to June 15, 2024 159,645,200
193,482,758 7-1/2s, with various due dates to July 15, 2024 181,699,350
115,255,254 7s, with various due dates to April 15, 2024 104,450,074
29,745,471 6-1/2s, with various due dates to February 15, 2024 25,971,514
59,195,689 6s, Midgets with various due dates to January 15, 2009 53,535,101
250,000,000 U.S. Treasury Bonds 11-1/8s, August 15, 2003 306,171,875
300,000,000 U.S. Treasury Bonds 7-1/2s, November 15, 2024 288,937,500
46,000,000 U.S. Treasury Notes 11-5/8s, November 15, 1994 46,359,375
175,000,000 U.S. Treasury Notes 8-3/4s, October 15, 1997 183,531,250
25,000,000 U.S. Treasury Notes 8-5/8s, August 15, 1997 26,109,375
30,000,000 U.S. Treasury Notes 8s, October 15, 1996 30,768,750
115,000,000 U.S. Treasury Notes 7-7/8s, April 15, 1998 117,803,125
150,000,000 U.S. Treasury Notes 7-7/8s, July 31, 1996 153,468,750
10,000,000 U.S. Treasury Notes 7-1/4s, May 15, 2024 9,746,875
25,000,000 U.S. Treasury Notes 6-7/8s, August 31, 1999 24,585,937
80,000,000 U.S. Treasury Notes 6-3/4s, June 30, 1999 78,350,000
100,000,000 U.S. Treasury Notes 6-1/2s, May 15, 1997 99,218,750
25,500,000 U.S. Treasury Notes 5-1/2s, February 28, 1999 23,914,218
---------------
Total U.S. Government and Agency Obligations
(cost $2,091,856,799) $2,016,719,701
- ------------- -------------------------------------------------- ---------------
COLLATERALIZED MORTGAGE OBLIGATIONS (10.8%)(a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------- ---------------
Federal Home Loan Mortgage Corporation
$ 37,475,500 10-1/2s, December 15, 2020 $40,813,163
83,925,572 10s, with various due dates to January 15, 2021 88,965,383
Federal National Mortgage Association
59,200,000 10-1/2s, November 25, 2020 63,325,500
7,500,000 10.2s, September 25, 2018 7,863,281
48,000,000 10s, with various due dates to April 25, 2007 50,859,688
8,016,350 Principal Only (PO) Strips, zero %, February 25,
2017(b) 7,477,751
1,694,929 Homestead Mortgage Acceptance Corporation 11.2s,
November 1, 2015 1,698,105
---------------
Total Collateralized Mortgage Obligations
(cost $275,156,802) $261,002,871
<PAGE>
SHORT-TERM INVESTMENTS (4.7%)(a)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------- ---------------
$84,454,000 Interest in $122,000,000 joint repurchase
agreement dated September 30, 1994 with Goldman
Sachs & Co., due October 3, 1994 with respect to
various U.S. Treasury obligations--maturity value
of $84,487,782 for an effective yield of 4.8% $84,454,000
29,976,000 Federal Home Loan Mortgage Corporation 4.8s,
October 3, 1994 29,988,000
---------------
Total Short-Term Investments (cost $114,442,000) $114,442,000
---------------
Total Investments (cost $2,481,455,601)(b) $2,392,164,572
</TABLE>
NOTES
(a) Percentages indicated are based on net assets of $2,417,844,759, which
correspond to a net asset value per class A share and class B share of $8.21
and $8.19, respectively.
(b) Principal Only (PO) Strips represent the right to receive the monthly
principal payments on an underlying pool of mortgage loans. No payments of
interest on the pool are passed through to the PO holders.
(c) The aggregate identified cost for federal income tax purposes is
$2,483,123,920 resulting in gross unrealized appreciation and depreciation of
$288,265 and $91,247,613, respectively, or net unrealized depreciation of
$90,959,348.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of assets and liabilities
September 30, 1994
<TABLE>
<S> <C>
Assets
Investments in securities, at value (identified cost $2,481,455,601) (Note 1) $2,392,164,572
Cash 336,744
Interest receivable 38,901,661
Receivable for shares of the fund sold 375,314
Receivable for securities sold 76,991
Total assets 2,431,855,282
Liabilities
Payable for shares of the fund repurchased 8,133,313
Payable for compensation of Manager (Note 2) 3,155,637
Payable for compensation of Trustees (Note 2) 2,440
Payable for investor servicing and custodian fees (Note 2) 124,587
Payable for administrative services (Note 2) 11,894
Payable for distribution fees (Note 2) 1,580,566
Other accrued expenses 1,002,086
Total liabilities 14,010,523
Net assets $2,417,844,759
Represented by
Paid-in capital (Notes 1, 4 and 5) $3,965,654,502
Accumulated net realized loss on investments (Notes 1 and 5) (1,463,085,664)
Undistributed net investment income (Notes 1 and 5) 4,566,950
Net unrealized depreciation of investments (89,291,029)
Total--Representing net assets applicable
to capital shares outstanding $2,417,844,759
Computation of net asset value and offering price
Net asset value and redemption price of class A shares
($2,412,153,599 divided by 293,728,628 shares) $8.21
Offering price per class A share (100/95.25 of $8.21)* $8.62
Net asset value and offering price of class B shares
($5,691,160 divided by 695,197 shares)** $8.19
<FN>
* 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
Year ended September 30, 1994
<TABLE>
<S> <C>
Investment income: $ 224,994,168
Expenses:
Compensation of Manager (Note 2) 14,081,046
Investor servicing and custodian fees (Note 2) 1,272,439
Compensation of Trustees (Note 2) 86,594
Reports to shareholders 325,333
Auditing 84,442
Legal 54,754
Postage 1,162,482
Administrative services (Note 2) 55,536
Distribution fees--class A(Note 2) 6,766,924
Distribution fees--class B (Note 2) 9,477
Registration fees 10,527
Other 259,042
Total expenses 24,168,596
Net investment income 200,825,572
Net realized loss on investments (Notes 1 and 3) (249,203,701)
Net unrealized depreciation of investments and TBA sale commitments during the year (75,684,083)
Net loss on investment transactions (324,887,784)
Net decrease in net assets resulting from operations $(124,062,212)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Year ended September 30
------------------------------------
1994 1993
- ---------------------------------------------------- --------------- -----------------
<S> <C> <C>
Decrease in net assets
Operations:
Net investment income $ 200,825,572 $ 321,023,280
Net realized loss on investments (249,203,701) (45,992,616)
Net unrealized depreciation of investments and TBA
sale commitments (75,684,083) (12,761,363)
Net increase/decrease in net assets resulting from
operations (124,062,212) 262,269,301
Undistributed net investment income included in
price of shares sold and repurchased, net -- (156,161)
Distributions to shareholders:
- ---------------------------------------------------- ------------- ---------------
From net investment income--class A (214,863,213) (313,364,337)
From net investment income--class B (63,569) --
Decrease from capital share transactions (Note 4) (773,296,455) (693,843,741)
Total decrease in net assets (1,112,285,449) (745,094,938)
Net assets
Beginning of year 3,530,130,208 4,275,225,146
End of year (including undistributed net investment
income of $4,566,950 and $7,502,782, respectively) $ 2,417,844,759 $3,530,130,208
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial Highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
May 20, 1994
(commencement
of operations)
to
September 30 Year ended September 30
1994 1994 1993 1992 1991
Class B Class A
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.43 $9.21 $9.32 $9.60 $9.32
Investment operations
Net investment income 0.21 0.62 0.77 0.56 0.70
Net realized and unrealized gain
(loss) on investments (0.25) (0.98) (0.13) 0.12 0.59
Total from investment operations (0.04) (0.36) 0.64 (0.52)(c) 1.29
Less distributions:
Net investment income (0.20) (0.64) (0.75) (0.56) (0.70)
From net realized gain on
investments -- -- -- (0.40) (0.31)
In excess of net investment income -- -- -- -- --
Tax return of capital -- -- -- -- --
Total distributions (0.20) (0.64) (0.75) (0.96) (1.01)
Net asset value, end of period $8.19 $8.21 $9.21 $9.32 $9.60
Total investment return at net
asset value (%) (b) (0.52)(c) (4.06) 7.20 7.56 14.49
Net assets, end of period
(in thousands) $5,691 $2,412,154 $3,530,130 $4,275,225 $5,045,139
Ratio of expenses to average
net assets (%) 0.59(c) 0.83 0.91 0.96 0.97
Ratio of net investment income to
average net assets (%) 2.22(c) 6.93 8.39 6.03 7.39
Portfolio turnover (%) 331.61 331.61 235.61 798.43 469.45
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the period
March 1, 1985
(commencement)
of operations to)
Year ended September 30 September 30
1990 1989 1988 1987 1986 1985+
Class A
<S> <C> <C> <C> <C> <C>
$10.06 $10.30 $10.38 $12.41 $11.89 $11.57
0.78 0.84 0.88 0.91 1.05 0.57(a)
(0.32) 0.12 0.32 (1.36) 1.07 0.45
0.46 0.96 1.20 (0.45) 2.12 1.02
(0.78) (0.84) (0.88) (0.91) (1.17) (0.52)
-- -- -- (0.56) (0.43) (0.18)
(0.42) (0.33) (0.36) -- -- --
-- (0.03) (0.04) (0.11) -- --
(1.20) (1.20) (1.28) (1.58) (1.60) (0.70)
$9.32 $10.06 $10.30 $10.38 $12.41 $11.89
4.77 10.01 11.97 (4.46) 18.86 8.98(c)
$6,171,106 $7,880,043 $9,519,718 $10,558,552 $5,164,692 $824,625
0.95 0.91 0.75 0.73 0.82 0.61(a)(c)
8.05 8.31 8.31 7.59 7.75 5.06(a)(c)
255.47 213.35 52.18 98.74 187.37 171.09(c)
<FN>
+ Activity for the period from December 18, 1984 to February 28, 1985 is not included.
(a) Reflects a voluntary expense limitation in effect during the period. As a result of such
limitation, expenses of the fund for the period ended September 30, 1985 reflect a reduction of
less than $0.01 per share.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Not annualized.
</TABLE>
<PAGE>
Notes to financial statements
September 30, 1994
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The fund seeks high
current income, with preservation of capital as its secondary objective.
Prior to November 1, 1992, the fund was named Putnam High Income Government
Trust and had the investment objective of high current return consistent with
preservation of capital through a portfolio of U.S. government securities.
The fund offers both class A and class B shares. The fund commenced its
public offering of class B shares on May 20, 1994. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares 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 six years of purchase. Expenses of the fund are
borne pro rata by the shareholders of both classes of shares, except that
each class bears expenses unique to that class (including the distribution
fees applicable to such class). Each class votes as a class only with respect
to its own distribution plan or other matters on which a class vote is
required by law or determined by the Trustees. Shares of each class would
receive their pro rata share of the net assets of the fund, if the fund were
liquidated. In addition, the Trustees declare separate dividends on each
class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
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 most
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 value,
and other investments are stated at fair value following procedures approved
by the Trustees.
B) 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 commitment will not fluctuate more than 2.0% from the principal
amount. The fund holds, and maintains until the settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the fund enters into offsetting contracts for the forward sale of
other securities it owns. 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.
<PAGE>
Although the fund will generally enter into TBA purchase commitments with the
intention of acquiring securities for its portfolio or for delivery pursuant
to options contracts it has entered into, the fund may dispose of a
commitment prior to settlement if the fund Manager deems it appropriate to do
so.
TBA sale commitments The fund may enter into TBA sale commitments to hedge
its portfolio positions or to sell mortgage-backed securities it owns under
delayed delivery arrangements. Proceeds of TBA sale commitments are not
received until the contractual settlement date. During the time a TBA sale
commitment is outstanding, equivalent deliverable securities, or an
offsetting TBA purchase commitment deliverable on or before the sale
commitment date, are held as "cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Security valuation" above. The contract is "marked-to-market" daily and the
change in market value is recorded by the fund as an unrealized gain or loss.
If the TBA sale commitment is closed through the acquisition of an offsetting
purchase commitment, the fund realizes a gain or loss on the commitment
without regard to any unrealized gain or loss on the underlying security. If
the fund delivers securities under the commitment, the fund realizes a gain
or loss from the sale of the securities based upon the unit price established
at the date the commitment was entered into.
C) 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
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.
D) 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. The fund's Manager 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.
E) 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. Discount on zero
coupon bonds is amortized according to the effective yield method.
F) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986. Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation of securities held, and excise tax
on income and capital gains.
At September 30, 1994, the fund had a capital loss carryover of approximately
$1,218,771,000 which may be available to offset realized capital
gains to the extent provided by regulations. Of this amount $1,165,356,000,
$45,648,000 and $7,767,000 will expire September 30, 1998, 2001, and 2002,
respectively. The fund may at times pay distributions from net current
realized short-term gains that could have been retained by the fund and
offset by the capital loss carryover. In such circumstances the fund loses
the benefit of the carryover.
<PAGE>
G) Distributions to shareholders Distributions to shareholders are recorded
by the fund on the ex-dividend date.
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. The differences include treatment of losses
on wash sales transactions and post-October losses. 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, 1994, the fund increased
undistributed net investment income by $476,264 and increased accumulated net
realized loss on investments by the same amount.
H) Equalization Prior to October 1, 1993, the fund used the accounting
practice known as equalization to keep a continuing shareholder's per share
interest in undistributed net investment income unaffected by sales or
repurchases of fund shares. This was accomplished by allocating a per share
portion of the proceeds from sales and the costs of repurchases of shares to
undistributed net investment income.
As of October 1, 1993, the fund discontinued using equalization. This change
had no effect on the fund's total net assets, net asset value per share, or
its net increase (decrease) in net assets from operations and did not have a
material effect on the per share amounts shown in the financial highlights.
In management's opinion, discontinuation of the use of equalization results
in less distortion of undistributed net investment income as compared to
income available for distribution for federal income tax purposes. The
cumulative effect of this change, was to increase undistributed net
investment income and decrease paid-in capital previously reported through
September 30, 1993 by $156,161.
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 for
the quarter.
Under a management contract dated December 8, 1989, the fees paid by the fund
for management and investment advisory services are based on the following
annual rates: 0.60% of the first $500 million of average net assets, 0.50% of
the next $1 billion, 0.45% of the next $1 billion, 0.40% of the next $4.5
billion, 0.375% of the next $2.5 billion, and 0.35% of any amount over $9.5
billion, subject, under current law, to reduction in any year to the extent
that expenses (exclusive of distribution fees, brokerage, interest, taxes and
custody credits allowed by PFTC.) of the fund exceed 2.5% of the first $30
million of average net assets, 2% of the next $70 million and 1.5% of any
excess over $100 million, and by the amount of certain brokerage commissions
and fees (less expenses) received by affiliates of the Manager on the fund's
portfolio transactions.
Effective May 6, 1994, the fund adopted a new distribution plan with respect
to its class A shares (the "Class A Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Class A Plan 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 class A shares. The Trustees have approved payment by the fund
to Putnam Mutual Funds Corp. at an annual rate of 0.25% of the fund's average
net assets attributable to class A shares.
Prior to May 6, 1994, the purpose of the fund's distribution plan was to
compensate Putnam Mutual Funds
<PAGE>
Corp. for services provided and expenses incurred by it in distributing
shares. Under this plan the fund paid Putnam Mutual Funds Corp. at an annual
rate of 0.25% of the fund's net assets at the end of each quarter
attributable to shareholders for whom firms other than Putnam Mutual Funds
are designated as the dealer on record.
For the period ended September 30, 1994, the fund paid $6,766,924 in
distribution fees for class A shares.
During the year ended September 30, 1994, Putnam Mutual Funds Corp., acting
as the underwriter, received net commissions of $138,446 from the sales of
class A shares.
A deferred sales charge of up to 1% is assessed on certain redemptions of
class A shares purchased as part of an investment of $1 million or more. For
the year ended September 30, 1994, Putnam Mutual Funds Corp., acting as the
underwriter, received $54,772 on class A redemptions.
The fund has adopted a distribution plan with respect to its class B shares
(the "Class B Plan") pursuant to Rule 12b-1 under the Investment Company Act
of 1940. The purpose of the Class B Plan is to compensate Putnam Mutual Funds
Corp. for services provided and expenses incurred by it in distributing class
B shares. The Class B Plan provides for payments by the fund to Putnam Mutual
Funds Corp. at an annual rate of up to 1.00% of the fund's average net assets
attributable to class B shares. 1994, the fund paid $9,477 in distribution
fees for class B shares.
Putnam Mutual Funds Corp. also receives the proceeds of contingent deferred
sales charges levied on class B share redemptions within six years of
purchase. The charge is based on declining rates, which begin at 5.0% of the
net asset value of the redeemed shares. Putnam Mutual Funds Corp. received
contingent deferred sales charges of $1,684 from such redemptions during the
year ended September 30, 1994.
The fund also reimburses the Manager 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. For the year ended
September 30, 1994, the fund paid $55,536 for these services.
Trustees of the fund receive an annual Trustee's fee of $4,510 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
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. Fees paid for these investor servicing and custodial
functions for the year ended September 30, 1994 amounted to $1,272,439.
Investor servicing and custodian fees reported in the Statement of operations
for the year ended September 30, 1994 have been reduced by credits allowed by
PFTC.
Note 3
Purchases and sales of securities
During the year ended September 30, 1994, purchases and sales of U.S.
government obligations other than short-term investments aggregated
$9,484,149,254 and $10,144,213,662, respectively. In determining the net gain
or loss on securities sold, the cost of securities has been determined on the
identified cost basis.
<PAGE>
Note 4
Capital shares
At September 30, 1994, there was an unlimited number of shares of beneficial
interest authorized, divided into two classes, class A and class B capital
shares. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Year ended September 30
-------------------------------------------------------------------------
1994 1993
--------------------------------- ------------------------------------
Class A Shares Amount Shares Amount
- -------------------- --------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Shares sold 8,942,849 $ 77,862,084 13,269,530 $ 121,899,393
Shares issued in
connection with
reinvestment of
distributions 10,622,308 91,971,912 13,785,421 126,356,684
- -------------------- ------------- ------------ ------------- ---------------
19,565,157 169,833,996 27,054,951 248,256,077
Shares repurchased (109,083,833) (948,928,990) (102,699,591) (942,099,818)
- -------------------- ------------- ------------ ------------- ---------------
Net decrease (89,518,676) $(779,094,994) (75,644,640) $(693,843,741)
- -------------------- ------------- ------------ ------------- ---------------
</TABLE>
For the period May 20, 1994
(commencement of operations)
to
September 30
----------------------------
1994
----------------------------
Class B Shares Amount
- ---------------------------------- ---------- --------------
Shares sold 714,110 $5,953,948
Shares issued in connection with
reinvestment of distributions 7,241 59,832
- ---------------------------------- -------- ------------
721,351 6,013,780
Shares repurchased (26,154) (215,241)
- ---------------------------------- -------- ------------
Net increase 695,197 $5,798,539
- ---------------------------------- -------- ------------
Note 5
Reclassification of capital accounts
Effective October 1, 1993, Putnam American Government Income Fund adopted the
provisions of Statement of Position 93-2 "Determination, Disclosure and
Financial Statement Presentation of Income, Capital Gain and Return of
Capital Distributions, by Investment Companies (SOP)." The purpose of this
SOP is to report the accumulated net investment income (loss) and accumulated
net realized gain (loss) accounts in such a manner as to approximate amounts
available for future distributions (or to offset future realized capital
gains) and to achieve uniformity in the presentation of distributions by
investment companies.
As a result of the SOP, the fund has reclassified $10,532,953 to increase
undistributed net investment income, $392,203,864 to decrease accumulated net
realized loss and $402,736,817 to decrease additional paid-in capital.
These reclassifications represent the cumulative amounts necessary to report
these balances through September 30, 1993, the close of the fund's prior
fiscal year end for financial reporting and tax purposes.
These reclassifications, which have no impact on the total net asset value of
the fund, are primarily attributable to market discount, post-October losses
and gains and losses on paydowns on mortgage-backed securities which are
treated differently in the computation of distributable income and capital
gains under federal income tax rules and regulations versus generally
accepted accounting principles.
<PAGE>
Federal tax information
For federal income tax purposes, distributions from investment income
totaling $.637 and $.197 per class A and class B share, respectively, for the
year ended September 30, 1994 constitute "dividend income." The fund has
designated none of this amount as qualifying for the dividends-received
deductions for corporations.
The Form 1099 you receive in January 1995 will show the tax status of all
distributions paid to your account in calendar 1994.
If you are a shareholder in an IRA or other tax-sheltered retirement plan,
this statement is for information only and will serve as a record
distributions reinvested in your account during the fiscal year. Money
invested in these plans generally is not subject to federal income tax until
you withdraw it.
As required by law, your Fund reports to the Internal Revenue Service on a
calendar year basis the amount of distributions paid to each shareholder.
<PAGE>
Our commitment to quality service
> CHOOSE AWARD-WINNING SERVICE.
Putnam Investor Services has won the DALBAR Quality Tested Service Seal every
year since the award's 1990 inception. DALBAR, an independent research firm,
ran more than 10,000 tests of 38 shareholder service components. In every
category, Putnam outperformed the industry standard.
> HELP YOUR INVESTMENT GROW.
Set up a systematic program for investing with as little as $25 a month from
a Putnam fund or from your own checking or savings account.*
> SWITCH FUNDS EASILY.
You can move money from one account to another with the same class of shares
without a service charge. (This privilege is subject to change or
termination.)
> ACCESS YOUR MONEY QUICKLY.
You can get checks sent regularly or redeem shares any business day at the
then-current net asset value, which may be more or less than their original
cost.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a helpful
Putnam representative.
> To make an additional investment in this or any other Putnam fund, contact
your financial advisor or call our toll-free number: 1-800-225-1581.
*Regular investing, of course, does not guarantee a profit or protect against
a loss in a declining market. Investors should consider their ability to
continue purchasing shares during periods of low price levels.
<PAGE>
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John R. Verani
Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
Alan J. Bankart
Vice President
Michael Martino
Vice President
and Fund Manager
William N. Shiebler
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam American
Government Income 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.
<PAGE>
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