PUTNAM
AMERICAN
GOVERNMENT
INCOME FUND
[Artwork]
SEMIANNUAL REPORT
March 31, 1995
[Putnam Logo]
Boston * London * Tokyo
<PAGE>
PERFORMANCE HIGHLIGHTS
For the 12 months ended March 31, 1995, the total return of the fund's class A
shares finished in the top third of the 151 general U.S. government funds
tracked by Lipper Analytical Services. *
Performance should always be considered in light of a fund's investment strate-
gy. Putnam American Government Income Fund is designed for investors seeking
high current income primarily through U.S. government securities.
SEMIANNUAL RESULTS AT A GLANCE
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CLASS A CLASS B
TOTAL RETURN: NAV POP NAV CDSC
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(change in value during period
plus reinvested distributions)
6 months ended 3/31/95 4.22% -0.73% 3.55% -1.45%
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CLASS A CLASS B CLASS M
SHARE VALUE: NAV POP NAV NAV POP
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9/30/94 $8.21 $8.62 $8.19 -- --
2/14/95 -- -- -- $8.14 $8.41
3/31/95 8.24 8.65 8.21 8.24 8.52
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DISTRIBUTIONS: NO. INCOME TOTAL
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Class A 6 $0.306 $0.306
Class B 6 0.262 0.262
Class M 2 0.101 0.101
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CLASS A CLASS B
CURRENT RETURN: NAV POP NAV
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End of period
Current dividend rate (1) 7.43% 7.08% 6.87%
Current 30-day SEC yield (2) 7.87 7.49 7.11
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Performance data represent past results and will differ for each share class.
For performance over longer periods, see pages 8 and 9. POP assumes 4.75% maxi-
mum sales charge. CDSC assumes 5% maximum contingent deferred sales charge. Per-
formance of class M shares, which became effective 2/14/95, is not shown because
of the brevity of the reporting period. (1) Income portion of most recent dis-
tribution, annualized and divided by NAV or POP at end of period. (2) Based only
on investment income, calculated using SEC guidelines.
* Lipper Analytical Services, an independent research organization, ranks funds
according to total-return performance. Their rankings vary over time, and do not
not reflect the effects of sales charges. For periods ended 3/31/95, the fund's
class A shares ranked 49 out of 151, 73 out of 80, and 19 out of 22 general U.S.
government funds for 1-, 5-, and 10-year performance, respectively. The fund's
class B shares were initially offered on 5/16/94, and were not ranked over these
periods. Past performance is not indicative of future results.
<PAGE>
FROM THE CHAIRMAN [Photograph of George Putnam]
* (C) Karsh, Ottawa
DEAR SHAREHOLDER:
THE PERFORMANCE OF PUTNAM AMERICAN GOVERNMENT INCOME FUND OVER THE FIRST HALF
OF FISCAL 1995 DEFINITELY REFLECTS A CHANGE FOR THE BETTER IN BOND-MARKET SENTI-
MENT. OVERALL, INVESTOR CONFIDENCE REBOUNDED SUBSTANTIALLY BETWEEN OCTOBER, WHEN
THE FUND BEGAN ITS FISCAL YEAR, AND MARCH 31, THE YEAR'S MIDPOINT.
LAST YEAR'S RISING INTEREST RATES MAY HAVE RATTLED THE FINANCIAL MARKETS, BUT
THE FEDERAL RESERVE BOARD SEEMS TO BE SUCCEEDING IN HEADING OFF INFLATION. THE
LATTER, AFTER ALL, WAS THE FED'S INTENT AS IT NUDGED SHORT-TERM RATES HIGHER
THROUGHOUT 1994 AND INTO EARLY 1995.
THOUGH YIELDS ON BENCHMARK 30-YEAR TREASURY BONDS SLIPPED FROM RECENT HIGHS,
REAL YIELDS, AFTER ALLOWING FOR MODERATE INFLATION, REMAIN CLOSE TO RECORD LE-
VELS. THE FUND'S SHORTER-TERM BONDS AND MORTGAGE-BACKED SECURITIES ALSO POSTED
STRONG PERFORMANCES DURING THE PERIOD.
IN THE FOLLOWING REPORT, FUND MANAGER MICHAEL MARTINO LOOKS BACK ON THE FIRST
HALF OF FISCAL 1995, AND OFFERS SOME PROJECTIONS FOR THE YEAR'S SECOND HALF.
RESPECTFULLY YOURS,
GEORGE PUTNAM
CHAIRMAN OF THE TRUSTEES
MAY 17, 199
* (C) Copyright
<PAGE>
REPORT FROM THE FUND MANAGER
MICHAEL MARTINO
A dramatic rebound in U.S. government securities during the six months ended
March 31, 1995, resulted in a period of strong performance for Putnam American
Government Income Fund. The fund's total return of 4.22% for class A shares at
net asset value (NAV) outpaced the 4.02% advance measured by the Lehman Brothers
Intermediate Treasury Index over the semiannual period. Although class B shares
trailed the Lehman index, they nevertheless posted a solid 3.55% total return
at NAV.
BOND MARKET STAGES IMPRESSIVE RALLY
Anticipating a slowing economy and continuing mild inflation, investors began
returning to the bond market in force last November after a hiatus of several
months. They were attracted by the high yields and relatively low prices created
by 1994's market decline. As demand increased, the yield on the 30-year Treasury
bond dropped from its peak of 8.15% in mid-November to just over 7.3% by the end
of March. Bond prices, which move in the opposite direction of yields, rallied
considerably in all domestic market sectors.
The market's recovery over this period reflected the growing perception that the
Federal Reserve Board's seven interest-rate increases were finally starting to
slow the economy's growth to a sustainable but noninflationary rate. Although
the gross domestic product results for the fourth quarter of calendar 1994 and
the first quarter of calendar 1995 continued to indicate relatively strong
growth, signs of a slowdown in such consumer-driven sectors as retail sales,
housing, and automobiles bolstered investors' confidence that the Fed's strategy
is producing the desired effect.
GINNIE MAES LEAD FUND PAST MANY COMPETITORS
Typically, your fund invests primarily in U.S. Treasury securities, with a sub-
stantial portion of its assets allocated to Government National Mortgage Asso-
ciation (Ginnie Mae) securities. Over the first half of the fiscal year, the
fund outperformed its benchmark index -- as well as many competing U.S. govern-
ment securities funds -- principally because of its Ginnie Mae allocation. While
both Ginnie Maes and Treasuries advanced, the yield advantage of Ginnie Maes
- -- normally about one percentage point more than long-term Treasuries -- attrac-
ted investors and caused Ginnie Mae prices to increase more than Treasury
prices.
<PAGE>
Given the consistent outperformance of Ginnie Maes relative to U.S. Treasuries
throughout 1994 and thus far in 1995, the availability of value-priced Ginnie
Mae securities has declined. Consequently, we took profits on a portion of the
fund's holdings and ended the fiscal period with a neutral portfolio weighting
in Ginnie Maes.
Despite this recent decline in relative value, we believe the yield advantage of
Ginnie Maes justifies the portfolio's current weighting. Moreover, we believe it
is likely that Ginnie Maes may return to being a somewhat better value than
Treasuries later in 1995 and, should that occur, we would increase the fund's
allocation at that time.
MODEST SHIFT IN RATE OUTLOOK
Our approach to structuring the fund's U.S. Treasury holdings during the period
reflected a slight shift in our outlook toward long-term interest rates.
Throughout most of 1994, we maintained a defensive portfolio structure by keep-
ing duration relatively short and by avoiding intermediate-maturity securities.
Duration is a measure of the price sensitivity of a given portfolio of bonds to
interest-rate changes. A shorter duration generally means lower portfolio vola-
tility
[Line Chart - Page 7]
GMNAS OUTPERFORM LONG-TERM TREASURIES
LONG-TERM
GNMAS (1) TREASURIES (2)
3/31/94 -0.68 % -1.18 %
5/31/94 -0.4 -1.84
6/30/94 -0.55 -2.77
7/31/94 1.39 0.53
8/31/94 1.71 -0.21
9/30/94 0.27 -3.36
10/31/94 0.11 -3.69
11/30/94 -0.17 -3.12
12/31/94 0.94 -1.63
1/31/95 3.03 0.89
2/28/95 5.75 3.75
3/31/95 6.26 4.65
(1) Lehman Brothers GNMA Index. (2) Lehman Brothers Long-Term Treasury Index.
Graph shows cumulative performance measured by each index for the 12-month pe-
riod ended 3/31/95. Each month-ending date reflects cumulative performance from
3/31/94 -- the beginning of the period. Indexes are unmanaged, assume reinvest-
ment of distributions, and do not reflect fund performance. Past performance is
not indicative of future results.
<PAGE>
when rates increase, and thus, can be instrumental in protecting the portfolio's
value.
Often, investing in intermediate-term securities can be helpful in managing du-
ration. However, when short-term interest rates rise faster than long-term ra-
tes, as they did in 1994, the prices of intermediate-maturity bonds typically
decline the most. Our avoidance of intermediate-term bonds during the semiannual
period undoubtedly contributed to the fund's strong performance.
Later in the fiscal period, we shifted to a somewhat more positive interest-rate
outlook. We now believe long-term interest rates could be modestly lower by the
end of calendar 1995, although there can be no assurance of this. Consequently,
we have extended the portfolio's duration slightly, lengthening it from 5.1
years on September 30, 1994, to 5.5 years as of March 31, 1995. A slightly lon-
ger duration gives the portfolio moderately greater sensitivity to interest-rate
movements and may benefit performance should long-term rates decline. However,
if long-term rates rise, the portfolio could experience moderate declines.
While our expectations for rates have improved, we remain cautious. We continue,
for the most part, to avoid intermediate-term securities in favor of concentra-
ting the fund's holdings in short- and long-term securities, maintaining a "bar-
bell" portfolio configuration. Typically, when short-term rates rise and long-
term rates remain stable or decline (that is, when the yield curve flattens),
a barbelled portfolio will outperform other portfolio configurations. While
there can be no guarantees, we believe the yield curve could flatten in the
months to come.
CMO reduction continues. As discussed in the annual report dated September 30,
1994, we continued to reduce the fund's exposure to collateralized mortgage
obligations (CMOs). CMOs are mortgage derivatives that split the cash flows from
pools of mortgage loans into short-, medium- and long-term time frames. While
CMOs can enhance the fund's dividend income, they are frequently more difficult
to sell in a timely manner at a desirable price than are other government-agency
mortgage-backed securities. By March 31, we had reduced CMO holdings to 0.60% of
the fund's assets. Please see the chart on page 7 for a comparison to earlier
periods.
MARKET CONSOLIDATION LIKELY AS FED VIGILANCE CONTINUES
We expect the Fed to remain vigilant in its fight against inflation for at least
several more months and we foresee the possibility of additional,
<PAGE>
[Bar Chart - Page 7]
PORTFOLIO ALLOCATIONS *
COLLATERALIZED CASH AND
U.S. TREASURY MORTGAGE-BACKED MORTGAGE SHORT-TERM
SECURITIES SECURITIES OBLIGATIONS INVESTMETS
3/31/94 52.70 21.80 11.40 14.10
9/30/94 58.70 26.10 10.90 4.30
3/31/95 67.10 27.00 0.60 5.30
* Based on net assets as of the indicated date. Allocations will vary over time.
albeit limited, increases in short-term interest rates. In fact, should the U.S.
dollar continue to hit historic lows against major foreign currencies, the Fed
may attempt to support the dollar by implementing additional interest-rate in-
creases. Whether this would actually help the dollar is a topic that investors
and economists continue to debate. Nevertheless, rate increases could help off-
set the inflationary impact of a severely weakened currency by reducing the de-
mand for imports and by restraining aggregate demand throughout the domestic
economy. (A weak dollar makes U.S. imports more expensive.)
Given the uncertainty surrounding any Fed response to the weak dollar, and given
the bond market's strong rally through the first quarter of calendar 1995, the
prospect of a sustained market advance over the rest of 1995 is questionable. In
any event, we will continue to monitor interest rates, the movement of the yield
curve, and the economy, and will seek to add value to the portfolio as opportu-
nities develop.
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 3/31/95, there is no guarantee the fund will continue to
hold these securities in the future. Mortgage-backed securities are subject to
prepayment risk, which is the risk that the investor's principal will be re-
turned in full at some point earlier than the security's stated maturity date.
Such prepayment may cause an investor's actual rate of return to differ from the
expected rate of return.
<PAGE>
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, assum-
ing you held the shares through the entire period and reinvested all distribu-
tions 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 rela-
tive to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDED 3/31/95
LEHMAN BROS.
INTERMEDIATE
CLASS A CLASS B TREASURY
NAV POP NAV CDSC INDEX CPI
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6 months 4.22% -0.73% 3.55% -1.45% 4.02% 1.34%
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1 year 3.81 -1.16 -- -- 4.24 2.85
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5 years 36.07 29.61 -- -- 48.14 17.64
Annual average 6.35 5.32 -- -- 8.18 3.30
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10 years 109.41 99.48 -- -- 139.52 42.29
Annual average 7.67 7.15 -- -- 9.13 3.59
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Life of class B -- -- 3.01 -1.86 4.91 2.71
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Fund performance data do not take into account any adjustment for taxes payable
on reinvested distributions. The fund began operations on 3/1/85 offering shares
now known as class A. The fund began offering class B shares on 5/16/94 and
class M shares on 2/14/95. Performance for class M shares is not shown because
of the brevity of the reporting period. Performance data represent past results
and will differ for each share class. Investment returns and principal value
will fluctuate so an investor's shares, when sold, may be worth more or less
than their original cost.
<PAGE>
TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial sales charge.
CLASS B SHARES may be subject to a sales charge upon redemption.
CLASS M SHARES have a lower initial sales charge and a higher 12b-1 fee than
class A shares and no sales charge on redemption.
NET ASSET VALUE (NAV) is the value of all your fund's assets, minus any liabili-
ties, divided by the number of outstanding shares, not including any initial or
contingent deferred sales charge.
PUBLIC OFFERING PRICE (POP) is the price of a mutual fund share plus the maximum
sales charge levied at the time of purchase. POP performance figures shown here
assume the maximum 4.75% sales charge for class A shares and 3.25% for class M
shares.
CONTINGENT DEFERRED SALES CHARGE (CDSC) is a charge applied at the time of the
redemption of class B shares and assumes redemption at the end of the period.
Your fund's CDSC declines from a 5% maximum during the first year to 1% during
the sixth year. After the sixth year, the CDSC no longer applies.
COMPARATIVE BENCHMARKS
LEHMAN BROTHERS INTERMEDIATE TREASURY INDEX is composed of all bonds covered by
the Lehman Brothers Treasury Bond Index with maturities between one and 9.9
years.
LEHMAN BROTHERS LONG-TERM TREASURY INDEX is composed of all bonds covered by the
Lehman Brothers Treasury Bond Index with maturities of 10 years or greater.
LEHMAN BROTHERS GNMA INDEX is composed of all fixed-rate, securitized mortgage
pools backed by GNMA, with principal amounts outstanding in excess of $50 mi-
llion. Subset of the Lehman Brothers Mortgage-Backed Securities Index.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of inflation; it does not
represent an investment return.
All indexes assume reinvestment of distributions and do not take into account
brokerage commissions or other costs. The fund's portfolio contains securities
that differ from those in the indexes.
<PAGE>
A PUTNAM PERSPECTIVE ON RISK AND REWARD
You've probably been told how important it is to understand the relationship be-
tween an investment's potential rewards and its accompanying risks. Given the
cautionary nature of such instructions, it may take most investors a while to
realize that risk has a positive side.
EVERY RISK SIGNALS A POTENTIAL REWARD. Selecting only those investments that
offer the greatest degree of security generally leads to only modest rewards.
Furthermore, even insured or guaranteed investments may be subject to changes in
their rates of return or, in some cases, in their principal values Experienced
investors know that no investment is truly risk free and are therefore willing
to take on some measure of risk in order to increase their potential gains.
THE GREATER THE RISK, THE GREATER THE POTENTIAL REWARD. Accepting an appropriate
level of investment risk can give you a better chance of outpacing inflation
over time and seeking to maximize your investment's return. How much risk? Your
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A RUNDOWN OF RISK TYPES
MARKET RISK Most important for stock funds, but relevant to all funds, this is
a measure of how sensitive a fund's holdings are to changes in general market
conditions. Remember, though, that securities that lose value quickly in market
declines may also show the strongest gains in more favorable environments.
INTEREST-RATE RISK Since bond prices fall as interest rates rise, this type of
risk is a particular concern for fixed-income investors. However, interest-rate
increases can also have a substantial negative effect on the stock market.
INFLATION RISK If your investments cannot keep pace with inflation, your money
will begin to lose its purchasing power. Stock investments are generally consi-
dered among the best ways of addressing inflation risk over the long term.
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<PAGE>
financial advisor's feedback and your time horizon can make all the difference
in determining how much risk is compatible with your investment goals and your
peace of mind.
FITTING YOUR FUND SELECTION TO YOUR RISK TOLERANCE
How do you find the right balance between investment risks and their potential
rewards? It's helpful to understand the types of risks that can apply to diffe-
rent types of investments, and to look at your own portfolio with this perspec-
tive.
For short-term goals, your first priority may be managing market risk. Longer-
term investors may be more concerned with inflation risk. And all income-orien-
ted investors should consider interest-rate, credit, and prepayment risks care-
fully. Within each of Putnam's four investment categories, you can select funds
with differing levels of risk and reward potential to customize your portfolio.
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CREDIT AND PREPAYMENT RISK Credit risk is the concern that the security's issuer
will not be able to meet its payment, while prepayment risk involves the prema-
ture payoff of a loan, with a resulting loss of interest income. Professional
management and in-depth research are invaluable in managing both these risks.
LIQUIDITY RISK Not all investments can be readily converted into cash at their
perceived market values. Liquidity risk can affect the price of securities held
in the fund's portfolio and, thus, the fund's share prices.
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This list covers only the most general types of risks; however, each investment
will also have its own specific risks. You will find a more detailed discussion
of these risk considerations in each fund's prospectus.
<PAGE>
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund Capital Appreciation Fund *
Diversified Equity Trust Europe Growth Fund
Global Growth Fund Health Sciences Trust
Investors Fund Natural Resources Trust
New Opportunities Fund OTC Emerging Growth Fund
Overseas Growth Fund Vista Fund
Voyager Fund
PUTNAM GROWTH AND INCOME FUNDS
Convertible Income-Growth Trust Growth and Income Fund II
Managed Income Trust The George Putnam Fund of Boston
The Putnam Fund for Growth and Income Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Adjustable Rate U.S. Government Fund American Government Income Fund
Diversified Income Trust High Yield Advantage Fund
High Yield Trust Income Fund
Intermediate U.S. Government Income Fund Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE INCOME FUNDS
Intermediate Tax Exempt Fund Municipal Income Fund
Tax Exempt Income Fund Tax-Free High Yield Fund
Tax-Free Insured Fund
STATE TAX-FREE INCOME FUNDS +
Arizona, California, Florida, Massachusetts Michigan,
Minnesota, New Jersey, New York, Ohio, and Pennsylvania
LIFESTAGESM 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 INVESTMENT ++
Putnam MONEY MARKET FUNDS:
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts +++
* Temporarily closed to new investment.
+ Not available in all states.
++ Relative to above.
+++ Not offered by Putnam Investments. Certificates of deposit offer a fixed ra-
te 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 at 1-800-225-1581 to obtain a
prospectus for any Putnam fund. It contains more complete information, in-
cluding charges and expenses. Please read it carefully before you invest or
send money.
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
March 31, 1995 (Unaudited)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (93.0%)*
PRINCIPAL AMOUNT VALUE
Government National Mortgage Association
$ 93,191,571 9s, with various due dates to July 1, 2024 $ 96,956,958
144,570,983 8 1/2s, with various due dates to November
15, 2024 147,235,731
262,961,119 8s, with various due dates to November 15, 2024 261,413,318
90,824,348 7 1/2s, with various due dates to July 15, 2024 87,676,503
125,000,000 U.S. Treasury Bonds 11 1/8s, August 15, 2003 155,039,062
75,000,000 U.S. Treasury Bonds 10 3/4s, August 15, 2005 93,421,875
50,000,000 U.S. Treasury Bonds 9 7/8s, November 15, 2015 61,906,250
150,000,000 U.S. Treasury Bonds 8 7/8s, February 15, 2019 170,953,125
100,000,000 U.S. Treasury Bonds 8 7/8s, August 15, 2017 113,687,500
250,000,000 U.S. Treasury Bonds 7 5/8s, February 15, 2025 255,390,625
100,000,000 U.S. Treasury Bond Stripped Principal Payment
zero %, November 15, 2018 16,593,750
50,000,000 U.S. Treasury Notes 9 1/2s, November 15, 1995 50,953,125
25,000,000 U.S. Treasury Notes 9 1/4s, January 15, 1996 25,515,625
25,000,000 U.S. Treasury Notes 8 7/8s, July 15, 1995 25,179,687
25,000,000 U.S. Treasury Notes 8 5/8s, August 15, 1997 25,953,125
150,000,000 U.S. Treasury Notes 7 7/8s, July 31, 1996 152,343,750
100,000,000 U.S. Treasury Notes 7 7/8s, February 15, 1996 101,125,000
100,000,000 U.S. Treasury Notes 7 3/8s, May 15, 1996 100,812,500
10,000,000 U.S. Treasury Notes 7 1/4s, May 15, 2004 10,006,250
100,000,000 U.S. Treasury Notes 7 1/4s, February 15, 1998 100,906,250
---------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(cost $2,050,576,673) $2,053,070,009
COLLATERALIZED MORTGAGE OBLIGATIONS (0.6%)*
PRINCIPAL AMOUNT VALUE
Federal National Mortgage Association
$ 5,580,000 10.2s, September 25, 2018 $ 5,571,162
7,500,000 Principal Only (PO) Strips, zero %,
February 25, 2017 +++ 7,952,344
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TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(cost $13,523,506) $ 13,523,506
<PAGE>
SHOR-TERM INVESTMENTS (5.7%)*
PRINCIPAL AMOUNT VALUE
$ 4,110,000 Federal Home Loan Mortgage Corporation 5.92s,
April 18, 1995 $ 4,098,510
Federal National Mortgage Association
15,000,000 5.92s, May 15, 1995 14,891,466
31,135,000 5.91s, May 8, 1995 30,945,881
50,000,000 5.90s, April 18, 1995 49,860,694
25,000,000 5.88s, April 13, 1995 24,951,000
560,000 Interest in $510,221,000 joint repurchase agreement
dated March 31, 1995 with Goldman Sachs &Co.,
due April 3, 1995 with respect to various U.S.
Treasury obligations -- maturity value of $560,293
for an effective yield of 6.28% 560,098
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TOTAL SHORT-TERM INVESTMENTS (cost $125,307,649) $ 125,307,649
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TOTAL INVESTMENTS (cost $2,189,407,828)*** $2,191,901,164
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* Percentages indicated are based on net assets of $2,207,930,141, which co-
rrespond to a net asset value per class A share, class B share and class M
share of $8.24, $8.21 and $8.24, respectively.
+++ Principal Only (PO) Strips represent the right to receive the monthly prin-
cipal payments on an underlying pool of mortgage loans. No payments of inte-
rest on the pool are passed through to the PO holders.
*** The aggregate identified cost on a tax basis is $2,189,407,828, resulting
in gross unrealized appreciation and depreciation of $17,643,993 and
$15,150,657, respectively, or net unrealized appreciation of $2,493,336.
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995 (Unaudited)
ASSETS
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Investments in securities, at value
(identified cost $2,189,407,828) (Note 1) $2,191,901,164
Cash 662
Interest receivable 24,385,155
Receivable for shares of the fund sold 205,504
Receivable for securities sold 103,068,097
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TOTAL ASSETS $2,319,560,582
LIABILITIES
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Payable for securities purchased 102,755,611
Payable for shares of the fund repurchased 3,549,228
Payable for compensation of Manager (Note 2) 2,779,485
Payable for compensation of Trustees (Note 2) 2,312
Payable for investor servicing and custodian fees (Note 2) 310,511
Payable for administrative services (Note 2) 10,829
Payable for distribution fees (Note 2) 1,374,494
Other accrued expenses 847,971
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TOTAL LIABILITIES 111,630,441
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NET ASSETS $2,207,930,141
REPRESENTED BY
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Paid-in capital (Notes 1and 4) $3,749,804,168
Accumulated net realized loss on investments (Note 1) (1,540,812,533)
Distributions in excess of net investment income (Notes 1 and 5) (3,554,830)
Net unrealized appreciation of investments 2,493,336
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TOTAL -- REPRESENTING NET ASSETS APPLICABLE TO
CAPITAL SHARES OUTSTANDING $2,207,930,141
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
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Net asset value and redemption price of class A shares
($2,203,122,472 divided by 267,282,225 shares) $8.24
Offering price per class A share (100/95.25 of $8.24) * $8.65
Net asset value and redemption price of class B shares
($4,790,216 divided by 583,217 shares) + $8.21
Net asset value and redemption price of class M shares
($17,453 divided by 2,118 shares) $8.24
Offering price per class M share (100/96.75 of $8.24) * $8.52
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* 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.
<PAGE>
STATEMENT OF OPERATIONS
Six months ended March 31, 1995 (Unaudited)
INTEREST INCOME $ 86,221,063
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EXPENSES:
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Compensation of Manager (Note 2) 5,720,544
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Compensation of Trustees (Note 2) 35,082
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Reports to shareholders 86,548
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Auditing 46,886
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Legal 11,118
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Postage 221,017
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Administrative services (Note 2) 22,536
- -------------------------------------------------------------------------------
Distribution fees -- class A (Note 2) 2,828,127
- -------------------------------------------------------------------------------
Distribution fees -- class B (Note 2) 14,648
- -------------------------------------------------------------------------------
Distribution fees -- class M (Note 2) 11
- -------------------------------------------------------------------------------
Other 140,377
- -------------------------------------------------------------------------------
Expense reduction (606,430)
- -------------------------------------------------------------------------------
TOTAL EXPENSES 8,520,464
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME 77,700,599
- -------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (77,726,869)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 91,784,365
- -------------------------------------------------------------------------------
NET INCREASE ON INVESTMENT TRANSACTIONS 14,057,496
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 91,758,095
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED
MARCH 31 SEPTEMBER 30
1995* 1994
- -------------------------------------------------------------------------------
DECREASE IN NET ASSETS
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $ 77,700,599 $ 200,825,572
- -------------------------------------------------------------------------------
Net realized loss on investments (77,726,869) (249,203,701)
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 91,784,365 (75,684,083)
- -------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS 91,758,095 (124,062,212)
- -------------------------------------------------------------------------------
Undistributed net investment income included in
price of shares sold and repurchased, net -- --
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- Class A (85,729,718) (214,863,213)
- -------------------------------------------------------------------------------
Net investment income -- Class B (92,547) (63,569)
- -------------------------------------------------------------------------------
Net investment income -- Class M (114) --
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (215,850,334) (773,296,455)
- -------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (209,914,618) (1,112,285,449)
- -------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------
Beginning of period 2,417,844,759 3,530,130,208
- -------------------------------------------------------------------------------
END OF PERIOD (including distributions in excess
of and undistributed net investment income of
$3,554,830 and $4,566,950, respectively) $2,207,930,141 $2,417,844,759
- -------------------------------------------------------------------------------
*Unaudited.
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
FOR THE PERIOD FOR THE PERIOD
FEBRUARY 14, 1995 MAY 20, 1994
(COMMENCEMENT SIX MONTHS (COMMENCEMENT SIX MONTHS
OF OPERATIONS) TO ENDED OF OPERATIONS) TO ENDED
MARCH 31 MARCH 31 SEPTEMBER 30 MARCH 31 YEAR ENDED SEPTEMBER 30
1995*+ 1995+ 1994 1995+ 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS M CLASS B CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $8.14 $8.19 $8.43 $8.21 $9.21 $9.32
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net investment income .12 .26 .21 .28 .62 .77
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments .08 .02 (.25) .06 (.98) (.13)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .20 .28 (.04) .34 (.36) .64
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Net investment income (.10) (.26) (.20) (.31) (.64) (.75)
- -----------------------------------------------------------------------------------------------------------------------------------
From net realized gain on
investments -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Tax return of capital -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.10) (.26) (.20) (.31) (.64) (.75)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.24 $8.21 $8.19 $8.24 $8.21 $9.21
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) (b) 2.49(c) 3.55(c) (.52)(c) 4.22(c) (4.06) 7.20
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(in thousands) $17 $4,790 $5,691 $2,203,122 $2,412,154 $3,530,130
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) .15(c) .77(c) .59(c) .37(c) .83 .91
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .86(c) 3.07(c) 2.22(c) 3.42(c) 6.93 8.39
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 230.80(c) 230.80(c) 331.61 230.80(c) 331.61 235.61
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
+ Unaudited.
* Per share investment income for the period ended March 31, 1995 for class M shares has been determined on the basis of the
weighted average number of shares outstanding during the period.
** Activity for the period from December 18, 1984 to February 28, 1985 is not included.
(a) Reflects an 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>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
FOR THE PERIOD
MARCH 1, 1985
(COMMENCEMENT
OF OPERATIONS) TO
YEAR ENDED SEPTEMBER 30 SEPTEMBER 30
1992 1991 1990 1989 1988 1987 1986 1985**
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $9.60 $9.32 $10.06 $10.30 $10.38 $12.41 $11.89 $11.57
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net investment income .56 .70 .78 .84 .88 .91 1.05 .57(a)
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments .12 .59 (.32) .12 .32 (1.36) 1.07 .45
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (.52)(c) 1.29 .46 .96 1.20 (.45) 2.12 1.02
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Net investment income (.56) (.70) (.78) (.84) (.88) (.91) (1.17) (.52)
- -----------------------------------------------------------------------------------------------------------------------------------
From net realized gain on
investments (.40) (.31) -- -- -- (.56) (.43) (.18)
- -----------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- (.42) (.33) (.36) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Tax return of capital -- -- -- (.03) (.04) (.11) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.96) (1.01) (1.20) (1.20) (1.28) (1.58) (1.60) (.70)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.32 $9.60 $9.32 $10.06 $10.30 $10.38 $12.41 $11.89
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) (b) 7.56 14.49 4.77 10.01 11.97 (4.46) 18.86 8.98(c)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(in thousands) $4,275,225 $5,045,139 $6,171,106 $7,880,043 $9,519,718 $10,558,552 $5,164,692 $824,625
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) .96 .97 .95 .91 .75 .73 .82 .61(a)(c)
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.03 7.39 8.05 8.31 8.31 7.59 7.75 5.06(a)(c)
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 798.43 469.45 255.47 213.35 52.18 98.74 187.37 171.09(c)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1995 (Unaudited)
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The fund is registered under the Investment Company Act of 1940, as amended, as
a diversified, open-end management investment company. The fund seeks high cu-
rrent 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 class A, class B and class M shares. The fund commenced its pu-
blic offering of class M shares on February 14, 1995. 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 sha-
res are redeemed within six years of purchase. Class M shares are sold with a
maximum front end sales charge of 3.25% and an ongoing distribution fee that is
higher than class A shares and lower than class B shares. Expenses of the fund
are borne pro rata by the shareholders of each class of shares, except that each
class bears expenses unique to that class (including the distribution fees
applicable to such class). Each class votes as a class only with respect to its
own distribution plan or other matters on which a class vote is required by law
or determined by the Trustees. Shares of each class would receive their pro rata
share of the net assets of the fund, if the fund were liquidated. In addition,
the Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently fo-
llowed 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 avail-
able are stated at market value, which is determined using the last reported sa-
le price, or, if no sales are reported -- as in the case of most securities tra-
ded 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) pur-
chase 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 commit-
ment will not fluctuate more
<PAGE>
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 consi-
dered securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in the value of the fund's other assets.
Unsettled TBA purchase commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Security valuation" above.
Although the fund will generally enter into TBA purchase commitments with the
intention of acquiring securities for 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 sales commitments are not received until
the contractual settlement date. During the time a TBA sale commitment is out-
standing, equivalent deliverable securities, or an offsetting TBA purchase com-
mitment 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 un-
derlying 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 compa-
nies managed by Putnam Investment Management Inc. ("Putnam Management"), the
fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc. and cer-
tain 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
<PAGE>
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). In-
terest 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 In-
ternal 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. Therefo-
re, no provision has been made for federal taxes on income, capital gains or un-
realized 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 carry-
over. In such circumstances the fund loses the benefit of the carryover.
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. These differences include the treatment of losses on wash
sale 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.
NOTE 2
MANAGEMENT FEE, ADMINISTRATIVE SERVICES, AND OTHER TRANSACTIONS
Compensation of Putnam Management for management and investment advisory servi-
ces is paid quarterly based on the average net assets of the fund for the quar-
ter.
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 ra-
tes: 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 excess over $9.5 billion, subject to
reduction in any year to the extent that expenses (exclusive of distribution
fees, brokerage, interest and taxes) of the fund exceed 2.5% of the first $30
million of average net
<PAGE>
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.
The fund also reimburses the Manager for the compensation and related expenses
of certain officers of the fund and their staff who provide administrative ser-
vices to the fund. The aggregate amount of all such reimbursements is determined
annually by the Trustees.
Trustees of the fund receive an annual Trustee's fee of $3,240 and an additional
fee for each Trustees' meeting attended. Trustees who are not interested per-
sons of the Manager and who serve on committees of the Trustees receive additio-
nal 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.
Investor servicing and custodian fees reported in the Statement of operations
for the six months ended March 31, 1995 have been reduced by credits allowed by
PFTC.
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 Com-
pany 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 pro-
vided and expenses incurred by it in distributing shares of the fund. The Plans
provide for payments by the Fund to Putnam Mutual Funds Corp. at an annual rate
up to 0.35%, 1.00%, and 1.00% of the average net assets attributable to class A,
class B, and class M shares, respectively. The Trustees have approved payment by
the fund at the 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 six months ended March 31, 1995, Putnam Mutual Funds Corp., acting as
underwriter, received net commissions of $41,564 from the sale of class A shares
and no commissions from the sale of class M shares. There was $889 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 purcha-
sed as part of an investment of $1 million or more. For the six months ended
March 31, 1995, Putnam Mutual Funds Corp., acting as underwriter, received
$251,753 on class A redemptions.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the six months ended March 31, 1995, purchases and sales of U.S. govern-
ment obligations other than short-term investments aggregated $4,407,471,315 and
$4,632,657,770, 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 March 31, 1995, there was an unlimited number of shares of beneficial inte-
rest authorized. Transactions in capital shares were as follows:
SIX MONTHS ENDED
MARCH 31, 1995
CLASS A SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 3,557,757 $28,940,837
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 4,764,315 38,516,305
- -------------------------------------------------------------------------------
8,322,072 67,457,142
- -------------------------------------------------------------------------------
Shares repurchased (34,768,475) (282,395,022)
- -------------------------------------------------------------------------------
NET DECREASE (26,446,403) $(214,937,880)
- -------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1994
CLASS A SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 8,942,849 $77,862,084
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 10,622,308 91,971,912
- -------------------------------------------------------------------------------
19,565,157 169,833,996
- -------------------------------------------------------------------------------
Shares repurchased (109,083,833) (948,928,990)
- -------------------------------------------------------------------------------
NET DECREASE (89,518,676) $(779,094,994)
- -------------------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 31, 1995
CLASS B SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 533,489 $4,331,963
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 8,105 65,458
- -------------------------------------------------------------------------------
541,594 4,397,421
- -------------------------------------------------------------------------------
Shares repurchased (653,574) (5,327,125)
- -------------------------------------------------------------------------------
NET DECREASE (111,980) $(929,704)
- -------------------------------------------------------------------------------
<PAGE>
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
- -------------------------------------------------------------------------------
FOR THE PERIOD
FEBRUARY 14, 1995
(COMMENCEMENT OF
OPERATIONS) TO
MARCH 31, 1995
CLASS M SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 2,116 $17,238
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 2 12
- -------------------------------------------------------------------------------
2,118 17,250
- -------------------------------------------------------------------------------
Shares repurchased -- --
- -------------------------------------------------------------------------------
NET INCREASE 2,118 $17,250
- -------------------------------------------------------------------------------
<PAGE>
OUR COMMITMENT TO QUALITY SERVICE
CHOOSE AWARD-WINNING SERVICE.
Putnam Investor Services has won the DALBAR Quality Tested Service Seal for the
past five years, through 1994. DALBAR, an independent research firm, ran more
than 10,000 tests of 38 shareholder service components. In every category, Put-
nam 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 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 repre-
sentative.
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 con-
tinue 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
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 Charles E. Porter
President Executive Vice President
Patricia C. Flaherty Lawrence J. Lasser
Senior Vice President Vice President
Gordon H. Silver Gary N. Coburn
Vice President Vice President
Alan J. Bankart Michael Martino
Vice President Vice President and Fund Manager
William N. Shiebler John R. Verani
Vice President 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 accompa-
nied by the current prospectus, which gives details of sales charges, investment
objectives and operating policies of the fund, and the most recent copy of Put-
nam's Quarterly Performance Summary. For more information, or to request a pros-
pectus, call toll free: 1-800-225-1581.
Shares of mutual funds are not deposits of, or guaranteed or endorsed by, any
financial institution, are not insured by the Federal Deposit Insurance Corpora-
tion (FDIC), the Federal Reserve Board, or any other agency, and involve risk,
including the possible loss of the principal amount invested.
<PAGE>
<PAGE>
---------------
PUTNAM INVESTMENTS Bulk Rate
U.S. Postage
THE PUTNAM FUNDS PAID
One Post Office Square Putnam
Boston, Massachusetts 02109 Investments
---------------
033/292/895-17780
<PAGE>
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED AND
EDGAR-FILED TEXTS:
(1) Boldface typeface is displayed with capital letters, italic typeface is
displayed in normal type.
(2) Because the printed page breaks are not reflected, certain tabular and
columnar headings and symbols are displayed differently in this filing.
(3) Bullet points and similar graphic signals are omitted.
(4) Page numbering has been omitted.
(5) The trademark symbol has been replaced by (TM).
(6) The copyright symbol has been replaced by (C).
(7) The registered mark symbol has been replaced by (R).
(8) The dagger symbol has been replaced by +
(9) The double dagger symbol has been replaced by ++
(10) The section symbol has been replaced by +++
