Putnam
American
Government
Income Fund
ANNUAL REPORT
September 30, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Reflecting the generally successful tenure of Fund Manager Michael
Martino since taking over the fund in February 1994, Putnam American
Government Income Fund's cumulative total return for class A shares
over the 3 years ended September 30, 1996, placed it in the top 28%,
or 30th out of 110, general U.S. government funds tracked by Lipper
Analytical Services.*
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
15 Portfolio holdings
17 Financial statements
*Lipper rankings are based on total return performance, vary over
time, and do not reflect the effects of sales charges. The fund's
class A, class B, and class M shares were ranked 66, 116, and 91,
respectively, out of 173 general U.S. government funds for 1-year
performance through 9/30/96. The fund's class A shares were ranked
59 out of 72 and 35 out of 39 general U.S. government funds for 5-
and 10-year performance, respectively, through 9/30/96. Class B and
class M shares were not ranked over longer applicable periods. Past
performance is not indicative of future results.
(copyright) Karsh, Ottawa
[PHOTO OF GEORGE PUTNAM OMITTED]
From the Chairman
Dear Shareholder:
Fiscal 1996, the 12 months ended September 30, was a year of
contrasts for Putnam American Government Income Fund. The year began
amid one of the most vibrant bond market advances in recent times.
By its midpoint, the rally suddenly became a retreat as investors,
reading stronger-than-expected economic numbers as a presage to a
pickup in inflation, sent the bond markets tumbling. Interest rates,
moving inversely to bond prices, bounded sharply higher.
During the fiscal year's second half, the market settled down
somewhat, although investors remained generally aloof, waiting to
discern a definite trend in interest rates. Fund Manager Michael
Martino, focusing on yield, trimmed back on Treasury securities in
favor of mortgage-backed issues.
As the fund begins a new fiscal year, Mike believes rates may trend
lower over the next few months as economic growth moderates. He
discusses the fund's performance and prospects in the report that
follows.
Respectfully yours,
/S/ George Putnam
George Putnam
Chairman of the Trustees
November 20, 1996
Report from the Fund Manager
Michael Martino
Putnam American Government Income Fund's 1996 fiscal year, which
ended on September 30, encompassed two periods of pronounced market
strength -- the first three months and the final month of the year -
- - with alternating periods of turbulence and stability in between.
Fiscal 1996 began with the same bond market strength that capped off
a successful calendar 1995.
Beginning in January, however, and extending through the first four
months of calendar 1996, interest rates rose dramatically across the
spectrum of bond maturities. From May to the end of the fiscal year,
rates stayed in a relatively tight range of 6.7% to 7.2% for the 30-
year Treasury bond and were accompanied by a somewhat surprising
lack of activity by the Federal Reserve Board. In fact, the bond
market's September advance was in response to the Fed's decision to
keep the target for short-term bank-lending rates unchanged at 5.25%
- -- a level it established last January -- based on evidence of a
slowing economy.
For the year as a whole, your fund posted solid total returns
relative to many other U.S. government securities funds, while
continuing to focus on strategies for seeking high current income.
(Please refer to the tables on pages 8 and 9 for complete
performance and dividend information.)
*ACTIVE MANAGEMENT OF INTEREST-RATE EXPOSURE WAS KEY TO PERIOD'S
RESULTS
The key determinant of your fund's performance over the year was
active management of the portfolio's duration. Duration is the
principal indicator of interest-rate sensitivity for a given
portfolio of bonds. It is measured in years. The longer the
duration, the more sensitive a portfolio is to a given change in
rates. When rates are falling, as was the case during the first
three months and the final month of the fiscal year, bond prices
rise, and a relatively long portfolio duration enables the fund to
capture a greater portion of that price appreciation.
When interest rates rise, however, a long duration has the opposite
effect, causing the portfolio's value to decline more rapidly for a
given change in rates. Consequently, over the course of the fiscal
year, we adjusted the fund's duration from approximately 6 years
during the first 3 months to under 4.5 years at the period's
midpoint, back out to nearly 6 years at the period's end.
*GINNIE MAES BOLSTER PERFORMANCE DURING PERIOD OF BROAD MARKET
WEAKNESS
Lack of momentum in the U.S. Treasury market during much of the
fund's fiscal year led bond investors to look elsewhere for yield.
This, in turn, led to an increased demand for mortgage-backed
securities at a time when the supply of such bonds was relatively
low. Premium mortgages -- those offering higher income streams than
the current yields of similar bonds -- outperformed Treasuries as
rising interest rates allayed prepayment fears.* All told, your
fund's considerable exposure to Ginnie Maes worked in its favor,
although it would have benefited more from a greater allocation to
premium mortgages.
[GRAPHIC OMITTED: vertical bar chart AVERAGE EFFECTIVE MATURITY AND
DURATION]
9/30/95 3/31/96 9/30/96
Average efffective
maturity 14.9 7.1 10.4
Duration 6.1 4.4 5.8
Footnote reads:
This chart depicts the fund's average effective maturity and
portfolio duration measures at the beginning, middle, and end of the
1996 fiscal year. Average effective maturity and duration are
derived from calculations that incorporate assumptions about
prepayment rates and cash flows of mortgage-backed securities.
Measures of effective maturity, duration, and the assumptions on
which they are based will vary over time.
As we approached the end of the fiscal year, Ginnie Maes and other
mortgage-backed securities appeared to be fully valued relative to
Treasuries. Therefore, during the September market rally, when we
extended the fund's duration, we accomplished this by adding
intermediate and long-term Treasuries -- not mortgage-backed
securities. Mortgage-backed securities, nevertheless, still
represent a substantial portion of your fund's portfolio, accounting
for approximately 45% of net assets at the end of the period. As for
Treasuries, your fund ended the year with nearly 54% of its net
assets allocated to Treasuries versus 46% at the beginning.
*SLOWER GROWTH MAY PROVIDE CONTINUED SUPPORT FOR BONDS
When the Federal Reserve Board last met in September, we believe it
made the right decision in taking no action on short-term interest
rates. The Fed's attempts to control inflation by adjusting monetary
policy, thus far, have been successful. Indeed, we believe the
economy's growth rate is likely to moderate, perhaps moving back
toward a 2% annual level. It is possible that inflation may exhibit
some near-term signs of accelerating, given the rising price of oil
and the trend toward increasing labor costs. We believe, however,
that should economic growth slow in the months ahead, inflation is
likely to remain well behaved.
Although we cannot provide assurances, if our expectations for the
economy prove correct, then the current favorable environment for
bonds may persist for some time. Given such a scenario, we would
likely maintain a portfolio that is moderately long in duration in
order to position the fund to participate should market strength
continue.
Footnote reads:
*Mortgage-backed securities are subject to prepayment risk, which is
the risk that an investor's principal will be returned in full at
some point prior to the security's stated maturity date. Such prepayment
may cause an investor's actual rate of return to differ from the expected
rate of return. Prepayment risk is greatest when interest rates are falling,
since mortgage holders rush to refinance, forcing retirement of the bonds
that back their existing mortgages.
[GRAPHIC OMITTED: vertical bar chart
COMPARATIVE PORTFOLIO ALLOCATIONS*]
9/30/95 9/30/96
U.S. Treasury
securities 46.1% 53.8%
Mortgage-backed
securities 49.8% 45.1%
Cash and short-
term investments 6.9% 0.2%
Footnote reads:
*Based on total net assets as of the indicated date. The allocations
to mortgage-backed securities are primarily concentrated in bonds
issued by the Government National Mortgage Association (Ginnie Mae).
Allocations will vary over time.
While mortgage-backed securities typically provide a higher yield
than Treasuries of comparable maturity, they generally underperform
during periods of market strength. Consequently, we are comfortable
with the fund's current allocation to mortgage-backed securities
and, consistent with our view of the broader market, do not plan to
increase the weighting at this time. We believe that intermediate
and long-term Treasuries represent better value at current yield
levels and plan, for now, to focus a greater share of our investment
activities on that segment of the government securities market.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described
holdings were viewed favorably as of 9/30/96, there is no guarantee
the fund will continue to hold these securities in the future. While
U.S. government backing of individual securities does not insure
your principal, which will fluctuate with market conditions, it does
guarantee that the fund's government-backed holdings will make
timely payments of interest and principal. The fund may invest in
securities other than those issued or backed by the full faith and
credit of the U.S. government.
Performance summary
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.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 9/30/96
Class A Class B Class M
(inception date) (3/1/85) (5/20/94) (2/14/95)
NAV POP NAV CDSC NAV POP
- -------------------------------------------------------------------
1 year 3.64% -1.27% 2.77% -2.07% 3.24% -0.11%
- -------------------------------------------------------------------
5 years 30.04 23.86 -- -- -- --
Annual average 5.39 4.37 -- -- -- --
- -------------------------------------------------------------------
10 years 83.57 74.85 -- -- -- --
Annual average 6.26 5.75 -- -- -- --
- -------------------------------------------------------------------
Life of class B -- -- 14.84 11.86 -- --
Annual average -- -- 6.01 4.84 -- --
- -------------------------------------------------------------------
Life of class M -- -- -- -- 15.05 11.36
Annual average -- -- -- -- 8.98 6.82
- -------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/96
Lehman Bros.
Intermediate Consumer
Treasury Index Price Index
- -------------------------------------------------------------------
1 year 5.08% 3.00%
- -------------------------------------------------------------------
5 years 38.69 15.02
Annual average 6.76 2.84
- -------------------------------------------------------------------
10 years 109.76 43.19
Annual average 7.69 3.66
- -------------------------------------------------------------------
Life of class B 17.09 6.98
Annual average 6.99 2.89
- -------------------------------------------------------------------
Life of class M 12.30 4.99
Annual average 7.60 3.03
- -------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take
into account any adjustment for taxes payable on reinvested
distributions. Investment returns and net asset value will fluctuate
so that an investor's shares, when sold, may be worth more or less
than their original cost. POP assumes 4.75% maximum sales charge for
class A shares and 3.25% for class M shares. CDSC for class B shares
assumes the applicable sales charge, with the maximum being 5%.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 9/30/86
Starting Value (Ending Value)
$9,525 Fund's class A shares at POP $17,485
$10,000 Lehman Bros. Intermediate Treasury Index $20,976
$10,000 Consumer Price Index $14,319
Date/year Fund at POP Index CPI
9/30/86 9525 10000 10000
9/30/87 9100 10144 10436
9/30/88 10189 11205 10871
9/30/89 11209 12281 11343
9/30/90 11743 13322 12042
9/30/91 13445 15124 12450
9/30/92 14462 17025 12822
9/30/93 15504 18332 13167
9/30/94 14875 18055 13557
9/30/95 16871 19962 13902
9/30/96 17485 20976 14319
Footnote reads:
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 $11,484 at net asset value on 9/30/96
($11,186 with a redemption at the end of the period). A $10,000
investment in the fund's class M shares at inception on 2/14/95
would have been valued at $11,505 at net asset value on 9/30/96
($11,136 at public offering price).
PRICE AND DISTRIBUTION INFORMATION
RMATION
12 months ended 9/30/96
Class A Class B Class M
- -------------------------------------------------------------------
Distributions (number) 12 12 12
- -------------------------------------------------------------------
Income $0.566 $0.504 $0.543
- -------------------------------------------------------------------
Total $0.566 $0.504 $0.543
- -------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- -------------------------------------------------------------------
9/30/95 $8.65 $9.08 $8.62 $8.65 $8.94
- -------------------------------------------------------------------
9/30/96 8.39 8.81 8.35 8.38 8.66
- -------------------------------------------------------------------
Current return
(end of period)
- -------------------------------------------------------------------
Current dividend rate1 6.01% 5.72% 5.17% 5.73% 5.54%
- -------------------------------------------------------------------
Current 30-day SEC yield2 6.28 5.98 5.51 6.02 5.82
- -------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided
by NAV or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1
fee than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus
any liabilities, divided by the number of outstanding shares, not
including any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus
the maximum sales charge levied at the time of purchase. POP
performance figures shown here assume the maximum 4.75% sales charge
for class A shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the
time of the redemption of class B shares and assumes redemption at
the end of the period. Your fund's CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth
year, the CDSC no longer applies.
COMPARATIVE BENCHMARKS
Lehman Brothers 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. Securities indexes assume reinvestment of all
distributions and interest payments, and the performance of the fund
will differ. It is not possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation;
it does not represent an investment return.
A Putnam perspective on risk and reward
You've probably been told how important it is to understand the
relationship between 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 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 different types of investments, and to look at
your own portfolio with this perspective.
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-oriented investors should consider interest-
rate, credit, and prepayment risks carefully. Within each of
Putnam's four investment categories, you can select funds with
differing levels of risk and reward potential to customize your
portfolio.
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.
*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 inves-
tors. 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 considered among the best ways of
addressing inflation risk over the long term.
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 premature 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.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund *
Health Sciences Trust
International Growth Fund +
International New Opportunities Fund
Investors Fund
New Opportunities Fund
OTC Emerging Growth Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental 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
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:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
MOST CONSERVATIVE
INVESTMENTS [SECTION MARK]
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 (double dagger)
* Formerly Natural Resources Fund
+ Formerly Overseas Growth Fund
(double dagger) Not available in all states.
[SECTION MARK] Relative to above.
** An investment in a money market fund is neither
insured nor guaranteed by the U.S. government. These
funds are managed to maintain a price of $1.00 per
share, although there is no assurance that this price
will be maintained in the future.
++ 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 at 1-800-225-1581 to obtain a
prospectus for any Putnam fund. It contains more
complete information, including charges and expenses.
Please read it carefully before you invest or send
money.
Report of independent accountants
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, 1996, 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, 1996 by
correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
November 13, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1996
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (98.9%) *
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C>
Collateralized Mortgage Obligations (0.4%)
- -------------------------------------------------------------------------------------------------------
$6,024,082 Federal National Mortgage Association Ser. 89-23,
Class D, 10.2s, September 25, 2018 6,238,690
U. S. Agency Mortgage Pass-Through Certificates (44.7%)
- -------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
163,965,227 8 1/2s, Dwarfs, August 1, 2011 170,318,880
46,956,298 7s, Dwarfs, with various due dates from May 1, 2009
to February 1, 2011 46,413,013
47,331,564 6 1/2s, Dwarfs, with various due dates from July 1, 2010
to February 1, 2011 45,881,802
Government National Mortgage Association
69,361,230 9s, with various due dates from November 15, 2008
to July 1, 2024 73,612,890
13,244,522 8 1/2s, with various due dates from August 15, 2019
to September 15, 2024 13,791,088
64,151,395 8s, with various due dates from August 15, 2006
to May 15, 2023 65,686,824
169,293,975 7 1/2s, with various due dates from February 15, 2022
to September 15, 2025 167,852,647
240,929,613 7s, with various due dates from April 15, 2023
to January 15, 2026 231,894,742
-------------
815,451,886
U.S. Treasury Obligations (53.8%)
- -------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
100,000,000 12s, August 15, 2013 140,625,000
50,000,000 9 7/8s, November 15, 2015 64,828,000
75,000,000 8 3/4s, November 15, 2008 83,097,750
145,000,000 6 3/4s, August 15, 2026 141,714,300
75,000,000 6s, February 15, 2026 65,906,250
U.S. Treasury Notes
150,000,000 9 1/8s, May 15, 1999 160,288,500
100,000,000 7 1/2s, October 31, 1999 103,234,000
125,000,000 7s, July 15, 2006 127,597,500
25,000,000 6 5/8s, July 31, 2001 25,152,250
50,000,000 6 5/8s, June 30, 2001 50,304,500
20,000,000 6 1/4s, April 30, 2001 19,840,600
-------------
982,588,650
-------------
Total U.S. Government and Agency Obligations (cost $1,827,207,446) $1,804,279,226
SHORT-TERM INVESTMENTS (0.2%) *(cost $3,854,602)
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
$3,854,000 Interest in $365,453,000 joint repurchase
agreement dated September 30, 1996 with
Goldman, Sachs & Co., due October 1, 1996
with respect to various U.S. Treasury
obligations -- maturity value of $3,854,602
for an effective yield of 5.625%. $3,854,602
- -------------------------------------------------------------------------------------------------------
Total Investments (cost $1,831,062,048) *** $1,808,133,828
- -------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $1,824,858,176.
*** The aggregate identified cost on a tax cost basis is $1,831,062,048
resulting in gross unrealized appreciation and depreciation of
$13,414,941 and $36,343,161 respectively, or net unrealized
depreciation of $22,928,220.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1996
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $1,831,062,048) (Note 1) $1,808,133,828
- ---------------------------------------------------------------------------------------------------------------
Cash 649
- ---------------------------------------------------------------------------------------------------------------
Interest receivable 24,654,693
- ---------------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 274,952
- ---------------------------------------------------------------------------------------------------------------
Receivable for securities sold 27,459
- ---------------------------------------------------------------------------------------------------------------
Total assets 1,833,091,581
Liabilities
- ---------------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 3,731,286
- ---------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,436,545
- ---------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 300,620
- ---------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 5,503
- ---------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 6,177
- ---------------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,184,086
- ---------------------------------------------------------------------------------------------------------------
Other accrued expenses 569,188
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 8,233,405
- ---------------------------------------------------------------------------------------------------------------
Net assets $1,824,858,176
Represented by
- ---------------------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,296,814,135
- ---------------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (1,449,027,739)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (22,928,220)
- ---------------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $1,824,858,176
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,800,683,132 divided by 214,610,108 shares) $8.39
- ---------------------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.39)* $8.81
- ---------------------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($23,067,343 divided by 2,761,691 shares)** $8.35
- ---------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,107,701 divided by 132,109 shares) $8.38
- ---------------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.38)* $8.66
- ---------------------------------------------------------------------------------------------------------------
* 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 intregral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30, 1996
<S> <C>
Interest Income: $143,457,170
- ------------------------------------------------------------------------------------------------------
Expenses:
- ------------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 10,427,209
- ------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 3,032,484
- ------------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 53,292
- ------------------------------------------------------------------------------------------------------
Administrative services (Note 2) 25,290
- ------------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 5,057,558
- ------------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 168,282
- ------------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 4,306
- ------------------------------------------------------------------------------------------------------
Reports to shareholders 119,492
- ------------------------------------------------------------------------------------------------------
Registration fees 550
- ------------------------------------------------------------------------------------------------------
Auditing 60,873
- ------------------------------------------------------------------------------------------------------
Legal 42,759
- ------------------------------------------------------------------------------------------------------
Postage 317,254
- ------------------------------------------------------------------------------------------------------
Other 125,703
- ------------------------------------------------------------------------------------------------------
Total expenses 19,435,052
- ------------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (965,207)
- ------------------------------------------------------------------------------------------------------
Net expenses 18,469,845
- ------------------------------------------------------------------------------------------------------
Net investment income 124,987,325
- ------------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 29,742,994
- ------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (81,261,946)
- ------------------------------------------------------------------------------------------------------
Net loss on investments (51,518,952)
- ------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $73,468,373
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
-------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $124,987,325 $148,626,707
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 29,742,994 (16,549,652)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (81,261,946) 147,624,755
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 73,468,373 279,701,810
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders
- ---------------------------------------------------------------------------------------------------------------
From net investment income:
Class A (123,617,463) (151,762,165)
- ---------------------------------------------------------------------------------------------------------------
Class B (883,264) (283,676)
- ---------------------------------------------------------------------------------------------------------------
Class M (48,099) (11,822)
- ---------------------------------------------------------------------------------------------------------------
In excess of net investment income:
Class A (10,592,525) --
- ---------------------------------------------------------------------------------------------------------------
Class B (75,685) --
- ---------------------------------------------------------------------------------------------------------------
Class M (4,121) --
- ---------------------------------------------------------------------------------------------------------------
From return of capital:
Class A -- (13,778,422)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (25,755)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (1,073)
- ---------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (306,925,164) (338,147,532)
- ---------------------------------------------------------------------------------------------------------------
Total decrease in net assets (368,677,948) (224,308,635)
- ---------------------------------------------------------------------------------------------------------------
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 2,193,536,124 2,417,844,759
- ---------------------------------------------------------------------------------------------------------------
End of year $1,824,858,176 $2,193,536,124
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
February 14, 1995
(commencement
Year ended of operations) to Year ended
September 30 September 30 September 30
----------------------------------------------------------
1996 1995 1996
----------------------------------------------------------
Class M
----------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $8.65 $8.14 $8.62
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .53 .29 (c) .49
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.26) .62 (.26)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .27 .91 .23
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.50) (.37) (.46)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net investment income (.04) - (.04)
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain (loss) on investments - - -
- ---------------------------------------------------------------------------------------------------------------------------
From return of capital - (.03) -
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.54) (.40) (.50)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.38 $8.65 $8.35
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (a) 3.24 11.44 * 2.77
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,108 $672 $23,067
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.20 .78 * 1.70
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.94 4.03 * 5.46
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 245.46 468.86 245.46
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
May 20, 1994
(commencement
Year ended of operations) to Year ended
September 30 September 30 September 30
-----------------------------------------------------------
1995 1994 1996
-----------------------------------------------------------
Class B
-----------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $8.19 $8.43 $8.65
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .46 (c) .21 .52
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .51 (.25) (.21)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .97 (.04) .31
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.49) (.20) (.53)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net investment income - - (.04)
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain (loss) on investments - - -
- ---------------------------------------------------------------------------------------------------------------------------
From return of capital (.05) - -
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.54) (.20) (.57)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.62 $8.19 $8.39
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (a) 12.32 (.52)* 3.64
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $9,099 $5,691 $1,800,683
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.68 .59 * .95
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.76 2.22 * 6.14
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 468.86 331.61 245.46
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year ended September 30
---------------------------------------------------
1995 1994 1993
---------------------------------------------------
Class A
---------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $8.21 $9.21 $9.32
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .55 .62 .77
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .50 (.98) (.13)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.05 (.36) .64
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.56) (.64) (.75)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net investment income - - -
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain (loss) on investments - - -
- ---------------------------------------------------------------------------------------------------------------------------
From return of capital (.05) - -
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.61) (.64) (.75)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.65 $8.21 $9.21
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (a) 13.42 (4.06) 7.20
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $2,183,766 $2,412,154 $3,530,130
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .94 .83 .91
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.62 6.93 8.39
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 468.86 331.61 235.61
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
1992
-----------------------
<S> <C>
Net asset value, beginning of period $9.60
- ---------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------
Net investment income .56
- ---------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .12
- ---------------------------------------------------------------------------------
Total from investment operations .68
- ---------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------
From net investment income (.56)
- ---------------------------------------------------------------------------------
In excess of net investment income -
- ---------------------------------------------------------------------------------
From net realized gain (loss) on investments (.40)
- ---------------------------------------------------------------------------------
From return of capital -
- ---------------------------------------------------------------------------------
Total distributions (.96)
- ---------------------------------------------------------------------------------
Net asset value, end of period $9.32
- ---------------------------------------------------------------------------------
Total investment return at net asset value (%) (a) 7.56
- ---------------------------------------------------------------------------------
Net assets, end of period (in thousands) $4,275,225
- ---------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .96
- ---------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.03
- ---------------------------------------------------------------------------------
Portfolio turnover (%) 798.43
- ---------------------------------------------------------------------------------
* Not annualized.
(a) Total investment return assumes dividend reinvestment
and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for periods ended September 30,
1995 and thereafter, includes amounts paid through expense offset
arrangements. Prior period ratios exclude these amounts (Note 2).
(c)Per share net investment income has been determined on the basis of the weighted
average number of shares outstanding during the period.
</TABLE>
Notes to financial statements
September 30, 1996
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.
The fund offers class A, class B and class M shares. Class A shares
are sold with a maximum front-end sales charge of 4.75%. Class B
shares, which convert to class A shares after approximately eight
years, do not pay a front-end sales charge, but pay a higher ongoing
distribution fee than class A shares, and are subject to a
contingent deferred sales charge, if those shares are redeemed
within six years of purchase. Class M shares are sold with a maximum
front-end sales charge of 3.25% and pay an ongoing distribution fee
that is lower than class B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class
of shares, except that each class bears expenses unique to that
class (including the distribution fees applicable to such class).
Each class votes as a class only with respect to its own
distribution plan or other matters on which a class vote is required
by law or determined by the Trustees. Shares of each class would
receive their pro-rata share of the net assets of the fund, if the
fund were liquidated. In addition, the Trustees declare separate
dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its
financial statements. The preparation of financial statements is in
conformity with generally accepted accounting principles and
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities. Actual results could
differ from those estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined
using the last reported sale price, or, if no sales are reported--as
in the case of most securities traded over-the-counter--the last
reported bid price. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value, and other investments are stated at fair
value following procedures approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by
the Securities and Exchange Commission, the fund may transfer
uninvested cash balances into a joint trading account along with the
cash of other registered investment companies and certain other
accounts managed by Putnam Investment Management, Inc. ("Putnam
Management"), the fund's Manager, a wholly-owned subsidiary of
Putnam Investments, Inc.. These balances may be invested in one or
more repurchase agreements and/or short-term money market
instruments.
C) Repurchase agreements The fund, or any joint trading account,
through its custodian, receives delivery of the underlying
securities, the market value of which at the time of purchase is
required to be in an amount at least equal to the resale price,
including accrued interest. Putnam Management is responsible for
determining that the value of these underlying securities is at all
times at least equal to the resale price, including accrued
interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to
buy or sell is executed). Interest income is recorded on the accrual
basis.
E) Federal taxes It is the policy of the fund to distribute all of
its taxable income within the prescribed time and otherwise comply
with the provisions of the Internal Revenue Code applicable to
regulated investment companies. It is also the intention of the fund
to distribute an amount sufficient to avoid imposition of any excise
tax under Section 4982 of the Internal Revenue Code of 1986.
Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation on securities held and for
excise tax on income and capital gains.
At September 30, 1996, the fund had a capital loss carryover of
approximately $1,447,359,000 available to offset future capital
gains, if any. The amount of the carryover and the expiration dates
are:
Loss Carryover Expiration
-------------- --------------------
$1,137,954,000 September 30, 1998
$ 45,648,000 September 30, 2001
$ 7,767,000 September 30, 2002
$ 255,990,000 September 30, 2003
F) Distributions to shareholders Distributions to shareholders from
net investment income are recorded by the fund on the ex-dividend
date. Capital gain distributions, if any, are recorded on the ex-
dividend date and paid annually. The amount and character of income
and gains to be distributed are determined in accordance with income
tax regulations which may differ from generally accepted accounting
principles. These differences include treatment of losses on wash
sale transactions, utilization of a capital loss carryover and
paydown gains and losses on mortgage backed securities.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital
loss carryovers) under income tax regulations. For the year ended
September 30, 1996, the fund reclassified $10,233,831 to increase
undistributed net investment income and $10,672,332 to decrease
paid-in-capital, with an increase to accumulated net realized loss
on investments of $438,501. The calculation of net investment income
per share in the financial highlights table excludes these
adjustments.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets
of the fund. Such fee is based on the following annual rates: 0.60%
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, under current law, to reduction in any
year by the amount of certain brokerage commissions and fees (less
expenses) received by affiliates of Putnam Management on the fund's
portfolio transactions.
The fund reimburses Putnam Management for the compensation and
related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of
all such reimbrsements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended September 30, 1996, fund expenses were reduced by
$965,207 under expense offset arrangements with PFTC. Investor
servicing and custodian fees reported in the Statement of operations
exclude these credits. The fund could have invested a portion of the
assets utilized in connection with the expense offset arrangements
in an income producing asset if it had not entered into such
arrangements.
Trustees of the fund receive an annual Trustees fee of $2,690 and an
additional fee for each Trustee's meeting attended. Trustees who are
not interested persons of Putnam Management and who serve on
committees of the Trustees receive additional fees for attendance at
certain committee meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which
allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees
remain in the fund and are invested in certain Putnam funds until
distribution in accordance with the Plan.
The fund has adopted distribution plans (the "Plans") with respect
to its class A, class B and class M shares pursuant to Rule 12b-1
under the Investment Company Act of 1940. The purpose of the Plans
is to compensate Putnam Mutual Funds Corp., a wholly-owned
subsidiary of Putnam Investments Inc., for services provided and
expenses incurred by it in distributing shares of the fund. The
Plans provide for payments by the fund to Putnam Mutual Funds Corp.
at an annual rate up to 0.35%, 1.00% and 1.00% of the average net
assets attributable to class A, class B and class M shares,
respectively. The Trustees have approved payment by the fund at an
annual rate of 0.25%, 1.00% and 0.50% of the average net assets
attributable to class A, class B and class M shares, respectively.
For the year ended September 30, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $109,577 and
$1,307 from the sale of class A and class M shares, respectively and
$40,354 in contingent deferred sales charges from redemptions of
class B shares. A deferred sales charge of up to 1% is assessed on
certain redemptions of class A shares. For the year ended September
30, 1996, Putnam Mutual Funds Corp., acting as underwriter received
$10,430 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended September 30, 1996, purchases and sales of
U.S. government and agency obligations other than short-term
investments aggregated $4,660,803,437 and $4,907,799,639,
respectively. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified
cost basis.
Note 4
Capital shares
At September 30, 1996, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were
as follows:
Year ended
September 30, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 7,763,736 $66,595,552
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,435,979 63,394,679
- ----------------------------------------------------
15,199,715 129,990,231
Shares
repurchased (52,919,429) (451,949,272)
- ----------------------------------------------------
Net decrease (37,719,714) $(321,959,041)
- ----------------------------------------------------
Year ended
September 30, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 6,624,630 $54,980,481
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 9,059,519 74,915,985
- ----------------------------------------------------
15,684,149 129,896,466
Shares
repurchased (57,082,955) (471,766,626)
- ----------------------------------------------------
Net decrease (41,398,806) $(341,870,160)
- ----------------------------------------------------
Year ended
September 30, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 2,556,309 $21,772,161
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 81,398 686,967
- ----------------------------------------------------
2,637,707 22,459,128
Shares
repurchased (931,482) (7,885,924)
- ----------------------------------------------------
Net increase 1,706,225 $14,573,204
- ----------------------------------------------------
Year ended
September 30, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 1,205,771 $10,033,873
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 25,686 214,274
- ----------------------------------------------------
1,231,457 10,248,147
Shares
repurchased (871,188) (7,180,267)
- ----------------------------------------------------
Net increase 360,269 $3,067,880
- ----------------------------------------------------
Year ended
September 30, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 104,264 $884,487
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,761 48,808
- ----------------------------------------------------
110,025 933,295
Shares
repurchased (55,599) (472,622)
- ----------------------------------------------------
Net increase 54,426 $460,673
- ----------------------------------------------------
For the period
February 14, 1995
(commencement of
operations) to
September 30, 1995
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 76,597 $645,492
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,133 9,656
- ----------------------------------------------------
77,730 655,148
- ----------------------------------------------------
Shares
repurchased (47) (400)
- ----------------------------------------------------
Net increase 77,683 $654,748
- ----------------------------------------------------
Federal tax information
(Unaudited)
The Form 1099 you receive in January 1997 will show the tax status
of all distributions paid to your account in calendar 1996.
Results of September 5, 1996 shareholder meeting
(Unaudited)
A meeting of shareholders of the fund was held on September 5, 1996.
At the meeting, each of the nominees for Trustees was elected, as
follows:
Votes
Votes for withheld
Jameson Adkins Baxter 139,568,298 3,421,823
Hans H. Estin 139,586,468 3,403,652
John A. Hill 139,705,416 3,284,704
R.J. Jackson 139,689,921 3,300,200
Elizabeth T. Kennan 139,716,780 3,273,340
Lawrence J. Lasser 139,728,714 3,261,406
Robert E. Patterson 139,726,551 3,263,569
Donald S. Perkins 139,602,881 3,387,239
William F. Pounds 139,668,997 3,321,123
George Putnam 139,495,722 3,494,399
George Putnam, III 139,638,565 3,351,555
Eli Shapiro 139,301,690 3,688,430
A.J.C. Smith 139,773,272 3,216,848
W. Nicholas Thorndike 139,678,207 3,311,913
A proposal to ratify the selection of Price Waterhouse LLP as
auditors for the fund was approved as follows: 138,037,975 votes
for, and 1,325,390 votes against, with 3,626,756 abstentions and
broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to diversification of investments was approved as
follows: 124,502,479 votes for, and 5,659,896 votes against, with
12,827,745 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to investments in the securities of a single issuer was
approved as follows: 122,381,297 votes for, and 7,025,849 votes
against, with 13,582,975 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to making loans was approved as follows: 119,937,511
votes for, and 9,652,837 votes against, with 13,399,773 abstentions
and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to investments in real estate was approved as follows:
121,290,509 votes for, and 8,577,985 votes against, with 13,121,627
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to investments in commodities or commodity contracts
was approved as follows: 120,379,512 votes for, and 9,374,198 votes
against, with 13,236,410 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to concentration of its assets was approved as follows:
123,306,211 votes for, and 6,470,277 votes against, with 13,213,632
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction
with respect to senior securities was approved as follows:
123,507,351 votes for, and 5,855,886 votes against, with 13,626,883
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to investments in securities of issuers in
which management of the fund or Putnam Investment Management, Inc.
owns securities was approved as follows: 120,272,936 votes for, and
8,899,876 votes against, with 13,817,308 abstentions and broker non-
votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to margin transactions was approved as
follows: 118,698,419 votes for, and 10,467,034 votes against, with
13,824,667 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to short sales was approved as follows:
119,418,584 votes for, and 9,768,408 votes against, with 13,803,129
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to pledging assets was approved as follows:
118,354,878 votes for, and 10,631,490 votes against, with 14,003,752
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to investments in restricted securities was
approved as follows: 119,900,112 votes for, and 9,051,304 votes
against, with 14,038,704 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to investments in certain oil, gas an
mineral interests was approved as follows: 121,166,191 votes for,
and 8,349,613 votes against, with 13,474,316 abstentions and broker
non-votes.
A proposal to eliminate the fund's fundamental investment
restriction with respect to investing to gain control of a company's
management was approved as follows: 119,739,814 votes for, and
9,258,368 votes against, with 13,991,938 abstentions and broker non-
votes.
All tabulations are rounded to nearest whole number.
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
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Alan J. Bankart
Vice President
Michael Martino
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
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. You can also learn more
at Putnam Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or
guaranteed or endorsed by, any financial institution, are not
insured by the Federal Deposit Insurance Corporation (FDIC), the
Federal Reserve Board or any other agency, and involve risk,
including the possible loss of principal amount invested.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------
28354-033 11/96
