Putnam
American
Government
Income Fund
ANNUAL REPORT
September 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Putnam American Government Income Fund continues to stand out among
its peers. For the 12 months ended September 30, 1997, the fund's class A
shares were ranked 36 out of 180 general U.S. government funds, according
to Lipper Analytical Services, placing them in the top 20% of similar
funds based on total return.*
* The fund's strong performance belies a relatively conservative
investment approach that has been lauded by industry analysts. "By
investing in both sides of the government market, this fund should provide
reasonable performance in a variety of market environments without going
to extremes."
-- Morningstar Mutual Funds, August 15, 1997
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
16 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 36, 87, and 39, respectively, out of 180
general U.S. government funds for 1-year performance through 9/30/97. The
fund's class A shares were ranked 39 out of 79 and 36 out of 49 general
U.S. government funds for 5- and 10-year performance, respectively,
through 9/30/97. Class B and class M shares were not ranked over these
periods. Past performance is not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Astute portfolio maneuvers, coupled with well-timed defensive strategies,
helped Putnam American Government Income Fund deliver a total return well
above that of its benchmark index during the fiscal year that ended on
September 30, 1997. Fund Manager Michael Martino skillfully adjusted both the
portfolio's average duration and mix of securities throughout the year in
response to a continuing stream of changing conditions to achieve these
positive results.
Nevertheless, an underlying current of nervousness prevailed throughout the
period as both the Federal Reserve Board and investors kept a close watch on
inflation, fearing that the still robust economy might ignite it at any
moment. The Fed's preemptive thrust in March with a quarter-point increase in
short-term interest rates seemed to do the trick without extinguishing the
economy's long-standing growth cycle.
Plenty of challenges remain as your fund embarks on a new fiscal year. In the
following report, Mike discusses performance in the year just ended and takes
a look at prospects for the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 19, 1997
Report from the Fund Manager
Michael Martino
Although Putnam American Government Income Fund began fiscal 1997 on a
defensive note, it completed the 12-month period ended September 30, 1997,
with a near double-digit total return. Your fund's 9.49% class A share return
at net asset value handily outpaced the 7.75% return of its benchmark, the
Lehman Brothers Intermediate Treasury Index. At public offering price, class A
shares returned 4.27%. For more performance information, including the results
for other share classes, please see pages 9 and 10.
* ROBUST U.S. ECONOMY PROMPTS DEFENSIVE POSITIONING
Economic activity in the first half of the fund's fiscal year was vigorous and
widespread. Consumer spending rose, unemployment fell, sales of new homes set
records, and manufacturing capacity became increasingly strained. Anticipating
a potential spike in inflation, the Federal Reserve Board raised short-term
interest rates by a quarter of a percentage point in late March, and the
market reacted -- some say overreacted -- immediately. Bonds and bond funds
most sensitive to changing interest rates suffered the greatest price
declines, but returns among fixed-income investments in general were
lackluster over the first half of the fiscal year. By maintaining a defensive
posture throughout this period, we were able to gain a competitive advantage
that carried over into the second half of the year.
Specifically we shortened the portfolio's duration, keeping it as much as 10%
lower than that of competing U.S. government funds. As mentioned in previous
reports, duration measures a portfolio's sensitivity to changing interest
rates. We shortened duration by balancing the fund's long-term bond holdings
with extremely short-term securities, such as cash equivalents. This meant
that the fund's cash position was often larger than it had been in previous
years, peaking at roughly 12% of net assets in March. At the end of the fiscal
year, the fund had 10.7% of net assets in cash or cash equivalents.
Economic activity tapered off in the second half in a manner that convinced
the Fed to leave interest rates unchanged. Despite a continued strong
employment picture, retail sales declined and manufacturers slowed production.
Whereas the country's gross domestic product measured more than 4% growth in
the first six months of the period (4.9% in the first quarter of 1997), growth
in the second half remained much closer to 3%. Evidence of inflationary growth
appeared to remain only in the imaginations of a decidedly nervous minority.
In fact, by June, as reports of moderating economic growth mounted, many
market watchers had ruled out any further rate increases in 1997. This new
landscape proved a welcome change for fixed-income investors: bond prices rose
throughout the spring and summer and bond yields fell. Although encouraged, we
were cautious about increasing portfolio duration -- and, consequently, the
fund's interest-rate exposure -- during this period, suspecting that market
participants were overly exuberant and that the rally would most likely
reverse itself to some extent. Instead, we chose to alter the fund's mix of
investments, applying greater resources to the mortgage-backed segment of the
fixed-income market.
[GRAPHIC OMITTED: vertical bar chart AVERAGE EFFECTIVE MATURITY AND DURATION]
AVERAGE EFFECTIVE MATURITY AND DURATION
9/30/96 3/31/97 9/30/97
Average effective maturity 10.4 9.4 6.7
Duration 5.8 4.8 4.2
Footnote reads:
This chart depicts the fund's average effective maturity and duration at
6-month intervals over the 12 months ended 9/30/97. Average effective
maturity and duration, stated in years, are derived from calculations
that incorporate assumptions about prepayment rates and cash flows of
mortgage-backed securities. Measures of effective maturity, duration, and
the assumptions on which they are based will vary over time.
* MORTGAGE EMPHASIS PREVAILS FOR MOST OF PERIOD
To achieve its objective of providing a high level of current income for
shareholders, your fund has the flexibility to invest in both the
mortgage-backed and Treasury segments of the U.S. government securities
market. The size of the investment in each area varies according to our
assessment of relative value and the tradeoff between potential risk and
reward.
We consider the fund's neutral weighting to be a balance of 35% mortgages and
65% Treasuries. However, throughout most of the fiscal year, mortgage-backed
securities such as GNMAs and FNMAs provided a distinct advantage over U.S.
Treasuries of comparable maturity and were, therefore, more heavily weighted
in the portfolio. Starting the fiscal year at 45% of net assets, the fund's
stake in these securities climbed to just over 50% by the end of September.
Mortgage-backed securities generally offer higher yields than Treasuries in
order to compensate investors for the risk of prepayment. Because many
homeowners opt to refinance or prepay their mortgages when interest rates fall
- -- and lower mortgage rates become available -- this prepayment risk can
dampen performance of mortgage-backed securities in a falling-rate
environment. However, prepayment risk was not an issue for a large part of the
year, since economic growth was generally strong and interest rates appeared
more likely to rise than fall.
In addition, mortgage-backed securities are less sensitive than Treasuries to
changes in interest rates. In a year when investor sentiment seemed to shift
on a daily basis, this meant that your fund's overweight mortgage-backed
position contributed to a greater degree of price stability than a portfolio
consisting of U.S. Treasuries alone. Only during the summer did Treasuries
gain the upper hand. Their sensitivity to changing interest rates translated
into relatively greater price appreciation, as the market rallied and rates
moved lower. Mortgages were doubly hurt during this period as the prospect of
lower rates rekindled fears of homeowner prepayments.
[GRAPHIC OMITTED: pie chart PORTFOLIO ALLOCATIONS]
PORTFOLIO ALLOCATIONS (9/30/97)*
Short-term investments 7.5%
Mortage-backed securities 50.5%
U.S. Treasury securities 42.0%
Footnote reads:
*Based on total market value of assets. The allocation to mortgage-backed
securities is primarily concentrated in bonds issued by the Government
National Mortgage Association (Ginnie Mae). Allocations will vary over time.
* CAUTION DICTATES MORE OF SAME
Whether the Fed will raise rates in the coming year remains an important
question for fixed-income investors. Unemployment continues to be low and
industrial capacity tight. Consumer spending, which had lagged income growth
in the first half of the year, posted sharp increases in the third quarter as
measured by rising retail sales. And stronger foreign economies, particularly
in Europe, have fueled U.S. export growth of late. The U.S. economy has
registered four calendar quarters of GDP growth above 3%, yet the Fed
maintains that noninflationary growth is something more on the order of 2.5%.
In light of these factors and considering that the summer's bond market rally
may have been overdone, we intend to keep the fund's slightly defensive
duration stance in the coming months.
We also expect to maintain an overweight position in mortgage-backed
securities, given our belief that rates are more likely to move up than down
at this point. That said, we expect to decrease the fund's mortgage weighting
somewhat in anticipation of the traditional supply surge at year-end, a time
when dealers attempt to clear their inventories before the new year. With
sizable holdings in both segments of the government market and a cautious eye
toward the future direction of interest rates, we believe Putnam American
Government Income Fund is well positioned to make the most of whatever
uncertainty lies ahead.
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 9/30/97, 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
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
American Government Income Fund is designed for investors seeking high
current income primarily through U.S. government securities.
TOTAL RETURN FOR PERIODS ENDED 9/30/97
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 9.49% 4.27% 8.72% 3.72% 9.45% 5.91%
- ------------------------------------------------------------------------------
5 years 32.37 26.15 27.17 25.34 30.79 26.47
Annual average 5.77 4.76 4.92 4.62 5.52 4.81
- ------------------------------------------------------------------------------
10 years 110.38 100.34 93.40 93.40 104.11 97.43
Annual average 7.72 7.20 6.82 6.82 7.40 7.04
- ------------------------------------------------------------------------------
Life of fund 160.36 147.93 133.25 133.25 149.56 141.48
Annual average 7.90 7.48 6.96 6.96 7.54 7.26
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/97
Lehman Bros.
Intermediate Consumer
Treasury Index Price Index
- ------------------------------------------------------------------------------
1 year 7.75% 2.15%
- ------------------------------------------------------------------------------
5 years 32.76 14.08
Annual average 5.83 2.67
- ------------------------------------------------------------------------------
10 years 122.82 40.17
Annual average 8.34 3.43
- ------------------------------------------------------------------------------
Life of fund 193.16 52.08
Annual average 8.92 3.39
- ------------------------------------------------------------------------------
Returns for class A and class M shares reflect the current maximum initial
sales charges of 4.75% for class A shares and 3.25% for class M shares.
One-, five-, and ten-year (when available) and life- of-fund returns for
class B shares reflect the applicable contingent deferred sales charges
(CDSC), which is 5% in the first year, declines to 1% in the sixth year,
and is eliminated thereafter. Returns shown for class B and class M shares
for periods prior to their inception are derived from the historical
performance of class A shares, adjusted to reflect both the initial sales
charge or CDSC, if any, currently applicable to each class and, in the
case of class B and class M shares, the higher operating costs applicable
to such shares. All returns assume reinvestment of distributions at NAV
and represent past performance; they do not guarantee future results.
Investment return and principal value will fluctuate so that an investor's
shares when redeemed may be worth more or less than their original cost.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 9/30/87
Plot points read:
Fund's Lehman Bros.
class A shares Intermediate Consumer
at POP Treasury Index Price Index
9/30/87 9523 10000 10000
9/30/88 10663 11046 10417
9/30/89 11730 12107 10870
9/30/90 12289 13132 11539
9/30/91 14071 14910 11930
9/30/92 15135 16784 12287
9/30/93 16225 18072 12617
9/30/94 15566 17799 12991
9/30/95 17655 19679 13322
9/30/96 18298 20679 13722
9/30/97 20034 22282 14017
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have been
valued at $19,340 and no contingent deferred sales charges would apply; a
$10,000 investment in the fund's class M shares would have been valued at
$20,411 ($19,743 at public offering price). See first page of performance
section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/97
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.512 $0.449 $0.489
- ------------------------------------------------------------------------------
Total $0.512 $0.449 $0.489
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
9/30/96 $8.39 $8.81 $8.35 $8.38 $8.66
- ------------------------------------------------------------------------------
9/30/97 8.65 9.08 8.61 8.66 8.95
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate(1) 6.10% 5.81% 5.30% 5.82% 5.63%
- ------------------------------------------------------------------------------
Current 30-day SEC yield(2) 5.70 5.43 4.92 5.41 5.23
- ------------------------------------------------------------------------------
(1)Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
(2)Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales 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.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund *
International New Opportunities Fund
Investors Fund
New Opportunities Fund +
OTC & Emerging Growth Fund [DBL. DAGGERS]
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 Total Return Fund
High Yield Trust +
Income Fund
Money Market 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 Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Overseas Growth Fund
+ Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[DBL. DAGGER] Formerly OTC Emerging Growth Fund
[SECTION MARK] Not available in all states.
** An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed to
maintain a price of $1.00 per share, although there is no assurance
that this price will be maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
Report of independent accountants
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, 1997, 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, 1997 by correspondence with
the custodian and the application of alternative auditing procedures where
investments purchased were not yet received by the custodian, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
November 11, 1997
Portfolio of investments owned
September 30, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (91.8%) *
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Pass-Through Certificates (50.1%)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$149,155,558 Federal National Mortgage Association
7s, with due dates from August 1, 2026 to
June 15, 2027 $ 148,548,344
24,060,621 5 1/2s, Dwarfs, with due dates from June 1, 2009 to
March 1, 2012 23,000,272
Government National Mortgage Association
57,404,364 9s, with due dates from November 15, 2008 to
July 1, 2024 61,787,431
243,320,927 8 1/2s, with due dates from February 15, 2005 to
July 15, 2027 254,755,551
29,817,702 8s, with due dates from August 15, 2006 to
May 15, 2023 31,222,860
269,488,607 7 1/2s, with due dates from February 15, 2022 to
January 15, 2027 274,766,201
--------------
794,080,659
U.S. Treasury Obligations (41.7%)
- ------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
100,000,000 12s, August 15, 2013 144,000,000
50,000,000 9 7/8s, November 15, 2015 68,218,500
75,000,000 8 3/4s, November 15, 2008 84,387,000
5,000,000 6 3/4s, August 15, 2026 5,188,300
7,575,000 6 5/8s, February 15, 2027 7,756,118
U.S. Treasury Notes
1,145,000 6 1/4s, June 30, 2002 1,155,557
100,000,000 6 1/8s, August 15, 2007 100,047,000
150,000,000 6s, July 31, 2002 150,000,000
100,000,000 6s, June 30, 1999 100,328,000
--------------
661,080,475
--------------
Total U.S. Government and Agency Obligations
(cost $1,439,323,736) $1,455,161,134
SHORT-TERM INVESTMENTS (7.5%) *
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
$38,000,000 Federal National Mortgage Association, effective
yield of 5.43%, November 24, 1997 $ 37,501,345
30,000,000 Federal National Mortgage Association, effective
yield of 5.41%, December 9, 1997 29,585,233
51,602,000 Interest in $565,867,000 joint repurchase agreement
dated September 30, 1997 with UBS Securities due
October 1, 1997 with respect to various U.S. Treasury
obligations -- maturity value of $51,610,672 for an
effective yield of 6.05% 51,610,672
--------------
Total Short-Term Investments (cost $118,697,250) $ 118,697,250
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,558,020,986) *** $1,573,858,384
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $1,585,810,673.
*** The aggregate identified cost on a tax basis is $1,558,020,986, resulting in gross unrealized
appreciation and depreciation of $25,349,122 and $9,511,724, respectively, or net unrealized
appreciation of $15,837,398.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,558,020,986) (Note 1) $1,573,858,384
- ---------------------------------------------------------------------------------------------------
Cash 50,508,179
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 15,160,869
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 162,275
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 1,981,769
- ---------------------------------------------------------------------------------------------------
Total assets 1,641,671,476
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 50,493,376
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,606,736
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,085,249
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 382,539
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 39,149
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 5,280
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,015,135
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 233,339
- ---------------------------------------------------------------------------------------------------
Total liabilities 55,860,803
- ---------------------------------------------------------------------------------------------------
Net assets $1,585,810,673
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $3,006,391,611
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 4,616,680
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investment (1,441,035,016)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 15,837,398
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,585,810,673
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,553,705,640) divided by 179,696,861 shares) $8.65
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.65)* $9.08
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($30,934,716 divided by 3,591,109 shares)** $8.61
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,170,317 divided by 135,197 shares) $8.66
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.66)* $8.95
- ---------------------------------------------------------------------------------------------------
* 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 sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30, 1997
<S> <C>
Interest Income: $122,958,704
- --------------------------------------------------------------------------------------------------
Expenses:
Compensation of Manager (Note 2) 8,812,467
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,756,418
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 76,532
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 21,409
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 4,153,229
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 270,734
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 5,672
- --------------------------------------------------------------------------------------------------
Reports to shareholders 57,153
- --------------------------------------------------------------------------------------------------
Registration fees 175
- --------------------------------------------------------------------------------------------------
Auditing 41,993
- --------------------------------------------------------------------------------------------------
Legal 16,549
- --------------------------------------------------------------------------------------------------
Postage 190,331
- --------------------------------------------------------------------------------------------------
Other 131,950
- --------------------------------------------------------------------------------------------------
Total expenses 16,534,612
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (778,673)
- --------------------------------------------------------------------------------------------------
Net expenses 15,755,939
- --------------------------------------------------------------------------------------------------
Net investment income 107,202,765
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 7,069,893
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 38,765,618
- --------------------------------------------------------------------------------------------------
Net gain on investments 45,835,511
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $153,038,276
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year Ended September 30
---------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 107,202,765 $ 124,987,325
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 7,069,893 29,742,994
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments 38,765,618 (81,261,946)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 153,038,276 73,468,373
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (100,203,913) (123,617,463)
- ----------------------------------------------------------------------------------------------------------------------
Class B (1,395,293) (883,264)
- ----------------------------------------------------------------------------------------------------------------------
Class M (64,049) (48,099)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A -- (10,592,525)
- ----------------------------------------------------------------------------------------------------------------------
Class B -- (75,685)
- ----------------------------------------------------------------------------------------------------------------------
Class M -- (4,121)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (290,422,524) (306,925,164)
- ----------------------------------------------------------------------------------------------------------------------
Total decrease in net assets (239,047,503) (368,677,948)
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 1,824,858,176 2,193,536,124
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $4,616,680 and $0, respectively) $1,585,810,673 $1,824,858,176
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.39 $8.65 $8.21 $9.21 $9.32
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .54 .52 .55 .62 .77
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .23 (.21) .50 (.98) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .77 .31 1.05 (.36) .64
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.51) (.53) (.56) (.64) (.75)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.04) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.05) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.51) (.57) (.61) (.64) (.75)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.65 $8.39 $8.65 $8.21 $9.21
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.49 3.64 13.42 (4.06) 7.20
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,553,706 $1,800,683 $2,183,766 $2,412,154 $3,530,130
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .97 .95 .94 .83 .91
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.34 6.14 6.62 6.93 8.39
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 253.26 245.46 468.86 331.61 235.61
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for 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>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share May 20, 1994+
operating performance Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.35 $8.62 $8.19 $8.43
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .48 .49 .46 (c) .21
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .23 (.26) .51 (.25)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .71 .23 .97 (.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.45) (.46) (.49) (.20)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.05) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.50) (.54) (.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.61 $8.35 $8.62 $8.19
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.72 2.77 12.32 (.52)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $30,935 $23,067 $9,099 $5,691
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.72 1.70 1.68 .59*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.59 5.46 5.76 2.22*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 253.26 245.46 468.86 331.61
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for 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>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Feb. 14, 1995+
operating performance Year ended September 30 Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.38 $8.65 $8.14
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .53 .53 .29(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .24 (.26) .62
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .77 .27 .91
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.49) (.50) (.37)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.04) --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.49) (.54) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.66 $8.38 $8.65
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.45 3.24 11.44*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,170 $1,108 $672
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.22 1.20 .78*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.10 5.94 4.03*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 253.26 245.46 468.86
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for 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, 1997
Note 1
Significant accounting policies
Putnam American Government Income Fund (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 certain 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, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At September 30, 1997, the fund had a capital loss carryover of approximately
$1,432,529,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
- --------------------------------------------
$1,123,124,000 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 at
least 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 temporary
and permanent differences of post-October loss deferrals, and paydown gains
and losses on mortgage backed securities. Reclassifications are made to the
fund's capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations. For the
year ended September 30, 1997, the fund reclassified $922,830 to decrease
undistributed net investment income with a decrease to accumulated net
realized loss on investments of $922,830. 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% thereafter.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
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, 1997, fund expenses were reduced by $778,673
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 $1,788 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of the
Trustees receive additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing shares
of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees currently limit payment by the fund to 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, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $70,001 and $505 from the sale of
class A and class M shares, respectively and $79,855 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, 1997, Putnam Mutual Funds Corp., acting as underwriter
received $473 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended September 30, 1997, purchases and sales of U.S.
government and agency obligations other than short-term investments aggregated
$3,925,492,683 and $4,320,821,580, 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, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
September 30, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 5,833,699 $49,722,743
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,932,492 50,394,712
- ------------------------------------------------------------
11,766,191 100,117,455
Shares
repurchased (46,679,438) (397,622,579)
- ------------------------------------------------------------
Net decrease (34,913,247) $(297,505,124)
- ------------------------------------------------------------
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, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 2,434,171 $20,670,881
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 126,879 1,073,299
- ------------------------------------------------------------
2,561,050 21,744,180
Shares
repurchased (1,731,632) (14,689,269)
- ------------------------------------------------------------
Net increase 829,418 $ 7,054,911
- ------------------------------------------------------------
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, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 82,926 $705,529
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,427 29,079
- ------------------------------------------------------------
86,353 734,608
Shares
repurchased (83,265) (706,919)
- ------------------------------------------------------------
Net increase 3,088 $ 27,689
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The Form 1099 you receive in January 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
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
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
William J. Curtin
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 the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
AN027-36845 -033/292/895 11/97
