Putnam
American
Government
Income Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Putnam American Government Income Fund once again provided strong
competitive performance. For the 12 months ended September 30, 1998, the
fund's class A shares were ranked 59 out of 188 general U.S. government
funds, according to Lipper Analytical Services, placing them in the top
32% of similar funds based on total return.*
* "Putnam American Government Income Fund is doing just fine by sticking
to basics . . . . Investors may find something to like in this
straightforward offering."
-- Morningstar Mutual Funds, July 18, 1998
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
13 Portfolio holdings
15 Financial statements
* Past performance is not indicative of future results. Lipper rankings
are based on total return performance, vary over time, and do not reflect
the effects of sales charges. The fund's class A, class B, and class M
shares were ranked 59, 93, and 62, respectively, out of 188 general U.S.
government funds for 1-year performance through 9/30/98. The fund's class
A shares were ranked 18 out of 97 and 39 out of 52 general U.S. government
funds for 5- and 10-year performance, respectively, through 9/30/98. Class
B and class M shares were not ranked over these periods.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Rarely have events beyond the boundaries of the United States had as
dramatic an impact on the performance of U.S. Treasury securities as they
did during the fiscal year that just ended for Putnam American Government
Income Fund.
The period began with the fund's portfolio in a decidedly defensive
position against the possibility of an inflation-quashing rise in interest
rates. It ended with the fund an indisputable beneficiary of the flight of
global investors to the safety of U.S. government securities. As this
striking change in circumstances unfolded, Fund Manager Michael Martino
made several astute portfolio shifts, which he describes in the following
report and which are clearly reflected in the fund's fiscal '98 results.
Shortly after the fiscal year's close, Kevin Cronin joined Mike on the
fund's management team. Kevin, who is also chief investment officer of the
Mortgage and Asset-Backed team, joined Putnam in 1997. He was previously
with MFS Investment Management and Liberty Mutual Insurance Company. He
has 10 years of investment experience.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 18, 1998
Report from the Fund Manager
Michael Martino
Well-timed shifts in fund structure and strategy helped Putnam American
Government Income Fund post a strong return for its 1998 fiscal year. The
fund's class A shares delivered a total return of 11.83% at net asset
value for the 12 months ended September 30, 1998, well ahead of its
benchmark, the Lehman Brothers Intermediate Treasury Index, which returned
10.81% during the same period. In addition, the fund outperformed many of
its peers; the 188 general U.S. government funds tracked by Lipper
Analytical Services averaged a performance of 11.64% for the 12-month
period. Class A shares returned 6.53% at public offering price. Please see
pages 8 and 9 for more performance information, including the results for
class B and class M shares.
* FUND BENEFITS FROM U.S. TREASURY RALLY
Ongoing turmoil characterized the global capital markets for most of the
period, especially the past six months. A string of negative economic
results and currency fluctuations raised fears that global economic health
would continue to erode. Doubts persisted about the pace of economic
recovery in Asia mainly because Japan was slow to enact reforms in its
banking industry that might have helped the country regain its role as the
engine for growth in the region. Fiscal, economic, and political problems
brewed in Russia and fears arose that the trend would spread to Latin
America.
The global turbulence made more and more investors risk averse and
prompted a continuing outflow of capital from emerging markets into the
developed world. Investors also shifted from stocks to bonds in a flight
to quality that benefited dollar-denominated assets in general and U.S.
Treasury securities in particular. Treasury bonds attracted investors
looking for liquidity and the shelter they offer; U.S. Treasuries are
considered among the strongest credits in the world because they are
backed by the full faith and credit of the U.S. government.
In this environment, Treasuries performed well for your fund. On the last
day of the fiscal year, the yield on the 30-year Treasury fell to 4.954%,
the first time since 1967 that it had dropped below 5%. Remember that when
bond yields drop, their prices rise; 30-year Treasuries proved to be among
the best performers in the bond market during the period.
* STRATEGY SHIFTS BOOST FUND PERFORMANCE
Your fund started its fiscal year with a defensive duration posture and an
increased focus on mortgage-backed securities. Duration is a measure of
the portfolio's interest-rate sensitivity; the longer the duration, the
more sensitive the fund will be to a change in rates. During the first six
months of the period, we were prepared for the possibility of an
interest-rate increase growing out of strong economic growth and mounting
indications that inflationary pressures would build. Consequently, we
pursued a defensive shorter-duration strategy to protect the value of
the portfolio.
[GRAPHIC OMITTED: vertical bar chart AVERAGE EFFECTIVE MATURITY AND DURATION]
AVERAGE EFFECTIVE MATURITY AND DURATION
9/30/97 3/31/98 9/30/98
Average effective maturity 6.7 8.8 8.9
Duration 4.2 4.2 4.3
This chart depicts the fund's average effective maturity and duration at
6-month intervals over the 12 months ended 9/30/98. Average effective
maturity and duration, stated in years, are derived from calculations that
incorporate assumptions about prepayment rates and cash flows of
mortgage-backed securities. Measures of effective maturity duration and
the assumptions on which they are based will vary over time.
[GRAPHIC OMITTED: pie chart PORTFOLIO ALLOCATIONS (9/30/98)]
PORTFOLIO ALLOCATIONS (9/30/98)*
Cash and short-term
investments -- 7.7%
U.S. Treasury
securities -- 31.2%
Mortgage-backed
securities -- 61.1%
Footnote reads:
*Based on total market value of investments. The allocation to
mortgage-backed securities is primarily concentrated in bonds issued by
the Government National Mortgage Association (GNMA). Allocations will vary
over time.
As we entered the second quarter of 1998, however, increased evidence that
deteriorating global economic conditions would hurt the U.S. economy
pointed toward a stronger potential for slower growth, benign inflation,
and falling interest rates. To take advantage of this backdrop, the fund's
duration was increased. That added sensitivity to the beneficial effects
of falling interest rates helped the fund to take full advantage of the
bond market's rally.
In addition, we pursued a barbell strategy -- concentrating investments at
the long and short ends of the maturity spectrum -- that added to your
fund's solid performance. On one side of the barbell, the fund benefited
from investments in 30-year Treasuries. These long-term securities were
among the best performers in the market because long-term interest rates
fell (and bond prices rose) more dramatically than short-term rates. On
the shorter end, your fund profited from the added income provided by
short-term cash investments because these securities furnished higher
yields than investments on the rest of the yield curve. To illustrate, the
federal funds rate, a key short-term rate set by the Federal Reserve
Board, stayed at a relatively high level of 5.50% during most of the
period. It was only at the end of the period that the Fed, in a
long-anticipated move, lowered this rate to 5.25% in a move to sustain
U.S. economic growth (Shortly after the end of the fiscal year, the rate
was lowered again to 5.00%).
Mortgage-backed securities performed very well during the first half of
the year, and your fund's focus on this sector contributed substantially
to performance. However, when interest rates started dropping rapidly,
mortgages started to lag comparable Treasuries because of fears of
increased prepayments. In this scenario, mortgage holders seek to pay off
their loans before maturity in order to refinance at lower rates.
Investors in mortgage-backed securities are then left to reinvest the
principal at current rates that are lower than the yield on the prepaid
mortgages.
* MORTGAGE-BACKED POSITION MAY RISE AGAIN IN FISCAL '99
Overall we anticipate an unchanged or falling trend for interest rates as
the U.S. economy works through the challenges brought on by an uncertain
global economic and investing climate. The Fed has certainly demonstrated
its willingness to adjust interest rates to avert a further weakening of
the U.S. economy. In this type of environment, government bond funds
should do relatively well. Looking more closely at fund strategy, we
anticipate adding to the fund's position in mortgage-backed securities.
After seeing such a marked drop in interest rates in the Treasury market
and with mortgage-backed securities offering an attractive yield advantage
to comparable Treasuries, we believe that they have the potential to
perform better than alternatives in the Treasury market.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 9/30/98, there is no guarantee the fund will
continue to hold these securities in the future. While U.S. government
backing of individual securities does not insure your principal, which
will fluctuate with market conditions, it does guarantee that the fund's
government-backed holdings will make timely payments of interest and
principal. 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 9/30/98
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 11.83% 6.53% 11.20% 6.20% 11.76% 8.14%
- ------------------------------------------------------------------------------
5 years 38.08 31.51 32.81 30.85 36.84 32.40
Annual average 6.67 5.63 5.84 5.52 6.47 5.77
- ------------------------------------------------------------------------------
10 years 110.09 100.19 93.89 93.89 104.85 98.24
Annual average 7.71 7.19 6.85 6.85 7.43 7.08
- ------------------------------------------------------------------------------
Life of fund 191.16 177.26 159.38 159.38 178.91 169.89
Annual average 8.19 7.80 7.27 7.27 7.85 7.58
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/98
Lehman Bros.
Intermediate Consumer
Treasury Index Price Index
- ------------------------------------------------------------------------------
1 year 10.81% 1.36%
- ------------------------------------------------------------------------------
5 years 36.62 12.61
Annual average 6.44 2.40
- ------------------------------------------------------------------------------
10 years 123.54 36.39
Annual average 8.38 3.15
- ------------------------------------------------------------------------------
Life of fund 224.85 54.15
Annual average 9.06 3.24
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. Returns for class A
and class M shares reflect the current maximum initial sales charges of
4.75% and 3.25% respectively. Class B share returns for the 1-, 5-, and
10-year (where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. Returns
shown for class B and class M shares for periods prior to their inception
are derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M shares,
the higher operating expenses applicable to such shares. All returns
assume reinvestment of distributions at NAV. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
9/30/88
Lehman Bros.
Fund's class A Intermediate Consumer Price
Date shares at POP Treasury Index Index
9/30/88 9,525 10,000 10,000
9/30/89 10,482 10,961 10,434
9/30/90 10,982 11,888 11,077
9/30/91 12,573 13,498 11,452
9/30/92 13,524 15,195 11,795
9/30/93 14,498 16,362 12,112
9/30/94 13,910 16,115 12,470
9/30/95 15,777 17,816 12,787
9/30/96 16,350 18,721 13,171
9/30/97 17,902 20,172 13,454
9/30/98 $20,019 $22,354 $13,639
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $19,389 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $20,485 ($19,824 at public offering price). See first page of
performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/98
Class A Class B Class M
- --------------------------------------------------------------------------
Distributions (number) 12 12 12
- --------------------------------------------------------------------------
Income $0.528 $0.465 $0.505
- --------------------------------------------------------------------------
Capital gains -- -- --
- --------------------------------------------------------------------------
Total $0.528 $0.465 $0.505
- --------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- --------------------------------------------------------------------------
9/30/97 $8.65 $9.08 $8.61 $8.66 $8.95
- --------------------------------------------------------------------------
9/30/98 9.11 9.56 9.08 9.14 9.45
- --------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 5.80% 5.52% 5.29% 5.65% 5.46%
- ------------------------------------------------------------------------------
Current 30-day SEC yield2 5.45 5.18 4.74 5.17 5.00
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
2Based on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Lehman Brothers 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. This 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 [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Quality Bond Fund +
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds-three investment portfolios that spread
your money across a variety of stocks, bonds, and money market investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
*Formerly Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
**An investment in a money market fund is neither insured nor guaranteed
by the U.S. government. These funds are managed to maintain a price of
$1.00 per share, although there is no assurance that this price will
be maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to
obtain a prospectus for any Putnam fund. It contains more complete
information, including charges and expenses. Please read it carefully
before you invest or send money.
Report of independent accountants
For the fiscal year ended September 30, 1998
To the Trustees and Shareholders of
Putnam 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, 1998, and
the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at September
30, 1998 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 11, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1998
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (91.6%) (a)
PRINCIPAL AMOUNT VALUE
U.S. Government Agency Mortgage Obligations (60.6%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$100,000,000 Federal Home Loan Mortgage Corp. 5 3/4s,
due April 15, 2008 $ 105,719,000
30,041,863 Federal Home Loan Mortgage Corp. Pass-through
Certificates 7s, with due dates from August 1, 2012
to November 1, 2012 30,858,402
Federal National Mortgage Association Pass-through
Certificates
142,522,023 6 1/2s, Dwarf, with due dates from October 1, 2010
to September 1, 2013 145,505,009
21,379,040 5 1/2s, Dwarf, with due dates from June 1, 2009
to March 1, 2012 21,292,026
Government National Mortgage Association Pass-through
Certificates
42,210,526 9s, with due dates from November 15, 2008
to July 15, 2024 45,353,563
9,448,417 8 1/2s, with due dates from February 15, 2005
to December 15, 2024 9,998,023
29,424,998 8s, with due dates from August 15, 2006
to March 15, 2028 30,764,466
127,091,400 7 1/2s, with due dates from February 15, 2022
to January 15, 2028 131,803,378
399,573,621 7s, with due dates from February 15, 2024
to July 15, 2028 412,435,174
29,660,775 6 1/2s, with due dates from February 15, 2028
to May 15, 2028 30,318,651
--------------
964,047,692
U.S. Treasury Obligations (31.0%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
50,000,000 9 7/8s, November 15, 2015 77,297,000
5,665,000 6 1/8s, November 15, 2027 6,530,669
200,000,000 5 1/2s, August 15, 2028 216,188,000
U.S. Treasury Notes
1,145,000 6 1/4s, June 30, 2002 1,218,532
36,040,000 5 5/8s, May 15, 2008 39,418,750
9,575,000 5 1/2s, May 31, 2003 10,044,750
136,000,000 5 3/8s, June 30, 2003 142,226,080
--------------
492,923,781
--------------
Total U.S. Government and Agency Obligations
(cost $1,397,453,955) $1,456,971,473
SHORT-TERM INVESTMENTS (7.7%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$60,000,000 Interest in $750,000,000 joint tri-party repurchase agreement
dated September 30, 1998 with Goldman Sachs & Co. due
October 1, 1998 with respect to various U.S. Treasury
obligations -- maturity value of $60,009,083 for an effective
yield of 5.45% $ 60,009,083
61,969,000 Interest in $458,140,000 joint repurchase agreement dated
September 30, 1998 with Swiss Bank due October 1, 1998
with respect to various U.S. Treasury obligations -- maturity
value of $61,978,467 for an effective yield of 5.50% 61,978,467
--------------
Total Short-Term Investments (cost $121,987,550) $ 121,987,550
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,519,441,505) (b) $1,578,959,023
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,590,330,183.
(b) The aggregate identified cost on a tax basis is $1,519,463,699, resulting in gross unrealized appreciation and
depreciation of $59,497,913 and $2,589, respectively, or net unrealized appreciation of $59,495,324.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,519,441,505) (Note 1) $1,578,959,023
- -----------------------------------------------------------------------------------------------
Cash 377
- -----------------------------------------------------------------------------------------------
Interest and other receivables 14,340,457
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,280,047
- -----------------------------------------------------------------------------------------------
Total assets 1,595,579,904
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,807,573
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,161,132
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 108,795
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 52,093
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,738
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 987,531
- -----------------------------------------------------------------------------------------------
Other accrued expenses 127,859
- -----------------------------------------------------------------------------------------------
Total liabilities 5,249,721
- -----------------------------------------------------------------------------------------------
Net assets $1,590,330,183
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,840,239,450
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (309,426,785)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 59,517,518
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,590,330,183
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,500,156,542 divided by 164,590,463 shares) $9.11
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.11)* $9.56
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($86,302,398 divided by 9,501,518 shares)** $9.08
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($3,871,243 divided by 423,654 shares) $9.14
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.14)* $9.45
- -----------------------------------------------------------------------------------------------
* 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, 1998
<S> <C>
Interest Income: $102,619,416
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 8,502,645
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,286,373
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 40,996
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 19,019
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 3,738,144
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 407,482
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 8,892
- -----------------------------------------------------------------------------------------------
Reports to shareholders 134,829
- -----------------------------------------------------------------------------------------------
Auditing 46,236
- -----------------------------------------------------------------------------------------------
Legal 13,416
- -----------------------------------------------------------------------------------------------
Postage 375,789
- -----------------------------------------------------------------------------------------------
Other 312,734
- -----------------------------------------------------------------------------------------------
Total expenses 15,886,555
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (733,802)
- -----------------------------------------------------------------------------------------------
Net expenses 15,152,753
- -----------------------------------------------------------------------------------------------
Net investment income 87,466,663
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 42,372,651
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 43,680,120
- -----------------------------------------------------------------------------------------------
Net gain on investments 86,052,771
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $173,519,434
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
-------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 87,466,663 $ 107,202,765
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments 42,372,651 7,069,893
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 43,680,120 38,765,618
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 173,519,434 153,038,276
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (89,363,617) (100,203,913)
- ---------------------------------------------------------------------------------------------------------------
Class B (2,093,444) (1,395,293)
- ---------------------------------------------------------------------------------------------------------------
Class M (98,251) (64,049)
- ---------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (77,444,612) (290,422,524)
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 4,519,510 (239,047,503)
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 1,585,810,673 1,824,858,176
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income
of $ -- and $4,616,680, respectively) $1,590,330,183 $1,585,810,673
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.65 $8.39 $8.65 $8.21 $9.21
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .50(c) .54 .52 .55 .62
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .49 .23 (.21) .50 (.98)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .99 .77 .31 1.05 (.36)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.53) (.51) (.53) (.56) (.64)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- (.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (.05) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.53) (.51) (.57) (.61) (.64)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.11 $8.65 $8.39 $8.65 $8.21
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 11.83 9.49 3.64 13.42 (4.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,500,157 $1,553,706 $1,800,683 $2,183,766 $2,412,154
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.01 .97 .95 .94 .83
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.72 6.34 6.14 6.62 6.93
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 316.47 253.26 245.46 468.86 331.61
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share May 20, 1994+
operating performance Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.61 $8.35 $8.62 $8.19 $8.43
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .41(c) .48 .49 .46(c) .21
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .53 .23 (.26) .51 (.25)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .94 .71 .23 .97 (.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.47) (.45) (.46) (.49) (.20)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- (.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (.05) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.47) (.45) (.50) (.54) (.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.08 $8.61 $8.35 $8.62 $8.19
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 11.20 8.72 2.77 12.32 (.52)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $86,302 $30,935 $23,067 $9,099 $5,691
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.76 1.72 1.70 1.68 .59*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.87 5.59 5.46 5.76 2.22*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 316.47 253.26 245.46 468.86 331.61
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.66 $8.38 $8.65 $8.14
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .46(c) .53 .53 .29(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .53 .24 (.26) .62
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .99 .77 .27 .91
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.51) (.49) (.50) (.37)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- (.04) --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.51) (.49) (.54) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.14 $8.66 $8.38 $8.65
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 11.76 9.45 3.24 11.44*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $3,871 $1,170 $1,108 $672
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.26 1.22 1.20 .78*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.34 6.10 5.94 4.03*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 316.47 253.26 245.46 468.86
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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, 1998
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
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. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
Discounts on original issue discount bonds are accreted according to the
yield-to-maturity 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, 1998, the fund had a capital loss carryover of
approximately $309,405,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------- -----------
$ 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 losses on wash
sale transactions, the expiration 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, 1998, the fund reclassified
$528,031 to decrease undistributed net investment income and
$1,088,707,549 to decrease paid-in-capital, with a decrease to accumulated
net realized loss on investments of $1,089,235,580. 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. On
March 5, 1998, the shareholders approved a proposal to increase fees
payable to Putnam Management under the fund's management contract.
Management fees will be paid thereafter at an annual rate of: 0.65% of the
first $500 million of average net assets, 0.55% of the next $500 million,
0.50% of the next $500 million, 0.45% of the next $5 billion, 0.425% of
the next $5 billion, 0.405% of the next $5 billion, 0.39% of the next $5
billion, and 0.38% thereafter. Prior to March 5, 1998, the fee was based
on the following annual rates: 0.60% of 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 an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended September 30, 1998, fund expenses were reduced by
$733,802 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $1,330
has been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the
average net assets attributable to class A, class B and class M shares,
respectively. The Trustees have approved 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, 1998, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $90,091 and $751 from the sale
of class A and class M shares, respectively and $101,871 in contingent
deferred sales charges from redemptions of class B shares. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended September 30, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received $159 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended September 30, 1998, purchases and sales of U.S.
government and agency obligations other than short-term investments
aggregated $4,681,670,306 and $4,723,192,819, respectively. In determining
the net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Note 4
Capital shares
At September 30, 1998, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 29,817,962 $264,047,180
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,334,109 46,827,065
- -----------------------------------------------------------------------------
35,152,071 310,874,245
Shares
repurchased (50,258,469) (443,308,545)
- -----------------------------------------------------------------------------
Net decrease (15,106,398) $(132,434,300)
- -----------------------------------------------------------------------------
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, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 8,932,737 $79,060,202
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 180,504 1,583,742
- -----------------------------------------------------------------------------
9,113,241 80,643,944
Shares
repurchased (3,202,832) (28,221,826)
- -----------------------------------------------------------------------------
Net increase 5,910,409 $52,422,118
- -----------------------------------------------------------------------------
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, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 372,928 $3,311,218
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,008 70,712
- -----------------------------------------------------------------------------
380,936 3,381,930
Shares
repurchased (92,479) (814,360)
- -----------------------------------------------------------------------------
Net increase 288,457 $2,567,570
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Steven M. Oristaglio
Vice President
David L. Waldman
Vice President
Michael Martino
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam 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
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
AN027 47009 033/292/895 11/98
