IMPORTANT INFORMATION
FOR SHAREHOLDERS OF
PUTNAM HIGH QUALITY BOND FUND
The document you hold in your hands contains a combined
prospectus/proxy statement and proxy card. A proxy card is, in
essence, a ballot. When you fill out your proxy card, it tells us how
to vote on your behalf on important issues relating to your fund. If
you complete and sign the proxy, we'll vote it exactly as you tell
us. If you simply sign the proxy, we'll vote it in accordance with
the Trustees' recommendation on page 31.
We urge you to carefully review the prospectus/proxy statement, fill
out your proxy card, and return it to us. When shareholders don't
return their proxies in sufficient numbers, we have to make follow-up
solicitations, which can cost your fund money.
We want to know how you would like to vote and welcome your comments.
Please take a few minutes with these materials and return your proxy
to us.
[logo: Putnam scales
BOSTON o LONDON o TOKYO]
<PAGE>
Table of Contents
<TABLE>
<S> <C>
A Message from the Chairman.................... 1
Notice of Shareholder Meeting.................. 3
Combined Prospectus/Proxy Statement............ 5
Proxy Card Enclosed
</TABLE>
If you have any questions, please contact
us at the special toll-free number we have
set up for you (1-800-225-1581)
or call your financial advisor.
- -----------------------------------------------
<PAGE>
A Message from the Chairman
Dear Shareholder:
[photo: George Putnam]
I am writing you to ask you for your vote on an important matter that affects
your investment in Putnam High Quality Bond Fund (the "High Quality Bond
Fund"). While you are, of course, welcome to join us at the High Quality Bond
Fund's meeting, most shareholders cast their vote by filling out and signing
the enclosed proxy card.
We are asking for your vote on the following matter:
Approval or disapproval of a proposed merger of the High Quality Bond Fund into
Putnam American Government Income Fund (the "American Government Fund"). In
this merger your shares of the High Quality Bond Fund would, in effect, be
exchanged, on a tax-free basis, for shares of the American Government Fund with
an equal net asset value.
The Trustees of the High Quality Bond Fund recommend approval of the merger,
because they believe it offers shareholders of the fund the opportunity to
invest in a substantially larger fund with similar investment policies but that
has a greater potential to achieve economies of scale and a lower expense
ratio.
The two funds are both fixed income funds investing primarily in U.S.
government and agency securities. The High Quality Bond Fund seeks high current
income. To the extent consistent with seeking high current income, capital
preservation and long-term total return are its secondary goals. The American
Government Fund seeks high current income, with preservation of capital as its
secondary objective.
Both funds seek their goals by investing, under normal market conditions, at
least 65% of their assets in U.S. government securities, which are debt
securities issued or guaranteed by
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the U.S. government, by certain of its agencies, or by various
instrumentalities established or sponsored by the U.S. government. The American
Government Fund may also invest up to 35% of its total assets in highly rated
mortgage-backed securities that are privately issued. The High Quality Bond
Fund can invest 35% of its assets in a broad range of other investment grade
obligations, including those of foreign government and corporate issuers, as
well as asset-backed securities. These non-U.S. government securities impose
risks as well as offering potential rewards. The Trustees have concluded that a
merger with a fund, the American Government Fund, focusing on the core
portfolio area of U.S. governmental securities and with the opportunity for
lowering expenses, is in the best interests of shareholders.
Your vote is important to us. We appreciate the time and consideration I am
sure you will give this important matter. If you have questions about the
proposal, please call 1-800-225-1581, or call your financial advisor.
Sincerely yours,
/s/ George Putnam
George Putnam, Chairman
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PUTNAM HIGH QUALITY BOND FUND
Notice of a Meeting of Shareholders
> This is the formal agenda for the shareholder meeting. It tells you what
matters will be voted on and the time and place of the meeting, in the
event you attend in person.
To the Shareholders of Putnam High Quality Bond Fund:
A meeting of shareholders of Putnam High Quality Bond Fund (the "Fund" or
the "High Quality Bond Fund") will be held July 1, 1999 at 2:00 p.m.,
Boston time, on the eighth floor of One Post Office Square, Boston,
Massachusetts, to consider the following:
1. Approving or disapproving an Agreement and Plan of Reorganization providing
for the sale of all of the assets of the Fund to Putnam American Government
Income Fund (the "American Government Fund") in exchange for shares of the
American Government Fund and the assumption by the American Government Fund
of all of the liabilities of the Fund, and the distribution of such shares
to the shareholders of the Fund in complete liquidation of the Fund. See
page 19.
2. Transacting such other business as may properly come before the meeting.
By the Trustees
George Putnam, Chairman
John A. Hill, Vice Chairman
William F. Pounds, Vice Chairman
<TABLE>
<S> <C>
Jameson A. Baxter Robert E. Patterson
Hans H. Estin Donald S. Perkins
Ronald J. Jackson George Putnam, III
Paul L. Joskow A.J.C. Smith
Elizabeth T. Kennan W. Thomas Stephens
Lawrence J. Lasser W. Nicholas Thorndike
John H. Mullin, III
</TABLE>
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WE URGE YOU TO MARK, SIGN, DATE AND MAIL THE ENCLOSED PROXY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, OR FOLLOW THE INSTRUCTIONS IN THESE
MATERIALS RELATING TO TELEPHONIC OR INTERNET VOTING, SO THAT YOU WILL BE
REPRESENTED AT THE MEETING.
April 12, 1999
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<PAGE>
Prospectus/Proxy Statement
April 12, 1999
> Acquisition of the assets and liabilities of
Putnam High Quality Bond Fund
One Post Office Square
Boston, Massachusetts 02109
(617) 292-1000
By and in exchange for shares of
Putnam American Government Income Fund
One Post Office Square
Boston, Massachusetts 02109
(617) 292-1000
Table of Contents
<TABLE>
<S> <C>
Synopsis ............................................... 8
Risk factors ........................................... 16
General ................................................ 18
Proposal regarding approval or disapproval of
merger and related Agreement and
Plan of Reorganization ................................. 19
Background and reasons for the proposed merger ......... 21
Information about the merger ........................... 23
Voting information ..................................... 31
Agreement and Plan of Reorganization ................... A-1
</TABLE>
> This document will give you the information you need to vote on the
proposed merger. Much of the information is required under rules of the
Securities and Exchange Commission ("SEC"); some of it is technical. If
there is anything you don't understand, please contact us at our special
toll-free number, 1-800-225-1581, or call your financial advisor.
This Prospectus/Proxy Statement relates to the proposed merger of Putnam
High Quality Bond Fund (the "High Quality Bond Fund") into Putnam American
Government Income Fund (the "American Government Fund"). As a result of the
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proposed transaction, each Class A, Class B and Class M shareholder of the
High Quality Bond Fund will receive a number of full and fractional Class
A, Class B and Class M shares, respectively, of the American Government
Fund equal in value at the date of the exchange to the total value of the
shareholder's High Quality Bond Fund shares. Like the High Quality Bond
Fund, the American Government Fund is in the family of funds managed by
Putnam Investment Management, Inc. ("Putnam Management"). The American
Government Fund and the High Quality Bond Fund are collectively referred to
herein as the "Funds," and each is referred to individually as a "Fund."
This Prospectus/Proxy Statement explains concisely what you should know
before voting on the proposed merger or investing in the American
Government Fund. Please read it and keep it for future reference. This
Prospectus/Proxy Statement is accompanied by (i) the Prospectus, dated
January 30, 1999, of the American Government Fund (the "American Government
Fund Prospectus"), and (ii) the Report of Independent Accountants and
financial statements included in the American Government Fund's Annual
Report to Shareholders for the fiscal year ended September 30, 1998. The
American Government Fund Prospectus and the American Government Fund's
Annual Report are incorporated into this Prospectus/Proxy Statement by
reference.
The following documents have been filed with the SEC and are also
incorporated into this Prospectus/Proxy Statement by reference:
(i) the Prospectus, dated February 28, 1999, of the High Quality Bond
Fund;
(ii) the Statement of Additional Information of the High Quality Bond
Fund, dated February 28, 1999;
(iii) the Statement of Additional Information of the American
Government Fund, dated January 30, 1999;
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(iv) the Report of Independent Accountants and financial statements
included in the High Quality Bond Fund's Annual Report to
Shareholders for the fiscal year ended October 31, 1998; and
(v) a Statement of Additional Information, dated April 12, 1999,
relating to the proposed merger.
For a free copy of any of the above, please contact us at the special
toll-free number we have set up for you (1-800-225-1581).
Proxy materials, information statements and other information filed by the
Funds can be inspected and copied at the Public Reference Room maintained
by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can also be obtained from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, Washington, D.C. 20549 at
prescribed rates. You may also access reports and other information about
the Funds on the Commission's Internet site at http://www.sec.gov.
The securities offered by the accompanying Prospectus/Proxy Statement
have not been approved or disapproved by the Securities and Exchange
Commission or any state securities commission nor has the Securities
and Exchange Commission or any state securities commission passed upon
the accuracy or adequacy of such Prospectus/Proxy Statement. Any
representation to the contrary is a criminal offense.
Shares of the American Government Fund are not deposits or obligations
of, or guaranteed or endorsed by any financial institution, are not
insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other agency, and involve risk, including the
possible loss of principal amount invested.
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Synopsis
> The responses to the questions that follow provide an overview of key
points typically of concern to shareholders considering a proposed merger
between funds. These responses are qualified in their entirety by the
remainder of the Prospectus/Proxy Statement, which contains additional
information and further details regarding the proposed merger.
1. What is being proposed?
The Trustees of the Funds are recommending that shareholders approve the
merger of the High Quality Bond Fund into the American Government Fund. If
approved by shareholders, all of the assets of the High Quality Bond Fund
will be transferred to the American Government Fund in exchange for shares
of the American Government Fund and for the assumption by the American
Government Fund of all of the liabilities of the High Quality Bond Fund.
Immediately following the transfer the American Government Fund shares
received by the High Quality Bond Fund will be distributed to its
shareholders, pro rata.
2. What will happen to my shares of the High Quality Bond Fund as a result of
the merger?
Your shares of the High Quality Bond Fund will, in effect, be exchanged on
a tax-free basis for shares of the American Government Fund with an equal
total net asset value.
3. Why are the Trustees proposing the merger?
As discussed in more detail below, the two Funds are similar in investment
strategy and policy. The Trustees believe that combining the two similar
Funds will result in lower expenses for Fund shareholders without changing
in a fundamental way the essential investment profile of the Funds. In
addition the Trustees believe the combined Fund will offer greater
potential for increased sales and thus the potential for further economies
of scale. As the American Government Fund is considerably larger the
Trustees believe it is appropriate for the smaller High Quality Bond Fund
to be merged into the larger Fund.
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4. How do the investment goals, policies and restrictions of the two Funds
compare?
The investment goals and policies of the two Funds are similar. Each is an
income oriented fund investing primarily in U.S. government and agency
securities. The High Quality Bond Fund seeks high current income. Capital
preservation and long-term total return are its secondary goals, but only
to the extent consistent with seeking high current income. The American
Government Fund seeks high current income, with preservation of capital as
its secondary objective.
Both Funds seek their goals by investing, under normal market conditions,
at least 65% of their assets in U.S. government securities, which are debt
securities issued or guaranteed by the U.S. government, by certain of its
agencies, or by various instrumentalities established or sponsored by the
U.S. government. The American Government Fund may also invest up to 35% of
its total assets in mortgage-backed securities that are privately issued
and at the time of purchase rated at least AAA or Aaa by a nationally
recognized securities rating organization, or if unrated, are determined by
Putnam Management to be of comparable quality. The High Quality Bond Fund
has broader investment flexibility than the American Government Fund. It
can invest up to 35% of its total assets in a wide variety of investment
grade obligations, including privately issued mortgage-backed and
asset-backed securities as well as securities of foreign government and
corporate issuers. These non-U.S. government securities impose risks as
well as offering potential rewards. The High Quality Bond Fund's
investments in non-U.S. government securities must be rated at the time of
purchase at least Baa or BBB by a nationally recognized securities rating
organization, or if unrated, determined by Putnam Management to be of
comparable quality.
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5. How do the management fees and other expenses of the two Funds compare, and
what are they estimated to be following the merger?
The American Government Fund and the High Quality Bond Fund have identical
fee and other expense structures. However, because the American Government
Fund is substantially larger than the High Quality Bond Fund, its expense
ratio is lower due to its attainment of break points in the management fee
schedule and other economies of scale. As of February 26, 1999, the
American Government Fund and the High Quality Bond Fund had net assets of
$1,525,308,706 and $377,695,854, respectively. Each Fund is subject to the
same management fee schedule. However, as shown in the Annual Fund
Operating Expenses table below, for the twelve month period ended December
31, 1998 the American Government Fund paid a management fee that is .09%
lower than that of the High Quality Bond Fund. On a pro forma basis, giving
effect to the merger, the combined Fund's effective management fees will be
.11% lower than those of the High Quality Bond Fund. Also as shown in the
table, the American Government Fund's "other expenses" were .05% lower than
those of the High Quality Bond Fund for the twelve month period ended
December 31, 1998. In total, the pro forma post-merger total annual
operating expenses of the American Government Fund are .16% lower than
those of the High Quality Bond Fund.
The sales charges payable by shareholders of the Funds and the maximum
amounts payable by the Funds under the distribution plans, adopted pursuant
to Rule 12b-1 under the Investment Company Act of 1940, are identical.
These 12b-1 fees are 0.25%, 1.00% and 0.50% of average net assets
attributable to Class A, Class B and Class M shares, respectively.
The following tables summarize the maximum fees and expenses you may pay
when investing in the Funds, expenses
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that each of the Funds incurred in the 12 months ending December 31, 1998
and estimated expenses that Putnam Management expects the combined Fund to
incur in the first year following the merger.
Shareholder Fees
(Fees paid directly from your investment)
<TABLE>
<CAPTION>
Class A Class B Class M
Shares Shares Shares
-------------- --------------- -----------
<S> <C> <C> <C>
Maximum Sales Charge
(Load) Imposed on
Purchases (as a
percentage of offering
price)
High Quality Bond Fund 4.75% NONE* 3.25%
American Government
Fund 4.75% NONE* 3.25%
(Not (Not
applicable applicable
to to
Merger Merger
Shares) Shares)
Maximum Deferred Sales
Charge (Load) (as a
percentage of the
original purchase price
or redemption proceeds,
whichever is lower)
High Quality Bond Fund NONE** 5.0%*** NONE
American Government
Fund NONE** 5.0%*** NONE
</TABLE>
- --------------------
*Higher 12b-1 fees borne by Class B and Class M shares may cause long-term
Class B and Class M shareholders to pay more than the total sales charges
paid by Class A shareholders.
**A deferred sales charge of up to 1.00% is assessed on certain redemptions of
Class A shares that were purchased without an initial sales charge as part of
an investment of $1 million or more.
***5.0% in the first year, declining to 1.0% in the sixth year, and eliminated
thereafter.
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Annual Fund Operating Expenses
(Expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
Total Annual
Management Distribution Other Fund Operating
Fees (12b-1) Fees Expenses Expenses
------------ -------------- ---------- ---------------
<S> <C> <C> <C> <C>
High Quality Bond
Fund
Class A 0.65% 0.25% 0.26% 1.16%
Class B 0.65% 1.00% 0.26% 1.91%
Class M 0.65% 0.50% 0.26% 1.41%
American
Government Fund
Class A 0.56% 0.25% 0.21% 1.02%
Class B 0.56% 1.00% 0.21% 1.77%
Class M 0.56% 0.50% 0.21% 1.27%
American
Government Fund
(Pro forma
combined)
Class A 0.54% 0.25% 0.21% 1.00%
Class B 0.54% 1.00% 0.21% 1.75%
Class M 0.54% 0.50% 0.21% 1.25%
</TABLE>
The tables are provided to help you understand the expenses of investing in
the Funds and your share of the operating expenses that each Fund incurs
and that Putnam Management expects the combined Fund to incur in the first
year following the merger. The expenses shown in the table do not reflect
the application of credits related to expense offset arrangements that
reduce certain Fund expenses.
Examples
These examples translate the "Total Annual Fund Operating Expenses" shown
in the preceding table into dollar amounts. By doing this, you can more
easily compare the cost of investing in the Funds. The examples make
certain assumptions. They assume that you invest $10,000 in a Fund for the
time periods shown and then, except as shown for Class B shares, redeem all
your shares at the end of these periods. They also assume 5% return on your
investment each year and that a
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Fund's operating expenses remain the same. The examples are hypothetical;
your actual costs and returns may be higher or lower.
<TABLE>
<CAPTION>
1 3 5 10
Year Years Years Years
------ ------- --------- --------
<S> <C> <C> <C> <C>
High Quality Bond Fund
Class A $588 $826 $1,083 $1,817
Class B $694 $900 $1,232 $2,038****
Class B (no redemption) $194 $600 $1,032 $2,038****
Class M $464 $757 $1,071 $1,961
American Government Fund
Class A $574 $784 $1,011 $1,664
Class B $680 $857 $1,159 $1,886****
Class B (no redemption) $180 $557 $ 959 $1,886****
Class M $450 $715 $ 999 $1,809
American Government Fund
(Pro forma combined)
Class A $572 $778 $1,001 $1,641
Class B $678 $851 $1,149 $1,864****
Class B (no redemption) $178 $551 $ 949 $1,864****
Class M $448 $709 $ 989 $1,787
</TABLE>
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****Reflects conversion of Class B shares to Class A shares
(which pay lower ongoing expenses) approximately eight years after purchase.
+ For purposes of determining the Contingent Deferred Sales Charge ("CDSC")
applicable to Class B Merger Shares, such shares will be treated as having
been acquired as of the dates the corresponding Class B shares of the High
Quality Bond Fund were originally acquired. See "Information about the merger
-- Description of the Merger Shares."
6. What are the federal income tax consequences of the proposed Merger?
For federal income tax purposes, no gain or loss will be recognized by the
High Quality Bond Fund or its shareholders as a result of the merger.
7. Will my dividend be affected by the merger?
After the merger you will continue to receive distributions of any net
investment income once a month and any net realized
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capital gains at least once a year. Except as described below, your
distributions will continue to be either reinvested, paid in cash or a
combination of the two, according to the option you selected with the High
Quality Bond Fund. Of course, the amount of these distributions will
reflect the investment policies of the American Government Fund. Since the
American Government Fund does not invest in corporate or foreign bonds as
High Quality Bond Fund does, its dividend rate can be expected to be lower
than that of the High Quality Bond Fund under normal market conditions.
The American Government Fund will not permit any High Quality Bond Fund
shareholder holding certificates for High Quality Bond Fund shares at the
time of the merger to receive cash dividends or other distributions,
receive certificates for shares issued in the merger ("Merger Shares"),
exchange Merger Shares for shares of other investment companies managed by
Putnam Management, or pledge or redeem Merger Shares until such
certificates for High Quality Bond Fund shares have been surrendered, or,
in the case of lost certificates, until an adequate surety bond has been
posted.
If a shareholder is not for that reason permitted to receive cash dividends
or other distributions on Merger Shares, the American Government Fund will
pay all such dividends and distributions in additional shares,
notwithstanding any election the shareholder may have made previously to
receive dividends and distributions on High Quality Bond Fund shares in
cash.
8. Do the procedures for purchasing, redeeming and exchanging shares of the
two Funds differ?
No. The procedures for purchasing and redeeming shares of each Fund, and
for exchanging such shares of each Fund for shares of other Putnam funds,
are identical.
Both Funds currently offer three classes of shares. Shares of both Funds
may be purchased either through investment dealers that have sales
agreements with Putnam Mutual Funds
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Corp. ("Putnam Mutual Funds") or directly through Putnam Mutual Funds at
prices based on net asset value, plus varying sales charges, depending on
the class and number of shares purchased. Reinvestment of distributions by
the Funds are made at net asset value for all classes of shares.
Shares of each Fund may be redeemed any day the New York Stock Exchange is
open at their net asset value next determined after receipt by the Fund of
a properly completed redemption request either directly by a Fund or
through an investment dealer.
Shares of both Funds may be exchanged after a ten-day holding period for
shares of the same class of certain other Putnam Funds.
9. How will I be notified of the outcome of the merger?
If the proposed merger is approved by shareholders, you will receive
confirmation after the reorganization is completed, indicating your new
account number, the number of shares you are receiving and the procedures
for surrendering your certificates if you have any. If the merger is not
approved, shareholders will be notified, and the results of the meeting
will be provided in the next annual report of the High Quality Bond Fund.
10. Will the number of shares I own change?
Yes, but the total value of the shares of the American Government Fund you
receive will equal the total value of the shares of the High Quality Bond
Fund that you hold at the time of the merger. Even though the net asset
value per share of each Fund is different, the total value of a
shareholder's holdings will not change as a result of the merger.
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<PAGE>
Risk factors
> What are the principal risks associated with an investment in the American
Government Fund, and how do they compare with those for the High Quality
Bond Fund?
Because the Funds share similar goals and policies, the risks of an
investment in the American Government Fund are similar to the risks of an
investment in the High Quality Bond Fund.
Lower Yielding Assets. Although the two Funds' investment policies are
similar they are not identical. The American Government Fund's investment
policies are more restrictive than those of the High Quality Bond Fund.
Although both can invest up to 35% of their assets in non-U.S. government
and agency securities, the American Government Fund is limited to investing
in AAA or Aaa rated mortgage backed securities while the High Quality Bond
Fund may invest in a broad range of investment grade U.S. corporate and
foreign debt. Since both corporate debt and foreign debt have additional
risks, an investment in the High Quality Bond Fund may involve more risk
than an investment in the American Government Fund. However, investment
grade corporate debt and foreign government debt will generally have higher
yields, and the diversification they add may reduce overall losses at times
when U.S. government securities markets are declining. Thus, although the
American Government Fund's overall portfolio risk may generally be lower
and its return less volatile, its yield and total return over the long term
can also be expected to be lower.
Interest rate risk. The values of debt investments usually rise and fall
in response to changes in interest rates. Declining interest rates will
generally raise the value of existing debt investments, and rising interest
rates will generally lower the value of existing debt investments. Changes
in the values of debt investments usually will not affect the amount of
income the Fund receives from them, but will affect the value
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<PAGE>
of the Fund's shares. Interest rate risk is generally greater for
investments with longer maturities.
Premium investments. Like the High Quality Bond Fund, the American
Government Fund may invest in so-called "premium" investments, which offer
interest rates higher than prevailing market rates. In addition, during
times of declining interest rates, many of the Fund's investments may offer
interest rates that are higher than current market rates. When the Fund
holds these "premium" investments, shareholders are likely to receive
higher dividends (but will bear a greater risk that the value of the Fund's
shares will fall) than they would if the Fund held investments that offered
current market rates of interest. Premium investments involve a greater
risk of loss, because their values tend to decline over time.
Credit risk. Although U.S. government investments are generally considered
to have the least credit risk--the risk that the issuer will fail to make
timely payments of interest and principal--they are not entirely free of
credit risk. In addition, the values of these investments will still
fluctuate in response to changes in interest rates. Other securities in
which the Fund may invest are subject to varying degrees of risk of
default. These risk factors include the creditworthiness of the issuer and,
in the case of mortgage-backed securities, the ability of the underlying
mortgagors or other borrowers to meet their obligations.
Prepayment risk. Traditional debt investments typically pay a fixed rate
of interest until maturity, when the entire principal amount is due. By
contrast, payments on mortgage-backed investments typically include both
interest and a partial payment of principal. Principal may also be prepaid
voluntarily, or as a result of refinancing or foreclosure. The Fund may
have to invest the proceeds from prepayments under less attractive terms
and yields.
Prepayments are particularly common during periods of declining interest
rates, when property owners seek to refi-
17
<PAGE>
nance their mortgages on more favorable terms; the reverse is true during
periods of rising interest rates. Mortgage-backed investments are therefore
less likely to increase in value during periods of declining interest rates
than other debt investments of comparable maturities. In addition, they
have a higher risk of decline during periods of rising interest rates
because declining prepayment rates effectively increase the average
maturity of the Fund's investments (and, therefore, its sensitivity to
changes in interest rates) at times when that is least desirable. These
investments can increase the volatility of the Fund.
Frequent trading. Like the High Quality Bond Fund, the American Government
Fund may buy and sell investments relatively often, which involves higher
brokerage commissions and other expenses, and may increase the taxes
payable by shareholders.
Other investments. In addition to the Fund's main investment strategies of
investing in U.S. government securities, the Fund may also buy and sell
other types of investments, such as collateralized mortgage obligations
(CMOs) and interest-only (IO) and principal-only (PO) stripped
mortgage-backed investments, and therefore may be subject to other risks.
General
This Prospectus/Proxy Statement is furnished in connection with the
proposed merger of the High Quality Bond Fund into the American Government
Fund and the solicitation of proxies by and on behalf of the Trustees of
the High Quality Bond Fund for use at the Meeting of Shareholders. The
Meeting is to be held on July 1, 1999 at 2:00 p.m. at One Post Office
Square, 8th Floor, Boston, Massachusetts. The Notice of the Meeting, the
combined Prospectus/Proxy Statement and the enclosed form of proxy are
being mailed to shareholders on or about April 15, 1999.
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<PAGE>
Any shareholder giving a proxy has the power to revoke it by mail
(addressed to the Fund's Clerk at the principal office of the High Quality
Bond Fund, One Post Office Square, Boston, Massachusetts 02109) or in
person at the Meeting, by executing a superseding proxy, or by submitting a
notice of revocation to the High Quality Bond Fund. All properly executed
proxies received in time for the Meeting will be voted as specified in the
proxy, or, if no specification is made, FOR the proposal (set forth in
Proposal 1 of the Notice of Meeting) to implement the merger of the High
Quality Bond Fund into the American Government Fund.
As of March 15, 1999, there were outstanding 37,923,733 shares of
beneficial interest of the High Quality Bond Fund. Only shareholders of
record on April 1, 1999 will be entitled to notice of and to vote at the
Meeting. Each share is entitled to one vote, with fractional shares voting
proportionally.
The Trustees of the High Quality Bond Fund know of no matters other than
those set forth herein to be brought before the Meeting. If, however, any
other matters properly come before the Meeting, it is the Trustees'
intention that proxies will be voted on such matters in accordance with the
judgment of the persons named in the enclosed form of proxy.
Proposal regarding approval or disapproval of merger
and related Agreement and Plan of Reorganization
The shareholders of the High Quality Bond Fund are being asked to approve
or disapprove a merger between the High Quality Bond Fund and the American
Government Fund pursuant to an Agreement and Plan of Reorganization between
the Funds, dated as of March 17, 1999 (the "Agreement"), a copy of which is
attached to this Prospectus/Proxy Statement as Exhibit A.
The merger is structured as a transfer of all of the assets of the High
Quality Bond Fund to the American Government Fund in exchange for the
assumption by the American Gov-
19
<PAGE>
ernment Fund of all of the liabilities of the High Quality Bond Fund and
for that number of the Class A, Class B and Class M Merger Shares equal in
total net asset value to the net value of assets transferred to the
American Government Fund, all as more fully described below under
"Information about the merger."
After receipt of the Merger Shares, the High Quality Bond Fund will
distribute the Class A Merger Shares to its Class A shareholders, the Class
B Merger Shares to its Class B shareholders and the Class M Merger Shares
to its Class M shareholders, in proportion to their existing shareholdings
in complete liquidation of the High Quality Bond Fund, and the legal
existence of the High Quality Bond Fund as a separate business trust under
Massachusetts law will be terminated. Each shareholder of the High Quality
Bond Fund will receive a number of full and fractional Class A, Class B, or
Class M Merger Shares equal in value at the date of the exchange to the
aggregate value of the shareholder's High Quality Bond Fund shares.
Prior to the date of the transfer (the "Exchange Date"), the High Quality
Bond Fund will declare a distribution to shareholders which, together with
all previous distributions, will have the effect of distributing to
shareholders all of its investment company taxable income (computed without
regard to the deduction for dividends paid) and net realized capital gains,
if any, through the Exchange Date.
The Trustees have voted unanimously to approve the proposed transaction and
to recommend that shareholders also approve the transaction. The
transactions contemplated by the Agreement will be consummated only if
approved by the affirmative vote of the holders of 662/3% or more of the
outstanding shares of the High Quality Bond Fund entitled to vote.
In the event that this proposal is not approved by the shareholders of the
High Quality Bond Fund, the High Quality Bond Fund will continue to be
managed as a separate Fund in
20
<PAGE>
accordance with its current investment objectives and policies, and the
Trustees may consider such alternatives as may be in the best interests of
its shareholders.
Background and reasons for the proposed merger
The Trustees of each Fund, including all Trustees who are not "interested
persons" of the Funds, have determined that the reorganization would be in
the best interests of each Fund's shareholders, and that the interests of
existing shareholders of each of the Funds would not be diluted as a result
of effecting the reorganization. The Trustees have unanimously approved the
proposed reorganization and have recommended its approval by shareholders.
The American Government Fund and the High Quality Bond Fund have the same
Trustees.
The proposal is the result of a recent review by Putnam Management of the
investment strategies and position of Putnam Management's fixed income
funds. Currently Putnam Management advises a number of mutual funds
investing wholly or substantially in U.S. government and agency securities
and investment grade corporate debt. As discussed above, while not
identical, the American Government Fund and the High Quality Bond Fund have
similar investment policies, each investing at least 65% in U.S. government
and agency securities.
In light of the substantial similarity of the Funds, Putnam Management
advised the Trustees that combining the Funds would be in the best
interests of shareholders of both Funds. The combined Fund would have lower
expenses than either of the existing Funds (see "Synopsis, question 5" for
a discussion of expenses). Putnam Management also advised the Trustees that
combining the Funds would likely improve sales of the Funds, thus offering
the opportunity for further growth and reduction of expenses although there
can be no assurance that the merger will lead to increased sales.
21
<PAGE>
Based on their review and Putnam Management's advice, the Trustees have
unanimously approved the proposal. Further in light of the larger size of
the American Government Fund ($1,525,308,706 as of February 26, 1999 versus
$377,695,854 for the High Quality Bond Fund), the Trustees concluded that
it would be preferable for the High Quality Bond Fund to merge into the
American Government Fund.
Set forth below is total return information for the Class A shares of the
two Funds for the one year periods ending on the dates stated: Annualized
Total Return (Total Investment Return at NAV)
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
American Government
Fund 8.55% 9.23% 2.29% 18.35% -2.89%
High Quality Bond Fund 6.66% 8.34% 2.00% 18.96% -3.11%
</TABLE>
Of course the Funds' past performance is not necessarily an indication of
future performance.
Exchange without recognition of gain or loss for Federal Income Tax
purposes. If a High Quality Bond Fund shareholder were to redeem his or her
shares to invest in another fund, like the American Government Fund, gain
or loss would be recognized by that shareholder for federal income tax
purposes. Also, if the High Quality Bond Fund were liquidated or were
reorganized in a taxable reorganization, the transaction would likely
result in a taxable event for its shareholders. By contrast, the proposed
merger will permit the High Quality Bond Fund's shareholders to exchange
their investment for an investment in the American Government Fund without
recognition of gain or loss for federal income tax purposes. After the
merger, shareholders will be free to redeem any or all of the American
Government Fund shares at net asset value at any time, at which point a
taxable gain or loss would be recognized.
22
<PAGE>
Information about the merger
Agreement and plan of reorganization. The proposed merger will be governed
by an Agreement and Plan of Reorganization. The Agreement provides that the
American Government Fund will acquire all of the assets of the High Quality
Bond Fund in exchange for the assumption by the American Government Fund of
all of the liabilities of the High Quality Bond Fund and for the issuance
of Class A, Class B and Class M Merger Shares equal in value to the value
of the transferred assets net of assumed liabilities. The shares will be
issued on the next full business day (the "Exchange Date") following the
time as of which the Funds' shares are valued for determining net asset
value for the merger (4:00 p.m. Boston time on July 9, 1999 or such other
date as may be agreed upon by the parties). The following discussion of the
Agreement is qualified in its entirety by the full text of the Agreement,
which is attached as Exhibit A to this Prospectus/Proxy Statement.
The High Quality Bond Fund will sell all of its assets to the American
Government Fund, and in exchange, the American Government Fund will assume
all of the liabilities of the High Quality Bond Fund and deliver to the
High Quality Bond Fund (i) a number of full and fractional Class A Merger
Shares having an aggregate net asset value equal to the value of assets of
the High Quality Bond Fund attributable to its Class A shares, less the
value of the liabilities of the High Quality Bond Fund assumed by the
American Government Fund attributable to such Class A shares; (ii) a number
of full and fractional Class B Merger Shares having a net asset value equal
to the value of assets of the High Quality Bond Fund attributable to its
Class B shares, less the value of the liabilities of the High Quality Bond
Fund assumed by the American Government Fund attributable to such Class B
shares, and (iii) a number of full and fractional Class M Merger Shares
having a net asset value equal to the value of assets of the
23
<PAGE>
High Quality Bond Fund attributable to its Class M shares, less the value
of the liabilities of the High Quality Bond Fund assumed by the American
Government Fund attributable to such Class M Shares.
Immediately following the Exchange Date, the High Quality Bond Fund will
distribute pro rata to its shareholders of record as of the close of
business on the Exchange Date the full and fractional Merger Shares
received by the High Quality Bond Fund, with Class A Merger Shares being
distributed to holders of Class A shares of the High Quality Bond Fund,
Class B Merger Shares being distributed to holders of Class B shares of the
High Quality Bond Fund and Class M Merger Shares being distributed to
holders of Class M shares of the High Quality Bond Fund. As a result of the
proposed transaction, each holder of Class A, Class B and Class M shares of
the High Quality Bond Fund will receive a number of Class A, Class B and
Class M Merger Shares equal in aggregate value at the Exchange Date to the
value of the Class A, Class B and Class M shares, respectively, of the High
Quality Bond Fund held by the shareholder. This distribution will be
accomplished by the establishment of accounts on the share records of the
American Government Fund in the name of such High Quality Bond Fund
shareholders, each account representing the respective number of full and
fractional Class A, Class B and Class M Merger Shares due such shareholder.
New certificates for Merger Shares will be issued only upon written
request.
The Trustees of the High Quality Bond Fund have determined that the
interests of the High Quality Bond Fund's shareholders will not be diluted
as a result of the transactions contemplated by the merger, and the
Trustees of both Funds have determined that the proposed merger is in the
best interests of each Fund.
The consummation of the merger is subject to the conditions set forth in
the Agreement. The Agreement may be terminated
24
<PAGE>
and the reorganization abandoned at any time, before or after approval by
the shareholders, prior to the Exchange Date by mutual consent of the
American Government Fund and the High Quality Bond Fund or, if any
condition set forth in the Agreement has not been fulfilled and has not
been waived by the party entitled to its benefits, by such party.
If shareholders of the High Quality Bond Fund approve the acquisition,
Putnam Management will be authorized to reposition the High Quality Bond
Fund's portfolio, subject to tax and other regulatory restraints, so that
it reflects the investment policies of the American Government Fund. The
Agreement provides that the repositioning of the High Quality Bond Fund
portfolio will be substantially completed prior to the Exchange Date,
unless otherwise agreed by the High Quality Bond Fund and the American
Government Fund. High Quality Bond Fund shareholders will bear the
portfolio trading costs associated with this repositioning to the extent
that it is completed prior to the Exchange Date. There can be no assurance
that such repositioning will be accomplished prior to the Exchange Date. To
the extent the respositioning is not accomplished prior to the Exchange
Date, the costs of the repositioning will be borne by the shareholders of
the surviving Fund, including current shareholders of the American
Government Fund.
Except for the trading costs associated with the repositioning described
above, the fees and expenses for the transaction are estimated to be
$215,000. All fees and expenses, including legal and accounting expenses,
portfolio transfer taxes (if any) or other similar expenses incurred in
connection with the consummation of the transactions contemplated by the
Agreement will be allocated ratably between the two Funds in proportion to
their net assets as of the day of the transfer, except that the costs of
proxy materials and proxy solicitations will be borne by the High Quality
Bond Fund. However, to the extent that any payment by either Fund of such
fees or expenses would
25
<PAGE>
result in the disqualification of the American Government Fund or the High
Quality Bond Fund as a "regulated investment company" within the meaning of
Section 851 of the Internal Revenue Code of 1986, as amended (the "Code"),
such fees and expenses will be paid directly by the party incurring them.
Description of the Merger Shares. Merger Shares will be issued to the High
Quality Bond Fund's shareholders in accordance with the procedure under the
Agreement as described above. The Merger Shares are Class A, Class B and
Class M shares of the American Government Fund. Investors purchasing Class
A and Class M shares pay a sales charge at the time of purchase, but High
Quality Bond Fund shareholders receiving Class A and Class M Merger Shares
in the merger will not pay a sales charge on such shares. Class A and Class
M shares of the American Government Fund generally are not subject to
redemption fees, but such shares are subject to a 12b-1 fee at the annual
rate of 0.25% and 0.50% of the Fund's average daily net assets attributable
to Class A and Class M shares, respectively. Class B shares of the American
Government Fund are sold without a sales charge, but are subject to a CDSC
of up to 5% if redeemed within six years of purchase. For purposes of
determining the CDSC payable on redemption of Class B Merger Shares
received by holders of Class B shares of the High Quality Bond Fund, such
shares will be treated as having been acquired as of the dates such
shareholders originally acquired their Class B shares of the High Quality
Bond Fund. Class B shares are also subject to a 12b-1 fee at the annual
rate of 1.00% of the Fund's average daily net assets attributable to Class
B shares. Class B shares will automatically convert to Class A shares,
based on relative net asset value, approximately eight years after
purchase.
Each of the Merger Shares will be fully paid and nonassessable when issued,
will be transferable without restriction, and
26
<PAGE>
will have no preemptive or conversion rights, except that Class B Merger
Shares will have the conversion rights specified above. The Agreement and
Declaration of Trust of the American Government Fund permits the Fund to
divide its shares, without shareholder approval, into two or more classes
of shares having such preferences and special or relative rights and
privileges as the Trustees may determine. The American Government Fund's
shares are currently divided into three classes--Class A, Class B and Class
M shares.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the American Government
Fund. However, the Agreement and Declaration of Trust disclaims shareholder
liability for acts or obligations of the American Government Fund and
requires that notice of such disclaimer be given in each agreement,
obligation, or instrument entered into or executed by the American
Government Fund or its Trustees. The Agreement and Declaration of Trust
provides for indemnification out of Fund property for all loss and expense
of any shareholder held personally liable for the obligations of the
American Government Fund. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to
circumstances in which the American Government Fund would be unable to meet
its obligations. The likelihood of such circumstances is remote. The
shareholders of the High Quality Bond Fund are currently subject to this
same risk of shareholder liability.
Federal income tax consequences. As a condition to the High Quality Bond
Fund's obligation to consummate the reorganization, the High Quality Bond
Fund will receive an opinion from Ropes & Gray, counsel to the Funds,
(which opinion would be based on certain factual representations and
subject to certain qualifications) (the "Tax Opinion") to the effect that,
on the basis of the existing provisions of the
27
<PAGE>
Internal Revenue Code of 1986, as amended (the "Code"), current
administrative rules and court decisions, for federal income tax purposes:
(i) The acquisition by the American Government Fund of substantially
all of the assets of the High Quality Bond Fund solely in exchange for
Merger Shares and the assumption by the American Government Fund of
liabilities of the High Quality Bond Fund followed by the distribution
by the High Quality Bond Fund to its shareholders of Merger Shares in
complete liquidation of the High Quality Bond Fund, all pursuant to
the plan of reorganization, constitutes a reorganization within the
meaning of Section 368(a) of the Code and the High Quality Bond Fund
and the American Government Fund will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code;
(ii) under Section 361 of the Code, no gain or loss will be recognized
by the High Quality Bond Fund upon the transfer of its assets and the
assumption of its liabilities by the American Government Fund or upon
the distribution of the Merger Shares to the High Quality Bond Fund's
shareholders in liquidation of the High Quality Bond Fund;
(iii) under Section 354 of the Code, no gain or loss will be
recognized by shareholders of the High Quality Bond Fund on the
exchange of their shares of the High Quality Bond Fund for Merger
Shares;
(iv) under Section 358 of the Code, the basis of the Merger Shares
received by the High Quality Bond Fund's shareholders will be the same
as the basis of the High Quality Bond Fund shares exchanged therefor;
(v) under Section 1223(1) of the Code, the holding periods of the
Merger Shares received by the shareholders of the High Quality Bond
Fund will include the holding
28
<PAGE>
periods of the High Quality Bond Fund shares exchanged therefor,
provided that at the time of the reorganization the High Quality Bond
Fund shares are held by such shareholders as a capital asset;
(vi) under Section 1032 of the Code, no gain or loss will be
recognized by the American Government Fund upon the receipt of assets
of the High Quality Bond Fund in exchange for Merger Shares and the
assumption by the American Government Fund of the liabilities of the
High Quality Bond Fund;
(vii) under Section 362(b) of the Code, the basis in the hands of the
American Government Fund of the assets of the High Quality Bond Fund
transferred to the American Government Fund will be the same as the
basis of such assets in the hands of the High Quality Bond Fund
immediately prior to the transfer; and
(viii) under Section 1223(2) of the Code, the holding periods of the
assets of the High Quality Bond Fund in the hands of the American
Government Fund will include the periods during which such assets were
held by the High Quality Bond Fund.
The American Government Fund will file the Tax Opinion with the SEC at a
future date.
29
<PAGE>
Capitalization. The following table shows the capitalization of the Funds
as of January 31, 1999, and on a pro forma combined basis, giving effect to
the proposed acquisition of assets at net asset value as of that date:
<TABLE>
<CAPTION>
(UNAUDITED)
---------------------------------------------
American
Government High Quality Pro Forma
Fund Bond Fund+ Combined*
------------ -------------- -------------
<S> <C> <C> <C>
Net assets (000's omitted)
Class A 1,450,703 339,367 1,790,006
Class B 104,511 42,725 147,230
Class M 4,049 2,734 6,783
Shares outstanding
(000's omitted)
Class A 161,192 33,276 198,898
Class B 11,657 4,207 16,426
Class M 449 268 752
Net Asset value per share
Class A 9.00 10.20 9.00
Class B 8.97 10.16 8.96
Class M 9.02 10.20 9.02
</TABLE>
--------------------
+High Quality Bond Fund assets reflect proxy-related costs.
*Pro forma combined net assets reflect legal and accounting merger-related
costs.
Unaudited pro forma combining financial statements of the Funds for the
twelve month period ended September 30, 1998 are included in the Statement
of Additional Information relating to the proposed merger. Because the
Agreement provides that the American Government Fund will be the surviving
Fund following the merger and because the American Government Fund's
investment objectives and policies will remain unchanged, the pro forma
combining financial statements reflect the transfer of the assets and
liabilities of the High Quality Bond Fund to the American Government Fund
as contemplated by the Agreement.
30
<PAGE>
Surrender of certificates. The American Government Fund will not permit
any High Quality Bond Fund shareholder holding certificates for High
Quality Bond Fund shares at the time of the merger to receive cash
dividends or other distributions, receive certificates for Merger Shares,
exchange Merger Shares for shares of other investment companies managed by
Putnam Management, or pledge or redeem Merger Shares until such
certificates for High Quality Bond Fund shares have been surrendered, or,
in the case of lost certificates, an adequate surety bond has been posted.
THE TRUSTEES OF PUTNAM HIGH QUALITY BOND FUND, INCLUDING THE INDEPENDENT
TRUSTEES, UNANIMOUSLY RECOMMEND APPROVAL OF THE AGREEMENT.
Voting information
Required vote. Proxies are being solicited from the High Quality Bond
Fund's shareholders by its Trustees for the Meeting of Shareholders to be
held on July 1, 1999 at 2:00 p.m. (the "Meeting"), at One Post Office
Square, 8th Floor, Boston, Massachusetts, or at such later time made
necessary by adjournment. Unless revoked, all valid proxies will be voted
in accordance with the specification thereon or, in the absence of
specifications, FOR approval of the Agreement. The transactions
contemplated by the Agreement will be consummated only if approved by the
affirmative vote of the holders of 662/3% or more of the outstanding shares
of the High Quality Bond Fund entitled to vote.
Record date, quorum and method of tabulation. Shareholders of record of
the High Quality Bond Fund at the close of business on April 1, 1999 (the
"record date") will be entitled to vote at the Meeting or any adjournment
thereof. The holders of 30% of the shares of the High Quality Bond Fund
outstanding at the close of business on the record date present in person
or represented by proxy will constitute a
31
<PAGE>
quorum for the Meeting; however, as noted above, the affirmative vote of
the holders of 66-2/3% or more of the outstanding shares of the High
Quality Bond Fund entitled to vote, is necessary to approve the merger.
Shareholders are entitled to one vote for each share held, with fractional
shares voting proportionally.
Votes cast by proxy or in person at the meeting will be counted by persons
appointed by the High Quality Bond Fund as tellers for the Meeting. The
tellers will count the total number of votes cast "for" approval of the
proposal for purposes of determining whether sufficient affirmative votes
have been cast. The tellers will count shares represented by proxies that
reflect abstentions as shares that are present and entitled to vote on the
matter for purposes of determining the presence of a quorum. Broker
non-votes (i.e., shares held by brokers or nominees as to which (i)
instructions have not been received from the beneficial owners or the
persons entitled to vote and (ii) the broker or nominee does not have the
discretionary voting power on a particular matter) will not be counted in
determining the number of shares present. Abstentions and broker non-votes
have the effect of a negative vote on the proposal.
As of February 28, 1999, the officers and Trustees of the High Quality Bond
Fund as a group beneficially owned less than 1% of the outstanding shares
of the High Quality Bond Fund. To the best of the knowledge of the High
Quality Bond Fund, the following shareholders owned of record or
beneficially 5% or more of the outstanding shares of the High Quality Bond
Fund:
32
<PAGE>
<TABLE>
<CAPTION>
Shareholder Percentage
Class Name and Address Owned
---------------------------------------------------------------------------
<S> <C> <C>
M Robert L. Salmon 10.10%
120 Seabury Road
PO Box 1008
York Harbor, ME 03911-1008
M Saint Dominic Grade School 5.70%
311 Campus Drive, Suite 102
Garden City, KS 67846-6150
M The Putnam Companies Inc. 19.00%
One Post Office Square
Boston, MA 02109
M Merrill, Lynch, Pierce, Fenner & Smith 6.20%
One Liberty Plaza
165 Broadway
New York, NY 10001
M Salomon Smith Barney Inc. 11.50%
333 W. 34th St.
New York, NY 10001
B Merrill, Lynch, Pierce, Fenner & Smith 15.90%
One Liberty Plaza
165 Broadway
New York, NY 10001
</TABLE>
The votes of the shareholders of the American Government Fund are not being
solicited, since their approval or consent is not necessary for this
transaction. As of February 28, 1999, the officers and Trustees of the
American Government Fund as a group beneficially owned less than 1% of the
outstanding shares of the American Government Fund. To the best of the
knowledge of the American Government Fund, the following shareholders
beneficially owned 5% or more of the outstanding shares of the American
Government Fund:
<TABLE>
<CAPTION>
Shareholder Percentage
Class Name and Address Owned
------- ---------------------------------------- -----------
<S> <C> <C>
B Merrill, Lynch, Pierce, Fenner & Smith 11.0%
One Liberty Plaza
165 Broadway
New York, NY 10001
</TABLE>
33
<PAGE>
Solicitation of proxies. In addition to soliciting proxies by mail, the
Trustees and employees of Putnam Management, Putnam Fiduciary Trust Company
and Putnam Mutual Funds may solicit proxies in person or by telephone. The
High Quality Bond Fund may also arrange to have votes recorded by
telephone. The telephonic voting procedure is designed to authenticate
shareholders' identities, to allow shareholders to authorize the voting of
their shares in accordance with their instructions and to confirm that
their instructions have been properly recorded. The High Quality Bond Fund
has been advised by counsel that these procedures are consistent with the
requirements of applicable law. If these procedures were subject to a
successful legal challenge, such votes would not be counted at the Meeting.
The High Quality Bond Fund is unaware of any such challenge at this time.
Shareholders would be called at the phone number Putnam Investments has in
its records for their accounts, and would be asked for their Social
Security numbers or other identifying information. The shareholders would
then be given an opportunity to authorize their proxies to vote their
shares in accordance with their instructions. To ensure that the
shareholders' instructions have been recorded correctly, they will also
receive a confirmation of their instructions in the mail. A special
toll-free number will be available in the event the information in the
confirmation is incorrect.
Shareholders may have the opportunity to submit their voting instructions
via the Internet by utilizing a program provided through Management
Information Services ("MIS"). The giving of such a proxy will not affect
your right to vote in person should you decide to attend the Meeting. To
vote via the Internet, you will need the 12-digit "control" number that
appears on your proxy card. To use the Internet, please access MIS on the
World Wide Web at www.proxyweb.com. The Internet voting procedures are
designed to authenticate shareholder identities, to allow shareholders to
give their voting instructions, and to confirm that shareholders'
instructions
34
<PAGE>
have been recorded properly. Shareholders voting via the Internet should
understand that there may be costs associated with electronic access, such
as usage charges from Internet access providers and telephone companies,
that must be borne by the shareholders.
Persons holding shares as nominees will upon request be reimbursed for
their reasonable expenses in soliciting instructions from their principals.
The High Quality Bond Fund has retained at its own expense D.F. King & Co.,
Inc., 77 Water Street, New York, New York 10005, to aid in the solicitation
of instructions for nominee and registered accounts for a fee of $7,500,
plus reasonable out-of-pocket expenses for mailing and phone costs.
Revocation of proxies. Proxies may be revoked at any time before they are
voted, by a written revocation received by the Clerk of the High Quality
Bond Fund, by properly executing a later-dated proxy or by attending the
Meeting and voting in person.
Adjournment. If sufficient votes in favor of the proposal are not received
by the time scheduled for the Meeting, the persons named as proxies may
propose adjournments of the Meeting for a period or periods of not more
than 60 days in the aggregate to permit further solicitation of proxies.
Any adjournment will require the affirmative vote of a majority of the
votes cast on the question in person or by proxy at the session of the
Meeting to be adjourned. The persons named as proxies will vote in favor of
such adjournment those proxies which they are entitled to vote in favor of
the proposal. They will vote against any such adjournment those proxies
required to be voted against the proposal. The High Quality Bond Fund pays
the costs of any additional solicitation and of any adjourned session.
Shareholder proposals. The High Quality Bond Fund does not hold regular
shareholder annual meetings, but may from
35
<PAGE>
time to time schedule special meetings. In accordance with the regulations
of the SEC, in order to be eligible for inclusion in the Fund's proxy
statement for such a meeting, a shareholder proposal must be received a
reasonable time before the Fund prints and mails its proxy statement. Also,
SEC rules permit management to exercise discretionary authority to vote on
shareholder proposals not included in the Fund's proxy statement if the
proponent has not notified the Fund of the proposal a reasonable time
before the Fund mails its proxy statement. All shareholder proposals must
also comply with other requirements of the SEC's rules and the Fund's
declaration of trust.
36
<PAGE>
Exhibit A
Agreement and Plan of Reorganization
This Agreement and Plan of Reorganization (the "Agreement") is made as of March
17, 1999 in Boston, Massachusetts, by and among Putnam American Government
Income Fund, a Massachusetts business trust (the "American Government Fund"),
Putnam High Quality Bond Fund, a Massachusetts business trust (the "High
Quality Bond Fund").
Plan of Reorganization
(a) The High Quality Bond Fund will sell, assign, convey, transfer and deliver
to the American Government Fund on the Exchange Date (as defined in Section
6) all of its properties and assets existing at the Valuation Time (as
defined in Section 3(c)). In consideration therefor, the American
Government Fund shall, on the Exchange Date, assume all of the liabilities
of the High Quality Bond Fund existing at the Valuation Time and deliver to
the High Quality Bond Fund (i) a number of full and fractional Class A
shares of beneficial interest of the American Government Fund (the "Class A
Merger Shares") having an aggregate net asset value equal to the value of
the assets of the High Quality Bond Fund attributable to Class A shares of
the High Quality Bond Fund transferred to the American Government Fund on
such date less the value of the liabilities of the High Quality Bond Fund
attributable to Class A shares of the High Quality Bond Fund assumed by the
American Government Fund on such date, (ii) a number of full and fractional
Class B shares of beneficial interest of the American Government Fund (the
"Class B Merger Shares") having an aggregate net asset value equal to the
value of the assets of the High Quality Bond Fund attributable to Class B
shares of the High Quality Bond Fund transferred to the American Government
Fund on such date less the value of the liabilities of the High Quality
Bond Fund attributable to Class B shares of the High Quality Bond Fund
assumed
A-1
<PAGE>
by the American Government Fund on such date, and (iii) a number of full
and fractional Class M shares of beneficial interest of the American
Government Fund (the "Class M Merger Shares") having an aggregate net
asset value equal to the value of the assets of the High Quality Bond Fund
attributable to Class M shares of the High Quality Bond Fund transferred
to the American Government Fund on such date less the value of the
liabilities of the High Quality Bond Fund attributable to Class M shares
of the High Quality Bond Fund assumed by the American Government Fund on
such date. The Class A Merger Shares, the Class B Merger Shares, and the
Class M Merger Shares shall be referred to collectively as the "Merger
Shares." It is intended that the reorganization described in this Plan
shall be a reorganization within the meaning of Section 368(a)(1)(C) of
the Internal Revenue Code of 1986, as amended (the "Code").
(b) Upon consummation of the transactions described in paragraph (a) of this
Agreement, the High Quality Bond Fund shall distribute in complete
liquidation to its Class A, Class B, and Class M shareholders of record as
of the Exchange Date Class A, Class B, and Class M Merger Shares, each
shareholder being entitled to receive that proportion of such Class A,
Class B or Class M Merger Shares that the number of Class A, Class B, or
Class M shares of beneficial interest of the High Quality Bond Fund held by
such shareholder bears to the number of such Class A, Class B or Class M
shares of the High Quality Bond Fund outstanding on such date. Certificates
representing the Merger Shares will be issued only if the shareholder so
requests.
Agreement
The American Government Fund and the High Quality Bond Fund agree as follows:
A-2
<PAGE>
1. Representations and warranties of the American Government fund. The
American Government Fund represents and warrants to and agrees with the
High Quality Bond Fund that:
(a) The American Government Fund is a business trust duly established and
validly existing under the laws of The Commonwealth of Massachusetts,
and has power to own all of its properties and assets and to carry out
its obligations under this Agreement. The American Government Fund is
not required to qualify as a foreign association in any jurisdiction.
The American Government Fund has all necessary federal, state and
local authorizations to carry on its business as now being conducted
and to carry out this Agreement.
(b) The American Government Fund is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company, and such registration has not been
revoked or rescinded and is in full force and effect.
(c) A statement of assets and liabilities, statement of operations,
statement of changes in net assets and schedule of investments
(indicating their market values) of the American Government Fund for
the fiscal year ended September 30, 1998, such statements and schedule
having been audited by PricewaterhouseCoopers LLP, independent
accountants, have been furnished to the High Quality Bond Fund. Such
statements of assets and liabilities and schedule of investments
fairly present the financial position of the American Government Fund
as of September 30, 1998 and such statements of operations and changes
in net assets fairly reflect the results of its operations and changes
in net assets for the period covered thereby in conformity with
generally accepted accounting principles.
(d) The prospectus and statement of additional information dated January
30, 1999, previously furnished to the High
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<PAGE>
Quality Bond Fund, and any amendment or supplement thereto or any
superseding prospectus or statement of additional information in
respect thereof in effect prior to the Exchange Date, which will be
furnished to the High Quality Bond Fund (collectively, the "American
Government Fund Prospectus") do not and will not, as of the relevant
date contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided however, that the American
Government Fund makes no representation or warranty as to any
information in the American Government Fund Prospectus that does not
specifically relate to the American Government Fund.
(e) There are no material legal, administrative or other proceedings
pending or, to the knowledge of the American Government Fund,
threatened against the American Government Fund which assert liability
or may, if successfully prosecuted to their conclusion, result in
liability on the part of the American Government Fund, other than as
have been disclosed in the American Government Fund Prospectus.
(f) The American Government Fund has no known liabilities of a material
nature, contingent or otherwise, other than those shown as belonging
to it on its statement of assets and liabilities as of September 30,
1998 and those incurred in the ordinary course of the American
Government Fund's business as an investment company since such date.
(g) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
American Government Fund of the transactions contemplated by this
Agreement, except such as may be required under the Securities Act of
1933, as amended (the "1933 Act"), the Securities Exchange Act
A-4
<PAGE>
of 1934, as amended (the "1934 Act"), the 1940 Act, state securities
or blue sky laws (which term as used herein shall include the laws of
the District of Columbia and of Puerto Rico) or the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "H-S-R Act").
(h) The registration statement (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission") by the
American Government Fund on Form N-14 relating to the Merger Shares
issuable hereunder, and the proxy statement of the High Quality Bond
Fund included therein (the "Proxy Statement"), on the effective date
of the Registration Statement (i) will comply in all material respects
with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and
the rules and regulations thereunder and (ii) will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; and at the time of the shareholders' meeting
referred to in Section 7(a) and at the Exchange Date, the prospectus
contained in the Registration Statement of which the Proxy Statement
is a part (the "Prospectus"), as amended or supplemented by any
amendments or supplements filed or requested to be filed with the
Commission by the High Quality Bond Fund, will not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; provided however, that none of the representations and
warranties in this subsection shall apply to statements in or
omissions from the Registration Statement, the Prospectus or the Proxy
Statement made in reliance upon and in conformity with information
furnished by the High Quality Bond Fund for use in the Registration
Statement, the Prospectus or the Proxy Statement.
(i) There are no material contracts outstanding to which the
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<PAGE>
American Government Fund is a party, other than as disclosed in the
Registration Statement, the Prospectus, or the Proxy Statement.
(j) All of the issued and outstanding shares of beneficial interest of the
American Government Fund have been offered for sale and sold in
conformity with all applicable federal securities laws.
(k) The American Government Fund is and will at all times through the
Exchange Date qualify for taxation as a "regulated investment company"
under Sections 851 and 852 of the Code.
(l) The issuance of the Merger Shares pursuant to this Agreement will be
in compliance with all applicable federal securities laws.
(m) The Merger Shares to be issued to the High Quality Bond Fund have been
duly authorized and, when issued and delivered pursuant to this
Agreement, will be legally and validly issued and will be fully paid
and nonassessable by the American Government Fund, and no shareholder
of the American Government Fund will have any preemptive right of
subscription or purchase in respect thereof.
2. Representations and warranties of the High Quality Bond Fund. The High
Quality Bond Fund represents and warrants to and agrees with the American
Government Fund that:
(a) The High Quality Bond Fund is a business trust duly established and
validly existing under the laws of The Commonwealth of Massachusetts,
and has power to own all of its properties and assets and to carry out
its obligations under this Agreement. The High Quality Bond Fund is
not required to qualify as a foreign association in any jurisdiction.
The High Quality Bond Fund has all necessary federal, state and local
authorizations to carry on its business as now being conducted and to
carry out this Agreement.
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<PAGE>
(b) The High Quality Bond Fund is registered under the 1940 Act as an
open-end management investment company, and such registration has not
been revoked or rescinded and is in full force and effect.
(c) A statement of assets and liabilities, statement of operations,
statement of changes in net assets and schedule of investments
(indicating their market values) of the High Quality Bond Fund for the
fiscal year ended October 31, 1998, such statements and schedule
having been audited by PricewaterhouseCoopers LLP, independent
accountants, have been furnished to the American Government Fund. Such
statements of assets and liabilities and schedule of investments
fairly present the financial position of the High Quality Bond Fund as
of October 31, 1998, and such statements of operations and changes in
net assets fairly reflect the results of its operations and changes in
net assets for the period covered thereby in conformity with generally
accepted accounting principles.
(d) The prospectus and statement of additional information dated February
28, 1999, previously furnished to the American Government Fund, and
any amendment or supplement thereto or any superseding prospectus or
statement of additional information in respect thereof in effect prior
to the Exchange Date, which will be furnished to the American
Government Fund (collectively the "High Quality Bond Fund
Prospectus"), does not and will not contain as of the relevant date
any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided however, that the High Quality Bond
Fund makes no representation or warranty as to any information in the
High Quality Bond Fund Prospectus that does not specifically relate to
the High Quality Bond Fund.
(e) There are no material legal, administrative or other pro-
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<PAGE>
ceedings pending or, to the knowledge of the High Quality Bond Fund,
threatened against the High Quality Bond Fund which assert liability
or may, if successfully prosecuted to their conclusion, result in
liability on the part of the High Quality Bond Fund, other than as
have been disclosed in the High Quality Bond Fund Prospectus.
(f) The High Quality Bond Fund has no known liabilities of a material
nature, contingent or otherwise, other than those shown as belonging
to it on its statement of assets and liabilities as of October 31,
1998 and those incurred in the ordinary course of the High Quality
Bond Fund's business as an investment company since such date. Prior
to the Exchange Date, the High Quality Bond Fund will advise the
American Government Fund of all material liabilities, contingent or
otherwise, incurred by it subsequent to October 31, 1998, whether or
not incurred in the ordinary course of business.
(g) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the High
Quality Bond Fund of the transactions contemplated by this Agreement,
except such as may be required under the 1933 Act, the 1934 Act, the
1940 Act, state securities or blue sky laws, or the H-S-R Act.
(h) The Registration Statement, the Prospectus and the Proxy Statement, on
the Effective Date of the Registration Statement and insofar as they
do not relate to the American Government Fund (i) will comply in all
material respects with the provisions of the 1933 Act, the 1934 Act
and the 1940 Act and the rules and regulations thereunder and (ii)
will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading; and at the time of the
shareholders' meeting referred to in Section 7(a) below and on the
Exchange Date, the Prospectus, as amended or supplemented by
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<PAGE>
any amendments or supplements filed or requested to be filed with the
Commission by the American Government Fund, will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; provided however, that the representations and
warranties in this subsection shall apply only to statements of fact
relating to the High Quality Bond Fund contained in the Registration
Statement, the Prospectus or the Proxy Statement, or omissions to
state in any thereof a material fact relating to the High Quality Bond
Fund, as such Registration Statement, Prospectus and Proxy Statement
shall be furnished to the High Quality Bond Fund in definitive form as
soon as practicable following effectiveness of the Registration
Statement and before any public distribution of the Prospectus or
Proxy Statement.
(i) There are no material contracts outstanding to which the High Quality
Bond Fund is a party, other than as will be disclosed in the
Prospectus or the Proxy Statement.
(j) All of the issued and outstanding shares of beneficial interest of the
High Quality Bond Fund have been offered for sale and sold in
conformity with all applicable federal securities laws.
(k) The High Quality Bond Fund is and will at all times through the
Exchange Date qualify for taxation as a "regulated investment company"
under Sections 851 and 852 of the Code.
(l) The High Quality Bond Fund has filed or will file all federal and
state tax returns which, to the knowledge of the High Quality Bond
Fund's officers, are required to be filed by the High Quality Bond
Fund and has paid or will pay all federal and state taxes shown to be
due on said returns or on any assessments received by the High Quality
Bond Fund. All tax liabilities of the High Quality
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<PAGE>
Bond Fund have been adequately provided for on its books, and to the
knowledge of the High Quality Bond Fund, no tax deficiency or
liability of the High Quality Bond Fund has been asserted, and no
question with respect thereto has been raised, by the Internal Revenue
Service or by any state or local tax authority for taxes in excess of
those already paid.
(m) At both the Valuation Time and the Exchange Date, the High Quality
Bond Fund will have full right, power and authority to sell, assign,
transfer and deliver the Investments and any other assets and
liabilities of the High Quality Bond Fund to be transferred to the
American Government Fund pursuant to this Agreement. At the Exchange
Date, subject only to the delivery of the Investments and any such
other assets and liabilities as contemplated by this Agreement, the
American Government Fund will acquire the Investments and any such
other assets and liabilities subject to no encumbrances, liens or
security interests whatsoever and without any restrictions upon the
transfer thereof (except for such restrictions as previously disclosed
to the American Government Fund by the High Quality Bond Fund). As
used in this Agreement, the term "Investments" shall mean the High
Quality Bond Fund's investments shown on the schedule of its
investments as of October 31, 1998 referred to in Section 2(c) hereof,
as supplemented with such changes as the High Quality Bond Fund shall
make, and changes resulting from stock dividends, stock splits,
mergers and similar corporate actions.
(n) No registration under the 1933 Act of any of the Investments would be
required if they were, as of the time of such transfer, the subject of
a public distribution by either of the American Government Fund or the
High
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<PAGE>
Quality Bond Fund, except as previously disclosed to the American
Government Fund by the High Quality Bond Fund.
(o) At the Exchange Date, the High Quality Bond Fund will have sold such
of its assets, if any, as necessary to assure that, after giving
effect to the acquisition of the assets of the High Quality Bond Fund
pursuant to this Agreement, the American Government Fund will remain
in compliance with its mandatory investment restrictions as set forth
in the American Government Fund Prospectus previously furnished to the
High Quality Bond Fund.
3. Reorganization.
(a) Subject to the requisite approval of the shareholders of the High
Quality Bond Fund and to the other terms and conditions contained
herein (including the High Quality Bond Fund's obligation to
distribute to its shareholders all of its investment company taxable
income and net capital gain as described in Section 8(m) hereof), the
High Quality Bond Fund agrees to sell, assign, convey, transfer and
deliver to the American Government Fund, and the American Government
Fund agrees to acquire from the High Quality Bond Fund, on the
Exchange Date all of the Investments and all of the cash and other
properties and assets of the High Quality Bond Fund, whether accrued
or contingent (including cash received by the High Quality Bond Fund
upon the liquidation by the High Quality Bond Fund of any investments
purchased by the High Quality Bond Fund after October 31, 1998 and
designated by the American Government Fund as being unsuitable for it
to acquire), in exchange for that number of Merger Shares provided for
in Section 4 and the assumption by the American Government Fund of all
of the liabilities of the High Quality Bond Fund, whether accrued or
contingent, existing at the Valuation Time. Pursuant to this
Agreement, the High Quality Bond Fund
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<PAGE>
will, as soon as practicable after the Exchange Date, distribute all
of the Class A, Class B and Class M Merger Shares received by it to
the Class A, Class B and Class M shareholders, respectively, of the
High Quality Bond Fund, in complete liquidation of the High Quality
Bond Fund.
(b) As soon as practicable following the requisite approval of the
shareholders of the High Quality Bond Fund, the High Quality Bond Fund
will, at its expense, effect a repositioning of its portfolio to
reflect the investment policies of the American Government Fund as
described in the Proxy Statement. Such repositioning will be
substantially completed prior to the Exchange Date, unless otherwise
agreed by the High Quality Bond Fund and the American Government Fund.
(c) The High Quality Bond Fund will pay or cause to be paid to the
American Government Fund any interest, cash or such dividends, rights
and other payments received by it on or after the Exchange Date with
respect to the Investments and other properties and assets of the High
Quality Bond Fund, whether accrued or contingent, received by it on or
after the Exchange Date. Any such distribution shall be deemed
included in the assets transferred to the American Government Fund at
the Exchange Date and shall not be separately valued unless the
securities in respect of which such distribution is made shall have
gone "ex" such distribution prior to the Valuation Time, in which case
any such distribution which remains unpaid at the Exchange Date shall
be included in the determination of the value of the assets of the
High Quality Bond Fund acquired by the American Government Fund.
(d) The Valuation Time shall be 4:00 p.m. Boston time on July 9, 1999 or
such earlier or later day as may be mutually agreed upon in writing by
the parties hereto (the "Valuation Time").
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<PAGE>
4. Exchange date; valuation time. On the Exchange Date, the American
Government Fund will deliver to the High Quality Bond Fund (i) a number of
full and fractional Class A Merger Shares having an aggregate net asset
value equal to the value of assets of the High Quality Bond Fund
attributable to Class A shares of the High Quality Bond Fund transferred to
the American Government Fund on such date less the value of the liabilities
of the High Quality Bond Fund attributable to the Class A shares of the
High Quality Bond Fund assumed by the American Government Fund on that
date, (ii) a number of full and fractional Class B Merger Shares having an
aggregate net asset value equal to the value of the assets of the High
Quality Bond Fund attributable to Class B shares of the High Quality Bond
Fund transferred to the American Government Fund on such date less the
value of the liabilities of the High Quality Bond Fund attributable to
Class B shares of the High Quality Bond Fund assumed by the American
Government Fund on that date, and (iii) a number of full and fractional
Class M Merger Shares having an aggregate net asset value equal to the
value of the assets of the High Quality Bond Fund attributable to Class M
shares of the High Quality Bond Fund transferred to the American Government
Fund on such date less the value of the liabilities of the High Quality
Bond Fund attributable to Class M shares of the High Quality Bond Fund
assumed by the American Government Fund on that date, determined as
hereafter provided in this Section 4.
(a) The net asset value of the Merger Shares to be delivered to the High
Quality Bond Fund, the value of the assets attributable to the Class
A, Class B and Class M shares of the High Quality Bond Fund and the
value of the liabilities attributable to the Class A , Class B and
Class M shares of the High Quality Bond Fund to be assumed by the
American Government Fund shall in each case be determined as of the
Valuation Time.
(b) The net asset value of the Class A , Class B and Class M
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<PAGE>
Merger Shares shall be computed in the manner set forth in the
American Government Fund Prospectus. The value of the assets and
liabilities of the Class A , Class B and Class M shares of the High
Quality Bond Fund shall be determined by the American Government Fund,
in cooperation with the High Quality Bond Fund, pursuant to procedures
that the American Government Fund would use in determining the fair
market value of the American Government Fund's assets and liabilities.
(c) No adjustment shall be made in the net asset value of either the High
Quality Bond Fund or the American Government Fund to take into account
differences in realized and unrealized gains and losses.
(d) The American Government Fund shall issue the Merger Shares to the High
Quality Bond Fund in three certificates registered in the name of the
High Quality Bond Fund, one for Class A Merger Shares, one for Class B
Merger Shares, and one for Class M Merger Shares (excluding any
fractional shares). The High Quality Bond Fund shall distribute the
Class A Merger Shares to the Class A shareholders of the High Quality
Bond Fund by redelivering such certificates to the American Government
Fund's transfer agent which will as soon as practicable set up open
accounts for each Class A High Quality Bond Fund shareholder in
accordance with written instructions furnished by the High Quality
Bond Fund. The High Quality Bond Fund shall distribute the Class B
Merger Shares to the Class B shareholders of the High Quality Bond
Fund by redelivering such certificates to the American Government
Fund's transfer agent which will as soon as practicable set up open
accounts for each Class B High Quality Bond Fund shareholder in
accordance with written instructions furnished by the High Quality
Bond Fund. The High Quality Bond Fund shall distribute the Class M
Merger Shares to the Class M shareholders of the
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<PAGE>
High Quality Bond Fund by redelivering such certificates to the
American Government Fund's transfer agent which will as soon as
practicable set up open accounts for each Class M High Quality Bond
Fund shareholder in accordance with written instructions furnished by
the High Quality Bond Fund. With respect to any High Quality Bond Fund
shareholder holding share certificates as of the Exchange Date, the
American Government Fund will not permit such shareholder to receive
dividends and other distributions on the Merger Shares (although such
dividends and other distributions shall be credited to the account of
such shareholder), receive certificates representing the Merger
Shares, exchange the Merger Shares credited to such shareholder's
account for shares of other investment companies managed by Putnam
Investment Management, Inc. ("Putnam"), or pledge or redeem such
Merger Shares until such shareholder has surrendered his or her
outstanding High Quality Bond Fund certificates or, in the event of
lost, stolen, or destroyed certificates, posted adequate bond. In the
event that a shareholder shall not be permitted to receive dividends
and other distributions on the Merger Shares as provided in the
preceding sentence, the American Government Fund shall pay any such
dividends or distributions in additional shares, notwithstanding any
election such shareholder shall have made previously with respect to
the payment, in cash or otherwise, of dividends and distributions on
shares of the High Quality Bond Fund. The High Quality Bond Fund will,
at its expense, request the shareholders of the High Quality Bond Fund
to surrender their outstanding High Quality Bond Fund certificates, or
post adequate bond, as the case may be.
(e) The American Government Fund shall assume all liabilities of the High
Quality Bond Fund, whether accrued or
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<PAGE>
contingent, in connection with the acquisition of assets and
subsequent dissolution of the High Quality Bond Fund or otherwise.
5. Expenses, fees, etc.
(a) All fees and expenses, including legal and accounting expenses,
portfolio transfer taxes (if any) or other similar expenses incurred
in connection with the consummation by the High Quality Bond Fund and
the American Government Fund of the transactions contemplated by this
Agreement will be allocated ratably between the American Government
Fund and the High Quality Bond Fund in proportion to their net assets
as of the Valuation Time, except that (i) the costs of proxy materials
and proxy solicitation will be borne by the High Quality Bond Fund,
and (ii) the costs of repositioning the portfolio of the High Quality
Bond Fund to reflect the investment policies of the American
Government Fund incurred prior to the Exchange Date shall be borne by
the High Quality Bond Fund; provided however, that such expenses will
in any event be paid by the party directly incurring such expenses if
and to the extent that the payment by the other party of such expenses
would result in the disqualification of the American Government Fund
or the High Quality Bond Fund, as the case may be, as a "regulated
investment company" within the meaning of Section 851 of the Code.
(b) In the event the transactions contemplated by this Agreement are not
consummated by reason of the American Government Fund's being either
unwilling or unable to go forward (other than by reason of the
nonfulfillment or failure of any condition to the American Government
Fund's obligations referred to in Section 8) the American Government
Fund shall pay directly all reasonable fees and expenses incurred by
the High Quality Bond Fund in
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<PAGE>
connection with such transactions, including, without limitation,
legal, accounting and filing fees.
(c) In the event the transactions contemplated by this Agreement are not
consummated by reason of the High Quality Bond Fund's being either
unwilling or unable to go forward (other than by reason of the
nonfulfillment or failure of any condition to the High Quality Bond
Fund's obligations referred to in Section 9) the High Quality Bond
Fund shall pay directly all reasonable fees and expenses incurred by
the American Government Fund in connection with such transactions,
including without limitation legal, accounting and filing fees.
(d) In the event the transactions contemplated by this Agreement are not
consummated for any reason other than (i) the American Government
Fund's or the High Quality Bond Fund's being either unwilling or
unable to go forward or (ii) the nonfulfillment or failure of any
condition to the American Government Fund's or the High Quality Bond
Fund's obligations referred to in Section 8 or Section 9 of this
Agreement, then each of the American Government Fund and the High
Quality Bond Fund shall bear all of its own expenses incurred in
connection with such transactions.
(e) Notwithstanding any other provisions of this Agreement, if for any
reason the transactions contemplated by this Agreement are not
consummated, no party shall be liable to the other party for any
damages resulting therefrom, including without limitation
consequential damages, except as specifically set forth above.
6. Exchange date. Delivery of the assets of the High Quality Bond Fund to be
transferred, assumption of the liabilities of the High Quality Bond Fund to
be assumed and the delivery of the Merger Shares to be issued shall be made
at the offices of Ropes & Gray, One International Place, Boston, Massachu-
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<PAGE>
setts, at 10:00 A.M. on the next full business day following the
Valuation Time, or at such other time and date agreed to by the
American Government Fund and the High Quality Bond Fund, the date and
time upon which such delivery is to take place being referred to
herein as the "Exchange Date."
7. Meeting of shareholders; dissolution.
(a) The High Quality Bond Fund agrees to call a meeting of its
shareholders as soon as is practicable after the effective date of the
Registration Statement for the purpose of considering the sale of all
of its assets to and the assumption of all of its liabilities by the
American Government Fund as herein provided, adopting this Agreement,
and authorizing the liquidation and dissolution of the High Quality
Bond Fund.
(b) The High Quality Bond Fund agrees that the liquidation and dissolution
of the High Quality Bond Fund will be effected in the manner provided
in the Agreement and Declaration of Trust of the High Quality Bond
Fund in accordance with applicable law and that on and after the
Exchange Date, the High Quality Bond Fund shall not conduct any
business except in connection with its liquidation and dissolution.
(c) The American Government Fund has, after the preparation and delivery
to the American Government Fund by the High Quality Bond Fund of a
preliminary version of the Proxy Statement which was satisfactory to
the American Government Fund and to Ropes & Gray for inclusion in the
Registration Statement, filed the Registration Statement with the
Commission. Each of the High Quality Bond Fund and the American
Government Fund will cooperate with the other, and each will furnish
to the other the information relating to itself required by the 1933
Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder set forth in the Registration Statement, including the
Prospectus and the Proxy Statement.
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<PAGE>
8. Conditions to the American Government Fund's obligations. The obligations
of the American Government Fund hereunder shall be subject to the following
conditions:
(a) That this Agreement shall have been adopted and the transactions
contemplated hereby shall have been approved by the affirmative vote
of the holders of at least two-thirds (662/3%) of the outstanding
shares of beneficial interest of the High Quality Bond Fund entitled
to vote.
(b) That the High Quality Bond Fund shall have furnished to the American
Government Fund a statement of the High Quality Bond Fund's net
assets, with values determined as provided in Section 4 of this
Agreement, together with a list of Investments with their respective
tax costs, all as of the Valuation Time, certified on the High Quality
Bond Fund's behalf by the High Quality Bond Fund's President (or any
Vice President) and Treasurer (or any Assistant Treasurer), and a
certificate of both such officers, dated the Exchange Date, to the
effect that as of the Valuation Time and as of the Effective Date
there has been no material adverse change in the financial position of
the High Quality Bond Fund since October 31, 1998 other than changes
in the Investments and other assets and properties since that date or
changes in the market value of the Investments and other assets of the
High Quality Bond Fund, changes due to net redemptions, or changes due
to dividends paid or losses from operations.
(c) That the High Quality Bond Fund shall have furnished to the American
Government Fund a statement, dated the Exchange Date, signed on behalf
of the High Quality Bond Fund by the High Quality Bond Fund's
President (or any Vice President) and Treasurer (or any Assistant
Treasurer) certifying that as of the Valuation Time and as of the
Exchange Date all representations and warranties of the High Quality
Bond Fund made in this Agreement are true and correct in all material
respects as if made at
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<PAGE>
and as of such dates, and that the High Quality Bond Fund has complied
with all of the agreements and satisfied all of the conditions on its
part to be performed or satisfied at or prior to each of such dates.
(d) That the High Quality Bond Fund shall have delivered to the American
Government Fund a letter from PricewaterhouseCoopers LLP dated the
Exchange Date, stating that on the basis of an examination under
attestation standards established by the American Institute of
Certified Public Accountants ("AICPA"), management's assertions that
for the fiscal period from November 1, 1998 to the Exchange Date the
High Quality Bond Fund (i) qualified as a regulated investment company
under the Internal Revenue Code (the "Code"), (ii) as of the Exchange
Date, has no liability other than liabilities stated for federal or
state income taxes and (iii) as of the Exchange Date, has no liability
for federal excise tax purposes under section 4982 of the Code are
fairly stated.
(e) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(f) That the American Government Fund shall have received an opinion of
Ropes & Gray, in form satisfactory to the American Government Fund and
dated the Exchange Date, to the effect that (i) the High Quality Bond
Fund is a business trust duly established and validly existing under
the laws of The Commonwealth of Massachusetts, and, to the knowledge
of such counsel, is not required to qualify to do business as a
foreign association in any jurisdiction except as may be required by
state securities or blue sky laws, (ii) this Agreement has been duly
authorized, executed, and delivered by the High Quality Bond Fund and,
assuming that the Registration Statement, the Prospectus and the Proxy
Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and
assuming due authorization, execution and delivery of this Agreement
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<PAGE>
by the American Government Fund, is a valid and binding obligation of
the High Quality Bond Fund, (iii) the High Quality Bond Fund has power
to sell, assign, convey, transfer and deliver the assets contemplated
hereby and, upon consummation of the transactions contemplated hereby
in accordance with the terms of this Agreement, the High Quality Bond
Fund will have duly sold, assigned, conveyed, transferred and
delivered such assets to the American Government Fund, (iv) the
execution and delivery of this Agreement did not, and the consummation
of the transactions contemplated hereby will not, violate the High
Quality Bond Fund's Agreement and Declaration of Trust, as amended, or
Bylaws or any provision of any agreement known to such counsel to
which the High Quality Bond Fund is a party or by which it is bound,
it being understood that with respect to investment restrictions as
contained in the High Quality Bond Fund's Agreement and Declaration of
Trust, Bylaws or then-current prospectus or statement of additional
information, such counsel may rely upon a certificate of an officer of
the High Quality Bond Fund's whose responsibility it is to advise the
High Quality Bond Fund with respect to such matters, and (v) no
consent, approval, authorization or order of any court or governmental
authority is required for the consummation by the High Quality Bond
Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as
may be required under state securities or blue sky laws and the H-S-R
Act, and (vi) such other matters as the American Government Fund may
reasonably deem necessary or desirable.
(g) That the American Government Fund shall have received an opinion of
Ropes & Gray dated the Exchange Date (which opinion would be based
upon certain factual representations and subject to certain
qualifications), to the
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<PAGE>
effect that, on the basis of the existing provisions of the Code,
current administrative rules and court decisions, for federal income
tax purposes: (i) no gain or loss will be recognized by the American
Government Fund or its shareholders upon receipt of the Investments
transferred to the American Government Fund pursuant to this Agreement
in exchange for the Merger Shares, (ii) the basis to the American
Government Fund of the Investments will be the same as the basis of
the Investments in the hands of the High Quality Bond Fund immediately
prior to such exchange, and (iii) the American Government Fund's
holding periods with respect to the Investments will include the
respective periods for which the Investments were held by the High
Quality Bond Fund.
(h) That the assets of the High Quality Bond Fund to be acquired by the
American Government Fund will include no assets which the American
Government Fund, by reason of charter limitations or of investment
restrictions disclosed in the American Government Fund Prospectus in
effect on the Exchange Date, may not properly acquire.
(i) That the Registration Statement shall have become effective under the
1933 Act, and no stop order suspending such effectiveness shall have
been instituted or, to the knowledge of the American Government Fund,
threatened by the Commission.
(j) That the American Government Fund shall have received from the
Commission, any relevant state securities administrator, the Federal
Trade Commission (the "FTC") and the Department of Justice (the
"Department") such order or orders as Ropes & Gray deems reasonably
necessary or desirable under the 1933 Act, the 1934 Act, the 1940 Act,
any applicable state securities or blue sky laws and the H-S-R Act in
connection with the transactions contemplated hereby, and that all
such orders shall be in full force and effect.
A-22
<PAGE>
(k) That all proceedings taken by the High Quality Bond Fund in connection
with the transactions contemplated by this Agreement and all documents
incidental thereto shall be satisfactory in form and substance to the
American Government Fund and Ropes & Gray.
(l) That, prior to the Exchange Date, the High Quality Bond Fund shall
have declared a dividend or dividends which, together with all
previous such dividends, shall have the effect of distributing to the
shareholders of the High Quality Bond Fund all of the High Quality
Bond Fund's investment company taxable income for its taxable years
ending on or after October 31, 1998 and on or prior to the Exchange
Date (computed without regard to any deduction for dividends paid),
and all of its net capital gain realized in each of its taxable years
ending on or after October 31, 1998 and on or prior to the Exchange
Date.
(m) That the High Quality Bond Fund's custodian shall have delivered to
the American Government Fund a certificate identifying all of the
assets of the High Quality Bond Fund held by such custodian as of the
Valuation Time.
(n) That the High Quality Bond Fund's transfer agent shall have provided
to the American Government Fund (i) the originals or true copies of
all of the records of the High Quality Bond Fund in the possession of
such transfer agent as of the Exchange Date, (ii) a certificate
setting forth the number of shares of the High Quality Bond Fund
outstanding as of the Valuation Time, and (iii) the name and address
of each holder of record of any such shares and the number of shares
held of record by each such shareholder.
(o) That all of the issued and outstanding shares of beneficial interest
of the High Quality Bond Fund shall have been offered for sale and
sold in conformity with all applicable state securities or blue sky
laws and, to the extent that
A-23
<PAGE>
any audit of the records of the High Quality Bond Fund or its transfer
agent by the American Government Fund or its agents shall have
revealed otherwise, either (i) the High Quality Bond Fund shall have
taken all actions that in the opinion of the American Government Fund
or its counsel are necessary to remedy any prior failure on the part
of the High Quality Bond Fund to have offered for sale and sold such
shares in conformity with such laws or (ii) the High Quality Bond Fund
shall have furnished (or caused to be furnished) surety, or deposited
(or caused to be deposited) assets in escrow, for the benefit of the
American Government Fund in amounts sufficient and upon terms
satisfactory, in the opinion of the American Government Fund or its
counsel, to indemnify the American Government Fund against any
expense, loss, claim, damage or liability whatsoever that may be
asserted or threatened by reason of such failure on the part of the
High Quality Bond Fund to have offered and sold such shares in
conformity with such laws.
(p) That the American Government Fund shall have received from
PricewaterhouseCoopers LLP a letter addressed to the American
Government Fund dated as of the Exchange Date satisfactory in form and
substance to the American Government Fund to the effect that, on the
basis of an examination under attestation standards established by the
AICPA, management's assertion that as of the Valuation Time the value
of the assets of the High Quality Bond Fund to be exchanged for the
Merger Shares has been determined in accordance with the provisions of
Article 10 section 5 (10.5) of the American Government Fund's By-laws
pursuant to the procedures customarily utilized by the American
Government Fund in valuing its assets and issuing its shares is fairly
stated.
(q) That the High Quality Bond Fund shall have executed and delivered to
the American Government Fund an
A-24
<PAGE>
instrument of transfer dated as of the Exchange Date pursuant to which
the High Quality Bond Fund will assign, transfer and convey all of the
assets and other property to the American Government Fund at the
Valuation Time in connection with the transactions contemplated by
this Agreement.
9. Conditions to the High Quality Bond Fund's obligations. The obligations of
the High Quality Bond Fund hereunder shall be subject to the following
conditions:
(a) That this Agreement shall have been adopted and the transactions
contemplated hereby shall have been approved by the affirmative vote
of the holders of at least two-thirds (662/3%) of the outstanding
shares of beneficial interest of the High Quality Bond Fund entitled
to vote.
(b) That the American Government Fund shall have furnished to the High
Quality Bond Fund a statement of the American Government Fund's net
assets, together with a list of portfolio holdings with values
determined as provided in Section 4 of this Agreement, all as of the
Valuation Time, certified on behalf of the American Government Fund by
the American Government Fund's President (or any Vice President) and
Treasurer (or any Assistant Treasurer), and a certificate of both such
officers, dated the Exchange Date, to the effect that as of the
Valuation Time and as of the Exchange Date there has been no material
adverse change in the financial position of the American Government
Fund since September 30, 1998, other than changes in its portfolio
securities since that date, changes in the market value of its
portfolio securities, changes due to net redemptions, or changes due
to dividends paid or losses from operations.
(c) That the American Government Fund shall have executed and delivered to
the High Quality Bond Fund an Assumption of Liabilities dated as of
the Exchange Date pursuant
A-25
<PAGE>
to which the American Government Fund will assume all of the
liabilities of the High Quality Bond Fund existing at the Valuation
Time in connection with the transactions contemplated by this
Agreement.
(d) That the American Government Fund shall have furnished to the High
Quality Bond Fund a statement, dated the Exchange Date, signed on
behalf of the American Government Fund by the American Government
Fund's President (or any Vice President) and Treasurer (or any
Assistant Treasurer) certifying that as of the Valuation Time and as
of the Exchange Date all representations and warranties of the
American Government Fund made in this Agreement are true and correct
in all material respects as if made at and as of such dates, and that
the American Government Fund has complied with all of the agreements
and satisfied all of the conditions on its part to be performed or
satisfied at or prior to each of such dates.
(e) That there shall not be any material litigation pending or threatened
with respect to the matters by this Agreement.
(f) That the High Quality Bond Fund shall have received an opinion of
Ropes & Gray, in form satisfactory to the High Quality Bond Fund and
dated the Exchange Date, to the effect that (i) the American
Government Fund is a business trust duly established and validly
existing in conformity with the laws of The Commonwealth of
Massachusetts, and, to the knowledge of such counsel, is not required
to qualify to do business as a foreign association in any jurisdiction
except as may be required by state securities or blue sky laws, (ii)
this Agreement has been duly authorized, executed and delivered by the
American Government Fund and, assuming that the Prospectus, the
Registration Statement and the Proxy Statement comply with the 1933
Act, the 1934 Act and the 1940 Act and assuming due authorization,
execution and delivery of this
A-26
<PAGE>
Agreement by High Quality Bond Fund, is a valid and binding obligation
of the American Government Fund, (iii) the Merger Shares to be
delivered to the High Quality Bond Fund as provided for by this
Agreement are duly authorized and upon such delivery will be validly
issued and will be fully paid and nonassessable by the American
Government Fund and no shareholder of the American Government Fund has
any preemptive right to subscription or purchase in respect thereof,
(iv) the execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, violate
the American Government Fund's Agreement and Declaration of Trust, as
amended, or By-laws, or any provision of any agreement known to such
counsel to which the American Government Fund is a party or by which
it is bound, it being understood that with respect to investment
restrictions as contained in the American Government Fund's Agreement
and Declaration of Trust, as amended, By-Laws or then-current
prospectus or statement of additional information, such counsel may
rely upon a certificate of an officer of the American Government Fund
whose responsibility it is to advise the American Government Fund with
respect to such matters, (v) no consent, approval, authorization or
order of any court or governmental authority is required for the
consummation by the American Government Fund of the transactions
contemplated herein, except such as have been obtained under the 1933
Act, the 1934 Act and the 1940 Act and such as may be required under
state securities or blue sky laws and the H-S-R Act, and (vi) the
Registration Statement has become effective under the 1933 Act, and to
the best of the knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the 1933 Act.
A-27
<PAGE>
(g) That the High Quality Bond Fund shall have received an opinion of
Ropes & Gray dated the Exchange Date (which opinion would be based
upon certain factual representations and subject to certain
qualifications), to the effect that, on the basis of the existing
provisions of the Code, current administrative rules and court
decisions, for federal income tax purposes: (i) no gain or loss will
be recognized by the High Quality Bond Fund or its shareholders upon
the transfer of the Investments to the American Government Fund and
the assumption by the American Government Fund of the liabilities of
the High Quality Bond Fund, or upon the distribution of the Merger
Shares by the High Quality Bond Fund to its shareholders, pursuant to
this Agreement, (ii) the basis of the Merger Shares an High Quality
Bond Fund shareholder receives in connection with the transaction will
be the same as the basis of his or her High Quality Bond Fund shares
exchanged therefor, and (iii) an High Quality Bond Fund shareholder's
holding period for his or her Merger Shares will be determined by
including the period for which he or she held the High Quality Bond
Fund shares exchanged therefor.
(h) That all proceedings taken by or on behalf of the American Government
Fund in connection with the transactions contemplated by this
Agreement and all documents incidental thereto shall be satisfactory
in form and substance to the High Quality Bond Fund and Ropes & Gray.
(i) That the Registration Statement shall have become effective under the
1933 Act, and no stop order suspending such effectiveness shall have
been instituted or, to the knowledge of the American Government Fund,
threatened by the Commission.
(j) That the High Quality Bond Fund shall have received from the
Commission, any relevant state securities administrator, the FTC and
the Department such order or orders
A-28
<PAGE>
as Ropes & Gray deems reasonably necessary or desirable under the 1933
Act, the 1934 Act, the 1940 Act, any applicable state securities or
blue sky laws and the H-S-R Act in connection with the transactions
contemplated hereby, and that all such orders shall be in full force
and effect.
10. Indemnification.
(a) The High Quality Bond Fund will indemnify and hold harmless, out of
the assets of the High Quality Bond Fund but no other assets, the
American Government Fund, its trustees and its officers (for purposes
of this subparagraph, the "Indemnified Parties") against any and all
expenses, losses, claims, damages and liabilities at any time imposed
upon or reasonably incurred by any one or more of the Indemnified
Parties in connection with, arising out of, or resulting from any
claim, action, suit or proceeding in which any one or more of the
Indemnified Parties may be involved or with which any one or more of
the Indemnified Parties may be threatened by reason of any untrue
statement or alleged untrue statement of a material fact relating to
the High Quality Bond Fund contained in the Registration Statement,
the Prospectus or the Proxy Statement or any amendment or supplement
to any of the foregoing, or arising out of or based upon the omission
or alleged omission to state in any of the foregoing a material fact
relating to the High Quality Bond Fund required to be stated therein
or necessary to make the statements relating to the High Quality Bond
Fund therein not misleading, including, without limitation, any
amounts paid by any one or more of the Indemnified Parties in a
reasonable compromise or settlement of any such claim, action, suit or
proceeding, or threatened claim, action, suit or proceeding made with
the consent of the High Quality Bond Fund. The Indemnified Parties
will notify the High Quality Bond Fund in writing within ten days
after the receipt by any one or more of the Indemnified Parties of any
A-29
<PAGE>
notice of legal process or any suit brought against or claim made
against such Indemnified Party as to any matters covered by this
Section 10(a). The High Quality Bond Fund shall be entitled to
participate at its own expense in the defense of any claim, action,
suit or proceeding covered by this Section 10(a), or, if it so elects,
to assume at its expense by counsel satisfactory to the Indemnified
Parties the defense of any such claim, action, suit or proceeding, and
if the High Quality Bond Fund elects to assume such defense, the
Indemnified Parties shall be entitled to participate in the defense of
any such claim, action, suit or proceeding at their expense. The High
Quality Bond Fund's obligation under this Section 10(a) to indemnify
and hold harmless the Indemnified Parties shall constitute a guarantee
of payment so that the High Quality Bond Fund will pay in the first
instance any expenses, losses, claims, damages and liabilities
required to be paid by it under this Section 10(a) without the
necessity of the Indemnified Parties' first paying the same.
(b) The American Government Fund will indemnify and hold harmless, out of
the assets of the American Government Fund but no other assets, the
High Quality Bond Fund, its trustees and its officers (for purposes of
this subparagraph, the "Indemnified Parties") against any and all
expenses, losses, claims, damages and liabilities at any time imposed
upon or reasonably incurred by any one or more of the Indemnified
Parties in connection with, arising out of, or resulting from any
claim, action, suit or proceeding in which any one or more of the
Indemnified Parties may be involved or with which any one or more of
the Indemnified Parties may be threatened by reason of any untrue
statement or alleged untrue statement of a material fact relating to
the American Government Fund contained in the Registration Statement,
the Prospectus or the Proxy Statement, or any amendment or supplement
to
A-30
<PAGE>
any thereof, or arising out of, or based upon, the omission or alleged
omission to state in any of the foregoing a material fact relating to
the American Government Fund required to be stated therein or
necessary to make the statements relating to the American Government
Fund therein not misleading, including without limitation any amounts
paid by any one or more of the Indemnified Parties in a reasonable
compromise or settlement of any such claim, action, suit or
proceeding, or threatened claim, action, suit or proceeding made with
the consent of the American Government Fund. The Indemnified Parties
will notify the American Government Fund in writing within ten days
after the receipt by any one or more of the Indemnified Parties of any
notice of legal process or any suit brought against or claim made
against such Indemnified Party as to any matters covered by this
Section 10(b). The American Government Fund shall be entitled to
participate at its own expense in the defense of any claim, action,
suit or proceeding covered by this Section 10(b), or, if it so elects,
to assume at its expense by counsel satisfactory to the Indemnified
Parties the defense of any such claim, action, suit or proceeding,
and, if the American Government Fund elects to assume such defense,
the Indemnified Parties shall be entitled to participate in the
defense of any such claim, action, suit or proceeding at their own
expense. The American Government Fund's obligation under this Section
10(b) to indemnify and hold harmless the Indemnified Parties shall
constitute a guarantee of payment so that the American Government Fund
will pay in the first instance any expenses, losses, claims, damages
and liabilities required to be paid by it under this Section 10(b)
without the necessity of the Indemnified Parties' first paying the
same.
11. No broker, etc. Each of the High Quality Bond Fund and the American
Government Fund represents that there is no per-
A-31
<PAGE>
son who has dealt with it who by reason of such dealings is entitled
to any broker's or finder's or other similar fee or commission arising
out of the transactions contemplated by this Agreement.
12. Termination. The High Quality Bond Fund and the American Government Fund
may, by mutual consent of their trustees, terminate this Agreement, and the
High Quality Bond Fund or the American Government Fund, after consultation
with counsel and by consent of their trustees or an officer authorized by
such trustees, may waive any condition to their respective obligations
hereunder. If the transactions contemplated by this Agreement have not been
substantially completed by October 31, 1999, this Agreement shall
automatically terminate on that date unless a later date is agreed to by
the High Quality Bond Fund and the American Government Fund.
13. Rule 145. Pursuant to Rule 145 under the 1933 Act, the American Government
Fund will, in connection with the issuance of any Merger Shares to any
person who at the time of the transaction contemplated hereby is deemed to
be an affiliate of a party to the transaction pursuant to Rule 145(c),
cause to be affixed upon the certificates issued to such person (if any) a
legend as follows:
"These shares have not been registered under the Securities Act of
1933, as amended, and may not be sold or otherwise transferred except
to Putnam American Government Income Fund or its principal underwriter
unless (i) a registration statement with respect thereto is effective
under the Securities Act of 1933, as amended, or (ii) in the opinion
of counsel reasonably satisfactory to Putnam American Government
Income Fund such registration is not required."
and, further, the American Government Fund will issue stop transfer
instructions to the American Government Fund's
A-32
<PAGE>
transfer agent with respect to such shares. The High Quality Bond Fund will
provide the American Government Fund on the Exchange Date with the name of
any High Quality Bond Fund shareholder who is to the knowledge of the High
Quality Bond Fund an affiliate of the High Quality Bond Fund on such date.
14. Covenants, etc., deemed material. All covenants, agreements,
representations and warranties made under this Agreement and any
certificates delivered pursuant to this Agreement shall be deemed to have
been material and relied upon by each of the parties, notwithstanding any
investigation made by them or on their behalf.
15. Sole agreement; amendments. This Agreement supersedes all previous
correspondence and oral communications between the parties regarding the
subject matter hereof, constitutes the only understanding with respect to
such subject matter, may not be changed except by a letter of agreement
signed by each party hereto, and shall be construed in accordance with and
governed by the laws of The Commonwealth of Massachusetts.
16. Agreement and declaration of trust. Copies of the Agreements and
Declarations of Trust of the High Quality Bond Fund and the American
Government Fund are on file with the Secretary of State of The Commonwealth
of Massachusetts, and notice is hereby given that this instrument is
executed by the Trustees of each Fund, respectively, as Trustees and not
individually and that the obligations of this instrument are not binding
upon any of the Trustees, officers or shareholders of the High Quality Bond
Fund or the American Government Fund individually but are binding only upon
the assets and property of the High Quality Bond Fund and the American
Government Fund, respectively.
A-33
<PAGE>
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original.
PUTNAM AMERICAN GOVERNMENT
INCOME FUND
By: /s/ Charles E. Porter
--------------------------------
Executive Vice President
PUTNAM HIGH QUALITY BOND FUND
By: /s/ Charles E. Porter
--------------------------------
Executive Vice President
A-34
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<PAGE>
[logo: PUTNAMINVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Toll-free 1-800-225-1581]
51880 4/99
<PAGE>
FOR YOUR CONVENIENCE YOU MAY RECORD YOUR VOTING INSTRUCTIONS VIA THE INTERNET OR
BY RETURNING THIS PROXY CARD BY MAIL
Your vote is very important. If you choose to record your voting instructions
via the Internet, visit the website at www.proxyweb.com. Please refer to the
instructions below. Your voting instructions will be immediately confirmed and
posted.
<TABLE>
<S> <C>
To record your voting instructions on the
Internet
1. Read the proxy statement.
2. Go to www.proxyweb.com
3. Enter the 12-digit control number on your
proxy card.
4. Follow the instructions on the site.
This is your PROXY CARD.
If you vote on the Internet, there is no need
to return your Proxy Card. Please record your voting instructions on this proxy
card, sign it below, and return it
***CONTROL NUMBER: 999 999 999 promptly in the envelope provided.
999 99* Your vote is important.
[arrow down] PLEASE FOLD AT PERFORATION
BEFORE DETACHING [arrow down]
</TABLE>
Proxy for a meeting of shareholders to be held on July 1, 1999 for Putnam High
Quality Bond Fund.
This proxy is solicited on behalf of the Trustees of the Fund.
The undersigned shareholder hereby appoints George Putnam, Hans H. Estin, and
Robert E. Patterson, and each of them separately, Proxies, with power of
substitution, and hereby authorizes them to represent and to vote, as designated
below, at the meeting of shareholders of Putnam High Quality Bond Fund on July
1, 1999, at 2:00 p.m., Boston time, and at any adjournments thereof, all of the
shares of the Fund that the undersigned shareholder would be entitled to vote if
personally present.
---------------------------------------------------------------------
PLEASE BE SURE TO SIGN AND DATE THIS PROXY.
---------------------------------------------------------------------
Please sign your name exactly as it appears on this card. If you are
a joint owner, each owner should sign. When signing as executor,
administrator, attorney, trustee, or guardian, or as custodian for a
minor, please give your full title as such. If you are signing for a
corporation, please sign the full corporate name and indicate the
signer's office. If you are a partner, sign the partnership name.
________________________________________________
Shareholder sign here Date
________________________________________________
Co-owner sign here Date
<PAGE>
<TABLE>
<S> <C>
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
Please use this form to notify us of any change in
address or telephone number or to provide us with ---------------------------------------------------
your comments. Detach this form from the proxy card
and return it with your signed proxy in the enclosed ---------------------------------------------------
envelope. DEAR SHAREHOLDER:
Your vote is important. Please help us to eliminate
Street the expense of follow-up mailings by signing and
- ---------------------------------------------------- returning this proxy card or by recording your
voting instructions via the Internet as soon as
City State Zip possible. A postage-paid envelope is enclosed for
- ---------------------------------------------------- your convenience.
THANK YOU!
Telephone
- ----------------------------------------------------
</TABLE>
[arrow up] PLEASE FOLD AT PERFORATION BEFORE DETACHING [arrow up]
If you complete and sign the proxy card, we'll vote exactly as you tell us. If
you simply sign the proxy, it will be voted FOR Proposal 1. The Proxies will
also be authorized to vote upon such other matters that may properly come before
the meeting.
THE TRUSTEES RECOMMEND A VOTE FOR THE PROPOSAL LISTED BELOW:
<TABLE>
<S> <C> <C> <C>
Please vote by filling in the appropriate box. FOR AGAINST ABSTAIN
[ ] [ ] [ ]
1. Approval of the Agreement and Plan of
Reorganization providing for the sale of all of
the assets of Putnam High Quality Bond Fund
("the Fund") to Putnam American Government |_ |_ |_
Income Fund ("the American Government Fund") in
exchange for shares of the American Government
Fund and the assumption by the American
Government Fund of all of the liabilities of the
Fund, and the distribution of such shares to the
shareholders of the Fund in liquidation of the
Fund.
</TABLE>
Note: If you have questions on the Proposal, please call 1-800-225-1581.
<PAGE>
PUTNAM AMERICAN GOVERNMENT INCOME FUND
FORM N-14
PART B
STATEMENT OF ADDITIONAL INFORMATION
APRIL 12, 1999
This Statement of Additional Information contains material that may be of
interest to investors but that is not included in the Prospectus/Proxy Statement
(the "Prospectus") of Putnam American Government Income Fund (the "American
Government Fund") dated April 12, 1999 relating to the sale of all or
substantially all of the assets of Putnam High Quality Bond Fund (the "High
Quality Bond Fund") to the American Government Fund. The American Government
Fund's Statement of Additional Information dated January 30, 1999, and the High
Quality Bond Fund's Statement of Additional Information dated February 28, 1999,
have been filed with the Securities and Exchange Commission and are incorporated
herein by reference. This Statement is not a Prospectus and is authorized for
distribution only when it accompanies or follows delivery of the Prospectus.
This Statement should be read in conjunction with the Prospectus. Investors may
obtain a free copy of the Prospectus or either or both of the Statements of
Additional Information by writing Putnam Investor Services, One Post Office
Square, Boston, MA 02109 or by calling 1-800-225-1581.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
PricewaterhouseCoopers LLP are the independent accountants for the American
Government Fund, providing audit services, tax return review and other tax
consulting services and assistance and consultation in connection with the
review of various Securities and Exchange Commission filings for the American
Government Fund. PricewaterhouseCoopers LLP are also the independent accountants
for the High Quality Bond Fund, providing audit services, tax return reviews and
other tax consulting services and assistance and consultation in connection with
the review of various Securities and Exchange Commission filings for the High
Quality Bond Fund. The following documents are incorporated by reference into
this Statement of Additional Information: (1) the Report of Independent
Accountants and financial statements included in the American Government Fund's
Annual Report for the fiscal year ended September 30, 1998, filed electronically
on November 18, 1998 (File No. 811-4178), and (ii) the Report of Independent
Accountants and financial statements included in the High Quality Bond Fund's
Annual Report for the fiscal year ended October 31, 1998, filed electronically
on December 16, 1998 (File No. 811-4178). The audited financial statements for
the American Government Fund and the High Quality Bond Fund incorporated by
reference into the Prospectus/Proxy Statement and this Statement of Additional
Information have been so included and incorporated in reliance upon the reports
of PricewaterhouseCoopers LLP, given on their authority as experts in auditing
and accounting.
-1-
<PAGE>
Table of Contents
Unaudited Pro Forma combined Financial Statements of the American Government
Fund and the High Quality Bond Fund................
-2-
<PAGE>
Putnam American Government Income Fund
and
Putnam High Quality Bond Fund
Proforma Combining Financial Statements
(Unaudited)
The accompanying unaudited proforma combining statements of investment
portfolios and assets and liabilities assumes that the exchange described in the
next paragraph occurred as of September 30, 1998, and the unaudited proforma
combining statement of operations for the twelve months ended September 30, 1998
presents the results of operations of Putnam American Government Income Fund
(the "American Government Fund") as if the combination with Putnam High Quality
Bond Fund (the "High Quality Bond Fund") had been consummated at October 1,
1997. The proforma results of operations are not necessarily indicative of
future operations or the actual results that would have occurred had the
combination been consummated at October 1, 1997. The historical statements have
been derived from the American Government Fund's books and records utilized in
calculating daily net asset value at September 30, 1998, and for the twelve
month period then ended.
The proforma statements give effect to the proposed transfer of all of the
assets of the High Quality Bond Fund to the American Government Fund in exchange
for the assumption by the American Government Fund of all of the liabilities of
the High Quality Bond Fund and for a number of the American Government Fund's
shares equal in value to the value of the net assets of the High Quality Bond
Fund's transferred to the American Government Fund. Under generally accepted
accounting principles, the historical cost of investment securities will be
carried forward to the surviving entity and the results of operations of the
American Government Fund for pre-combination periods will not be restated. The
proforma statement of operations does not reflect the expenses of either fund in
carrying out its obligations under the Agreement and Plan of Reorganization.
The unaudited proforma combining statements should be read in conjunction with
the separate financial statements of the American Government Fund and the High
Quality Bond Fund incorporated by reference in this statement of additional
information.
-3-
<PAGE>
Putnam American Government Income Fund
Notes to Proforma Combining Statements
(Unaudited)
September 30, 1998
The proforma adjustments to these proforma financial statements are comprised of
the following:
(A) Elimination and reduction of duplicative expenses as a result of the
merger.
(B) $145,000 relates to proxy costs which will be borne by the Putnam High
Quality Bond Fund. The other $70,000 consists of $50,000 of legal
costs and $20,000 of accounting costs. These are related merger costs
which will be allocated ratably between the two funds upon
consummation of the merger.
(C) Issuance of class A, class B and class M shares of Putnam American
Government Income Fund to the holders of class A, class B and class M
shares of Putnam High Quality Bond Fund.
<PAGE>
AMERICAN GOVERNMENT INCOME FUND
Pro Forma Combining (Unaudited)
Statement of Assets and Liabilities
30-Sep-98
<TABLE>
<CAPTION>
American
Government High Quality Pro Forma Pro Forma
Income Fund Bond Fund Adjustments Combined
<S> <C> <C> <C> <C>
Assets
Investments in securities, at value
(identified cost $1,519,441,505, $363,648,938 and $1,578,959,023 $ 377,276,674 $1,956,235,697
$1,883,090,443 respectively)
Cash 377 3,585,479 3,585,856
Interest and other receivables 14,340,457 3,510,188 17,850,645
Receivable for shares of the fund sold 2,280,047 829,985 3,110,032
Receivable for investments sold -- 81,998,443 81,998,443
Receivable for open forward currency contracts -- 130,817 130,817
Receivable for variation margin -- 234,813 234,813
Total assets 1,595,579,904 467,566,399 2,063,146,303
Liabilities
Payable for securities purchased -- 66,076,735 66,076,735
Payable for shares of the fund repurchased 1,807,573 240,129 2,047,702
Payable for compensation of Manager 2,161,132 382,513 2,543,645
Payable for investor servicing and custodian fees 108,795 46,665 155,460
Payable for compensation of Trustees 52,093 3,660 55,753
Payable for administrative services 4,738 2,107 6,845
Payable for distribution fees 987,531 744,509 1,732,040
TBA sales commitments, at value
(proceeds receivable $7,568,881) -- 7,651,737 7,651,737
Payable for open forward currency contracts -- 271,468 271,468
Payable for closed forward currency contracts -- 1,319,125 1,319,125
Other accrued expenses 127,859 11,515,447 215,000 B 11,858,306
Total liabilities 5,249,721 88,254,095 215,000 93,718,816
Net assets $1,590,330,183 $379,312,304 (215,000) 1,969,427,487
Class A
Net assets $1,500,156,542 $346,796,460 (198,210)B $1,846,754,792
Shares outstanding 164,590,463 33,353,014 4,698,749 C 202,642,226
Net asset value per share $9.11 $10.40 $ 9.11
Class B
Net assets $86,302,398 $28,172,373 (14,838)B $ 114,459,933
Shares outstanding 9,501,518 $2,719,978 381,410 C 12,602,906
Net asset value per share $9.08 $10.36 $ 9.08
Class M
Net assets $3,871,243 $4,343,471 (1,952)B $ 8,212,762
Shares outstanding 423,654 417,624 57,393 C 898,671
Net asset value per share $9.14 $10.40 $ 9.14
</TABLE>
<PAGE>
The Proforma Combining Investment Portfolio
of Putnam High Quality Bond Fund and
Putnam American Government Income Fund
September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
American Government High Quality Proforma
Income Fund Bond Fund Combined
U.S. Governement and Principal 91.6%* Principal 66.4%* Principal 86.9%*
Agency Obligations Amount Value Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corp.
5 3/4s, due April 15, 2008 $ 100,000,000 $ 105,719,000 $ 100,000,000 $105,719,000
5 1/2s, with due dates from March 1, 2011
to April 1, 2011 $ 8,276,173 $ 8,245,137 8,276,173 8,245,137
Federal Home Loan Mortgage Corp.
Pass-through Certificates
7s, with due dates from August 1, 2012
to November 1, 2012 30,041,863 30,858,402 30,041,863 30,858,402
Federal National Mortgage Association
7s, Dwarf TBA, October 15, 2013 1,050,000 1,077,888 1,050,000 1,077,888
6 1/2s, Dwarf TBA, October 15, 2013 18,630,000 19,019,920 18,630,000 19,019,920
6s, Dwarf TBA, October 15, 2013 7,360,000 7,435,882 7,360,000 7,435,882
Federal National Mortgage Association
Pass-through Certificates
6 1/2s, Dwarf, with due dates from
October 1, 2010 to September 2013 142,522,023 145,505,009 142,522,023 145,505,009
6 1/2s, Dwarf, with due dates from
October 1, 2010 to August 1, 2028 20,852,192 21,223,185 20,852,192 21,223,185
6 1/2s, with due dates from July 1, 2028
to August 1, 2028 4,713,851 4,793,374 4,713,851 4,793,374
5 1/2s, Dwarf, with due dates from
June 1, 2009 to March 1, 2012 21,379,040 21,292,026 21,379,040 21,292,026
Government National Mortgage Association
Pass-through Certificates
9s, with due dates from November 15, 2008
to July 15, 2024 42,210,526 45,353,563 42,210,526 45,353,563
8 1/2s, with due dates from February 15, 2005
to December 15, 2024 9,448,417 9,998,023 9,448,417 9,998,023
8s, with due dates from August 15, 2006
to March 15, 2028 29,424,998 30,764,466 29,424,998 30,764,466
8s, with due dates from January 15, 2001
to February 15, 2028 26,076,262 27,268,747 26,076,262 27,268,747
7 1/2s, with due dates from
February 15, 2022 to January 15, 2028 127,091,400 131,803,378 127,091,400 131,803,378
7s, with due dates from August 15, 2025
to June 15, 2028 65,247,385 67,348,511 65,247,385 67,348,511
7s, with due dates from February 15, 2024
to July 15, 2028 399,573,621 412,435,174 399,573,621 412,435,174
6 1/2s, with due dates from March 15, 2028
to June 15, 2028 6,149,440 6,285,834 6,149,440 6,285,834
6 1/2s, with due dates from February 15, 2028
to May 15, 2028 29,660,775 30,318,651 29,660,775 30,318,651
Government National Mortgage Association Adjustable Rate Mortgages
7s, October 20, 2024 2,347,042 2,403,512 2,347,042 2,403,512
5 1/2s, April 15, 2028 78,932 79,105 78,932 79,105
U.S. Treasury Bonds
11 7/8s, November 15, 2003 # 13,740,000 18,368,594 13,740,000 18,368,594
11 5/8s, November 15, 2004 11,900,000 16,422,000 11,900,000 16,422,000
9 7/8s, November 15, 2015 50,000,000 77,297,000 50,000,000 77,297,000
8 1/8s, August 15, 2019 3,935,000 5,390,320 3,935,000 5,390,320
7 1/2s, November 15, 2024 7,988,000 10,600,316 7,988,000 10,600,316
6 1/8s, November 15, 2027 5,665,000 6,530,669 5,500,000 6,340,455 11,165,000 12,871,124
5 1/2s, August 15, 2028 200,000,000 216,188,000 12,272,000 13,265,296 212,272,000 229,453,296
U.S. Treasury Notes
6 1/4s, June 30, 2002 1,145,000 1,218,532 1,145,000 1,218,532
5 7/8s, September 30, 2002 2,830,000 2,985,650 2,830,000 2,985,650
5 5/8s, May 15, 2008 36,040,000 39,418,750 13,505,000 14,771,094 49,545,000 54,189,844
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
5 1/2s, May 31, 2003 9,575,000 10,044,750 9,575,000 10,044,750
5 3/8s, June 30, 2003 136,000,000 142,226,080 136,000,000 142,226,080
5 1/4s, August 15, 2003 955,000 997,679 955,000 997,679
Total U.S. Governement and Agency Obligations $1,456,971,473 $254,322,499 $1,711,293,972
(cost $1,397,453,955, $250,193,361
and $1,647,647,316 respectively)
<CAPTION>
Principal -%* Principal 15.4%* Principal 3.0%*
Corporate Bonds and Notes Amount Value Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arco Chemical deb. 9.8s, 2020 820,000 817,335 820,000 817,335
AT&T Capital Corp. notes 6 6s, 2005 1,420,000 1,477,581 1,420,000 1,477,581
AirTouch Communications notes 6.65s, 2008 1,750,000 1,889,755 1,750,000 1,889,755
Amvescap PLC 6.6s, 2005 (United Kingdom) 1,730,000 1,749,463 1,730,000 1,749,463
Canadian Pacific Ltd. deb. 9.45s,
2021 (Canada) 1,430,000 1,782,538 1,430,000 1,782,538
Chrysler Corp. deb. Ser. B, 7.45s, 2097 430,000 473,920 430,000 473,920
Coastal Corp. deb. 6 1/2s, 2008 1,600,000 1,638,992 1,600,000 1,638,992
Coastal Corp. bonds 6.95s, 2028 1,735,000 1,677,901 1,735,000 1,677,901
Continental Airlines pass-through
certificates Ser. 97CI, 7.42s, 2007 1,645,000 1,735,047 1,645,000 1,735,047
Dell Computer Corp. deb. 7.1s, 2028 1,320,000 1,375,361 1,320,000 1,375,361
Edison Mission Energy 144A
company guaranty 7.33s, 2008 1,070,000 1,201,064 1,070,000 1,201,064
Enron Corp. notes 6.4s, 2006 550,000 562,942 550,000 562,942
Enron Corp. notes 6.95s, 2028 1,090,000 1,080,517 1,090,000 1,080,517
Executive Risk Capital Trust
company guaranty Ser. B, 8.675s, 2027 1,700,000 1,710,574 1,700,000 1,710,574
First Financial Caribbean Corp.
sr. notes 7.84s, 2006 1,865,000 1,999,467 1,865,000 1,999,467
Fleet Financial Group, Inc. sub.
deb. 6 7/8s, 2028 1,670,000 1,707,542 1,670,000 1,707,542
Global Marine Inc. notes 7s, 2028 2,595,000 2,464,757 2,595,000 2,464,757
Markel Capital Trust I
company guaranty Ser. B, 8.71s, 2046 1,675,000 1,692,923 1,675,000 1,692,923
Neiman-Marcus Group, Inc. deb. 7 1/8s, 2028 1,725,000 1,673,612 1,725,000 1,673,612
News America Holdings, Inc. deb. 7.7s, 2025 840,000 898,296 840,000 898,296
News America Holdings, Inc. deb. 7 3/4s, 2045 1,705,000 1,801,384 1,705,000 1,801,384
OMEGA Healthcare Investors, Inc.
notes 6.95s, 2007 (R) 1,235,000 1,198,642 1,235,000 1,198,642
PT Alatief Freeport sr. notes
9 3/4s, 2001 (Netherlands) 1,770,000 1,268,205 1,770,000 1,268,205
Paine Webber Group, Inc. sr.
notes 6.55s, 2008 1,750,000 1,760,780 1,750,000 1,760,780
Peoples Bank-Bridgeport sub.
notes 7.2s, 2006 1,700,000 1,687,828 1,700,000 1,687,828
Petro Geo-Services AS ADR notes
7 1/2s, 2007 (Norway) 1,885,000 2,010,767 1,885,000 2,010,767
St. Paul Bancorp sr. notes 7 1/8s, 2004 1,795,000 1,933,879 1,795,000 1,933,879
Salton Sea Funding Corp. company
guaranty Ser. E, 8.3s, 2011 2,010,000 2,335,982 2,010,000 2,335,982
Sun Communities 7 5/8s, 2003 (R) 2,020,000 2,180,974 2,020,000 2,180,974
TCI Communications, Inc. sr.
notes 8.65s, 2004 1,555,000 1,793,957 1,555,000 1,793,957
Teco Energy, Inc. notes 5.54s, 2001 1,850,000 1,870,813 1,850,000 1,870,813
Texas Utilities Electric Capital Trust
V company guaranty 8.175s, 2037 1,720,000 1,772,116 1,720,000 1,772,116
Time Warner Inc. 7 3/4s, 2005 840,000 936,499 840,000 936,499
Time Warner Entertainment sr.
notes 8 3/8s, 2033 1,685,000 2,056,879 1,685,000 2,056,879
Union Pacific Resources Group Inc.
notes 6 3/4s, 2008 1,920,000 1,959,226 1,920,000 1,959,226
Wilmington Trust Corp. sub. notes
6 5/8s, 2008 2,590,000 2,742,784 2,590,000 2,742,784
Total Corporate Bonds and Notes $58,920,302 $58,920,302
(cost $-, $53,692,696 and $53,692,696 respectively)
<CAPTION>
Principal -%* Principal 14.2%* Principal 2.8%*
Collateralized Mortgage Obligations Amount Value Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------------
Amresco Commercial Mortgage Funding I
<S> <C> <C> <C> <C> <C> <C>
Ser. 97-C1, Class A1, 6.73s, 2029 684,386 711,146 684,386 711,146
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Chase Mortgage Finance Corp.
Ser. 1998-S2, Class A14, 6 3/4s, 2028 720,000 742,922 720,000 742,922
Ser. 1994-G, Class B3, 7s, 2025 1,299,214 1,274,448 1,299,214 1,274,448
Interest Only (IO) Ser. 1993-3,
Class B6, 7.46s, 2024 826,711 875,735 826,711 875,735
IO Ser. 1993-3, Class B7, 7.46s, 2024 3,501,413 3,709,046 3,501,413 3,709,046
CMC Securities Corp. III Ser. 1994-F,
Class B2, 6 1/4s, 2014 1,015,940 1,001,653 1,015,940 1,001,653
Commercial Mortgage Acceptance Corp.
6.03s, 2008 2,670,000 2,741,756 2,670,000 2,741,756
Ser. 97-ML1, Class A2, 6.53s, 2007 75,000 79,113 75,000 79,113
Ser. 97-ML1, Class A3, 6.57s, 2007 1,080,000 1,143,450 1,080,000 1,143,450
Ser. 97-ML1, Class D, 7.11s, 2030 1,010,000 1,065,234 1,010,000 1,065,234
Criimi Mae Commercial Mortgage Trust
Ser. 98-C1, Class A2, 7s, 2011 3,280,000 3,355,850 3,280,000 3,355,850
Ser. 98-C1, Class B, 7s, 2011 1,310,000 1,285,233 1,310,000 1,285,233
Fannie Mae Strip
Zero %, 294-1 Principal Only (PO),
February 1, 2028 1,370,744 1,222,746 1,370,744 1,222,746
6 1/2s,290 IO, December 1, 2024 1,529,526 247,114 1,529,526 247,114
First Union-Lehman Brothers
Commercial Mortgage Co.
Ser. 97-C2, Class A3, 6.65s, 2007 1,725,000 1,823,716 1,725,000 1,823,716
Ser. 97-C2, Class D, 7.12s, 2012 1,160,000 1,184,922 1,160,000 1,184,922
Ser. 98-C2, Class D, 6.778s, 2013 1,270,000 1,257,449 1,270,000 1,257,449
Ser. 98-C2, Class IO, 0.816s, 2028 30,185,000 1,321,773 30,185,000 1,321,773
Freddie Mac Strip
Ser. 194, IO 6 1/2s, 2028 4,203,989 707,453 4,203,989 707,453
Ser. 199, IO 6 1/2s, 2028 985,737 165,881 985,737 165,881
GMAC Commercial Mortgage Securities Inc.
Ser. 98-C1, Class A1, 6.44s, 2030 1,785,686 1,853,835 1,785,686 1,853,835
Ser. 98-C1, Class E, 7.153s, 2011 1,278,000 1,329,719 1,278,000 1,329,719
GS Mortgae Securities Corp. II
Ser. 98-GLII, Class A2, 6.562s, 2031 1,030,000 1,080,856 1,030,000 1,080,856
Ser. 98-GLII, Class D, 7.191s, 2031 565,000 573,828 565,000 573,828
Housing Securities Inc. Ser. 1993-J,
Class J2, 6.66s, 2009 2,487,753 2,612,918 2,487,753 2,612,918
Merrill Lynch Mortgage Investors, Inc.
Ser. 98-C2, Class D, 7.116s, 2030 159,000 165,087 159,000 165,087
Morgan Stanley Capital I
Ser. 96-WF1, Class A2, 7.218s, 2006 610,000 655,178 610,000 655,178
Ser. 98-XL1, Class E, 6.989s, 2030 315,000 327,403 315,000 327,403
Prudential Home Mortgage Securities
Ser. 1994-28, Class B2, 6.803s, 2001 2,632,131 2,606,632 2,632,131 2,606,632
Ser. 94-D, Class 3B, 6.312s, 2009 4,307,378 4,275,746 4,307,378 4,275,746
Ser. 93-31, Class B1, 6s, 2000 3,633,057 3,580,831 3,633,057 3,580,831
Residential Funding Mortgage Securities
Ser. 93-S17, Class M3, 7s, 2008 890,489 910,386 890,489 910,386
Ser. 93-S23, Class M3, 6 1/2s, 2008 681,688 687,760 681,688 687,760
RFM-98 SB 6 3/4s, 2008 1,740,000 1,829,036 1,740,000 1,829,036
Sears Mortgage Securities, Ser. 1993-7,
Class T-7, 7s, 2007 750,000 764,498 750,000 764,498
Securitized Asset Sales, Inc.
Ser. 93-J, Class 2B, 6.808s, 2023 3,337,412 3,374,958 3,337,412 3,374,958
Mtge. Pass Thru Certifcates Ser. 1994-3,
Class B1, 6.11s, 1999 1,801,857 1,787,217 1,801,857 1,787,217
Total Collateralized Mortgage Obligations $ 54,332,528 $ 54,332,528
(cost $-, $50,856,745 and $50,856,475,
respectively)
Foreign Government Bonds and Notes Principal -%* Principal 2.2%* Principal 0.4%*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount Value Amount Value Amount Value
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Germany (Federal Republic of)
bonds Ser. 98, 5 5/8s, 2028 6,390,000 4,305,306 6,390,000 4,305,306
Ontario (Province of)
sr. unsub. 5 1/2s, 2008 4,010,000 4,077,769 4,010,000 4,077,769
Total Foreign Government
Bonds and Notes 10,400,000 $ 8,383,075 10,400,000 $ 8,383,075
(cost $-, $7,615,741
and $7,615,741)
<CAPTION>
Asset Backed Securities
(cost $-, $1,290,395 and Principal -%* Principal 0.3%*Principal 0.1%
$1,290,395, respectively) Amount Value Amount Value Amount Value
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Green Tree Recreational Equipment &
Cons. Ser. 98-A, Class A1C, 6.18s, 2019 $1,290,395 $ 1,318,270 $1,290,395 $ 1,318,270
<CAPTION>
Short Term Securities Principal 7.7%* Principal -%* Principal 6.2%
Amount Value Amount Value Amount Value
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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% $ 60,000,000 $ 60,009,083 $ 60,000,000 $ 60,009,083
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% 61,969,000 61,978,467 61,969,000 61,978,467
Total Short Term Investments $ 121,987,550 $ 121,987,550
(cost $121,987,550, $- and $121,987,550,
respectively)
Total Investments
(cost $1,519,441,505, $363,648,938 and
$1,883,090,443, respectively) $ 1,578,959,023 $ 377,276,674 $1,956,235,697
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain securities of the High Quality Bond Fund do not conform to the
investment policies of the American Government Income Fund.
*Percentages indicated are based on net assets as follows:
- -------------------------------------------------------------
- -------------------------------------------------------------
<TABLE>
<CAPTION>
Net Assets
- -------------------------------------------------------------
<S> <C>
American Government Income Fund $ 1,590,330,183
High Quality Bond Fund 379,312,304
Proforma $ 1,969,427,487
- -------------------------------------------------------------
</TABLE>
# A portion of this security was pledged and segregated with the custodian to
cover margin requirements for futures contracts at September 30, 1998.
(R) Real Estate Investment Trust.
144A after the name of a security represents those exempt from registration
under Rule 144A of the Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified institutional
buyers.
TBA after the name of a security represents to be announced securities.
ADR after the name of a foreign holding stands for American Depository Receipts
representing ownership of foreign securities on deposit with a domestic
custodian bank.
<PAGE>
<TABLE>
<CAPTION>
039
Putnam High Quality Bond Fund
Forward Currency Contracts to Buy at September 30, 1998
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deutschemarks $ 3,776,909 $ 3,646,092 12/16/98 $ 130,817
- ------------------------------------------------------------------------------------------
$ 130,817
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
039
Putnam High Quality Bond Fund
Forward Currency Contracts to Sell at September 30, 1998
Unrealized
Market Aggregate Face Delivery Appreciation/
Value Value Date (Depreciation)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deutschemarks $ 7,714,354 $ 7,442,886 12/16/98 $ (271,468)
- ------------------------------------------------------------------------------------------
$ (271,468)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
039
Putnam High Quality Bond Fund
TBA Commitments to Sell Outstanding at September 30, 1998
(proceeds receivable $7,568,881)
Agency Principal Amount Settlement date Market Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FNMA 6 1/2s, October 15, 2028 7,325,000 7,448,573
GNMA 8s, October 15, 2028 195,000 203,165
- ------------------------------------------------------------------------------------------
$7,651,738
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
039
Putnam High Quality Bond Fund
Futures Contracts Outstanding at September 30, 1998
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
Bonds 20yr 13,278,344 12,618,764 Dec 98 659,580
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Proforma Combining
Statement of Operations
Twelve months ended September 30, 1998 (Unaudited)
American
Government High Quality Pro Forma Pro Forma
Income Fund Bond Fund Adjustments Combined
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:
Interest (net of foreign tax of $-, $52,428 and
$52,428, respectively) $102,619,416 $24,374,694 $126,994,110
- -------------------------------------------------------------------------------------------------------------------------
Total Investment Income 102,619,416 24,374,694 0 $126,994,110
Expenses:
Compensation of Manager 8,502,645 2,262,421 (504,984)A 10,260,082
Investor servicing and custodian fees 2,286,373 682,170 (56,413)A 2,912,130
Compensation of Trustees 40,996 15,647 56,643
Administrative Services 19,019 7,129 (215)A 25,933
Distiribution Fee - Class A 3,738,144 917,534 4,655,678
Distribution Fee - Class B 407,482 157,046 564,528
Distribution Fee - Class M 8,892 7,219 16,111
Reports to Shareholders 134,829 40,141 (34,484)A 140,486
Registration Fee 75 (75)A -
Auditing Fee 46,236 50,398 (50,398)A 46,236
Legal Fee 13,416 8,460 21,876
Postage Fee 375,789 70,252 446,041
Other Expenses 312,734 92,461 405,195
- -------------------------------------------------------------------------------------------------------------------------
Total Expenses 15,886,555 4,310,953 (646,569) 19,550,939
=========================================================================================================================
Expense reduction (733,802) (323,703) (1,057,505)
=========================================================================================================================
Net expenses 15,152,753 3,987,250 (646,569) 18,493,434
=========================================================================================================================
Net investment income 87,466,663 20,387,444 646,569 108,500,676
=========================================================================================================================
Net realized gain on investments 42,372,651 10,886,433 53,259,084
Net realized loss on futures contracts (883,765) (883,765)
Net realized gain on foreign currency transactions 545,735 545,735
Net unrealized appreciation of assets and libilities
in foreign currencies during the year 244,010 244,010
Net unrealized appreciation of investments, futures
and TBA sale commitments during the year 43,680,120 (4,995,949) 38,684,171
=========================================================================================================================
Net gain on investments 86,052,771 5,796,464 0 91,849,235
=========================================================================================================================
Net increase in net assets
resulting from operations $173,519,434 $26,183,908 $ 646,569 $200,349,911
=========================================================================================================================
</TABLE>
