Putnam
American
Government
Income Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The U.S. economy's continued strength and historically low unemployment
rate, combined with dramatic recovery elsewhere in the world, hastened the
flow of assets from safe haven of U.S. government securities and back to
more adventuresome investments during the 12 months ended September 30,
1999.
While it is disconcerting to cope with a market experiencing such a trying
period, Putnam American Government Income Fund's managers handled the
challenge well by taking a distinctly neutral approach.
In a market environment practically devoid of opportunities, the managers
focused on yield curve positioning, duration, and sector rotation; in
other words, they built the portfolio around securities they believed had
the most attractive yields, the least sensitivity to interest-rate shifts,
and the most promising prospects for improvement.
In the following report, the managers discuss the market environment
during fiscal 1999, their response to it, and their expectations for
fiscal 2000.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 17, 1999
Report from the Fund Managers
Michael Martino
Kevin M. Cronin
Rising interest rates dampened returns on all fixed-income securities,
including those issued by the U.S. Government, during Putnam American
Government Income Fund's 1999 fiscal year. Rates rose in response to fears
that continued vibrant economic growth in the United States would lead to
a build-up in inflationary pressures. Since rates and bond prices move in
opposite directions, the interest-rate increases caused a drop in the
value of U.S. Treasuries and other government securities. While
mortgage-backed securities enjoyed a short rally in early 1999, softened
demand caused them to underperform Treasuries over the course of the year.
Pursuing a neutral strategy within this backdrop, your fund delivered
competitive returns in line with its investment universe. Please see page
6 for more performance information.
Total return for 12 months ended 9/30/99
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
- ----------------------------------------------------------------------------
-2.12% -6.72% -2.83% -7.45% -3.49% -4.40% -2.36% -5.57%
- ----------------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance calculation
methods begin on page 6.
* PENDULUM SWINGS THE OTHER WAY
Interest rates plunged during the first half of the fund's fiscal year,
with the onset of emerging-markets crises and a credit crunch in the last
half of 1998. The Federal Reserve Board helped propel rates lower by
cutting the federal funds rate three times, taking it from 5.50% in
September to 4.75% in mid November. Investors fled to the quality offered
by Treasury bonds, but non-Treasury sectors including mortgage-backed
securities -- whose value had dropped during the flight to quality --
rebounded during the first quarter of 1999 as the global economy showed
signs of stabilizing.
[GRAPHIC OMITTED: vertical bar chart AVERAGE EFFECTIVE MATURITY AND DURATION]
AVERAGE EFFECTIVE MATURITY AND DURATION
9/30/98 3/31/99 9/30/99
Average Effective 8.9 10.3 9.1
Maturity
Duration 4.3 5.3 5.2
Footnote reads:
This chart depicts the fund's average effective maturity and duration at
6-month intervals over the 12 months ended 9/30/99. Average effective
maturity and duration stated in years are derived from calculations that
incorporate assumptions about prepayment rates and cash flow of
mortgage-backed securities. Measures of effective maturity duration and
the assumptions on which they are based will vary over time.
When investors turned their attention back to the domestic economy, they
were confronted by data that showed historically low unemployment and
robust economic growth, two potential precursors of the inflation that can
eat into the value of a bond's fixed payments. Interest rates started to
rise, and the Fed moved to head off an inflationary spurt by raising the
federal funds rate by 0.25 percentage points at the end of June and again
in August. As a result of these adjustments, both Treasuries and mortgages
- -- the two sectors in which your fund invests -- experienced drops in
value, although Treasury securities outperformed all other sectors of the
market during the last six months of your fund's fiscal year.
Since the beginning of calendar 1999 and as of September 30, 1999, the
yield on the benchmark 30-year Treasury rose from 5.10% to 6.06%.
Non-Treasury yields also increased.
[GRAPHIC OMITTED: pie chart PORTFOLIO ALLOCATIONS (9/30/99)]
PORTFOLIO ALLOCATIONS (9/30/99)*
U.S. Treasury securities -- 22.3%
Cash and short-term investments -- 12.0%
Mortgage-backed securities -- 65.7%
Footnote reads:
*Based on total market value of assets. The allocation to mortgage-backed
securities is primarily concentrated in bonds issued by the Government
National Mortgage Association (GNMA). Allocations will vary over time.
* A DISTINCTLY NEUTRAL APPROACH
For most of the fiscal year, the fund remained neutral in the three areas
where we seek to add value: focusing investments on a particular part or
parts of the yield curve (a representation of the difference between
short- and long-term interest rates), duration (a measure of the fund's
sensitivity to changes in interest rates ), and sector rotation (a shift
in the relationship) between Treasuries and mortgages. In this bond market
environment, one of the worst in recent memory, there was a distinct
absence of opportunities for us to pursue.
"[S]ome say Treasuries and other top-quality bonds will see increased
popularity in the coming months, at least relative to other bond funds, as
investors shift into the most dependable class of bonds they can find."
- -- The Wall Street Journal, October 4, 1999
More recently we have increased the fund's mortgage-backed security
allocation from a neutral stance of about 45% of the portfolio to about
65% at the end of the period, seeking to benefit from what we see as
greater value in this sector. Mortgage-backed prices have become quite
cheap as demand slackened this year. There were several reasons for this
decline. First, investors tried to sell off these securities as rates rose
because their average life lengthens -- and their sensitivity to changes
in interest rate increases -- as interest rates rise. Secondly, in the
first nine months of calendar 1999, corporations issued new bonds at an
extraordinary rate in order to raise capital well in advance of any
problems that might occur closer to the year 2000. That glut of new supply
caused issuers to increase yields to attract buyers and pulled assets away
from the mortgage market and to corporates. Finally, Y2K concerns have
prompted securities dealers to overweight their portfolios with Treasuries
because they offer the most liquidity.
We have not altered the strategy of your fund in order to prepare for Y2K.
The main concern for most portfolio managers is providing liquidity in
case there are redemptions near year-end. That is much less of an issue
with this fund because of its high quality and liquidity. Furthermore, as
we make our way through to the New Year and interest rates and corporate
issuance stabilize, we anticipate that the yield differential between
Treasuries and mortgage-backed securities will diminish, signifying a
rebound in the mortgage sector.
* OUTLOOK FOR SLOWER GROWTH, MODERATELY HIGHER INFLATION
Going forward, we are most concerned about the outlook for inflation. Over
the next few months, we anticipate short-term jumps in the consumer and
producer price indexes. However, we believe that longer term we will see a
slowdown in the economy. Not a slow economy, mind you, but an economy with
a slower pace of growth and modest inflation. We believe interest rates
will move within a narrow range over the next year. Shortly after the end
of the fiscal year, the Fed opted not to raise rates a third time but
indicated a switch toward an inclination to increase rates further. We
consider this to be a possibility before year's end.
"As we make our way through to the year 2000 and interest rates and corporate
issuance stabilize, we anticipate that the yield differential between
Treasuries and mortgage-backed securities will diminish, signifying a rebound
in the mortgage sector."
- -- Michael Martino, fund manager
Looking more closely at the portfolio, we believe we can add value by
adding slightly to the fund's mortgage-backed security holdings; these
securities should remain cheap and once held, would benefit the fund when
they eventually rebound. We may nudge the fund's duration upward to help
it take advantage of interest-rate declines that could occur once the
market stabilizes through the end of the year. And we will aim to take
advantage of any yield-curve opportunities that arise. Thus far, the fund
has succeeded by pursuing the status quo. As 1999 winds down, we will be
looking for developments that dictate a shift to an alternate course.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 9/30/99, there is no guarantee the fund will
continue to hold these securities in the future. While U.S. government
backing of individual securities does not insure your principal, which
will fluctuate with market conditions, it does guarantee that the fund's
government-backed holdings will make timely payments of interest and
principal. The fund may invest in securities other than those issued or
backed by the full faith and credit of the U.S. government.
Performance summary
This section provides information about your fund's performance, which should
always be considered in light of its investment strategy. Putnam American
Government Income Fund is designed for investors seeking high current income
primarily through U.S. government securities with preservation of capital as
its secondary objective.
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 9/30/99
Class A Class B Class C Class M
(inception dates) (3/1/85) (5/20/94) (7/26/99) (2/14/95)
NAV POP NAV CDSC NAV CDSC NAV POP
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year -2.12% -6.72% -2.83% -7.45% -3.49% -4.40% -2.36% -5.57%
- ---------------------------------------------------------------------------------------------
5 years 40.87 34.18 35.61 33.61 35.69 35.69 39.55 34.96
Annual average 7.09 6.06 6.28 5.97 6.29 6.29 6.89 6.18
- ---------------------------------------------------------------------------------------------
10 years 86.95 78.09 73.13 73.13 73.21 73.21 82.56 76.67
Annual average 6.46 5.94 5.64 5.64 5.65 5.65 6.20 5.86
- ---------------------------------------------------------------------------------------------
Life of fund 184.99 171.39 152.04 152.04 155.20 155.20 172.32 163.51
Annual average 7.45 7.09 6.55 6.55 6.64 6.64 7.11 6.87
- ---------------------------------------------------------------------------------------------
</TABLE>
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/99
Lehman Bros.
Intermediate
Treasury Consumer
Bond Index price index
- -----------------------------------------------------------------------
1 year 0.72% 2.75%
- -----------------------------------------------------------------------
5 years 39.73 12.38
Annual average 6.92 2.36
- -----------------------------------------------------------------------
10 years 105.41 34.32
Annual average 7.47 2.99
- -----------------------------------------------------------------------
Life of fund 227.20 58.40
Annual average 8.47 3.20
- -----------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 4.75% and
3.25% respectively. Class B share returns for the 1-, 5-, and 10-year
(where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. Returns
shown for class B and class M shares for periods prior to their inception
are derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M shares the
higher operating expenses applicable to such shares. For class C shares,
returns for periods prior to their inception are derived from the
historical performance of class A shares, adjusted to reflect both the
CDSC currently applicable to class C shares, which is 1% for the first
year and is eliminated thereafter, and the higher operating expenses
applicable to class C shares. All returns assume reinvestment of
distributions at NAV. Investment return and principal value will fluctuate
so that an investor's shares when redeemed may be worth more or less than
their original cost.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 9/30/89
Lehman Bros.
Fund's class A Intermediate Treasury Consumer price
Date shares at POP Bond Index index
9/30/89 9,527 10,000 10,000
9/30/90 9,981 10,846 10,616
9/30/91 11,427 12,315 10,976
9/30/92 12,291 13,862 11,304
9/30/93 13,177 14,927 11,608
9/30/94 12,642 14,701 11,952
9/30/95 14,338 16,254 12,256
9/30/96 14,860 17,080 12,624
9/30/97 16,269 18,404 12,896
9/30/98 18,194 20,394 13,072
9/30/99 $17,809 $20,541 $13,432
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B and class C shares
would have been valued at $17,313 and $17,321, respectively, and
contingent deferred sales charges would not apply; a $10,000 investment in
the fund's class M shares would have been valued at $18,256 ($17,667 at
public offering price).
<TABLE>
<CAPTION>
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 9/30/99
Class A Class B Class C Class M
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Distributions (number) 12 12 2 12
- --------------------------------------------------------------------------------------
Income $0.5000 $0.4370 $0.0750 $0.4770
- --------------------------------------------------------------------------------------
Capital gains -- -- -- --
- --------------------------------------------------------------------------------------
Total $0.5000 $0.4370 $0.0750 $0.4770
- --------------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
- --------------------------------------------------------------------------------------
9/30/98 $9.11 $9.56 $9.08 -- $9.14 $9.45
- --------------------------------------------------------------------------------------
7/26/99* -- -- -- $8.42 -- --
- --------------------------------------------------------------------------------------
9/30/99 8.42 8.84 8.39 8.41 8.45 8.73
- --------------------------------------------------------------------------------------
Current return (end of period)
- --------------------------------------------------------------------------------------
Current dividend rate1 5.70% 5.43% 5.01% 5.14% 5.40% 5.23%
- --------------------------------------------------------------------------------------
Current 30-day SEC yield2 5.60 5.42 4.84 4.70 5.34 5.24
- --------------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by NAV or POP at
end of period.
2Based on investment income, calculated using SEC guidelines.
*Inception date of class C shares.
</TABLE>
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are subject
to a contingent deferred sales charge only if the shares are redeemed
during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B or C shares and assumes redemption at the end of
the period. Your fund's class B CDSC declines from a 5% maximum during the
first year to 1% during the sixth year. After the sixth year, the CDSC no
longer applies. The CDSC for class C shares is 1% for one year after
purchase.
Comparative benchmarks
Lehman Brothers Intermediate Treasury Bond Index is an unmanaged list of
Treasury bonds; it is used as a general gauge of the market for
intermediate-term fixed-income securities. The index does not take into
account brokerage commissions or other costs, may include bonds different
from those in the fund, and may pose different risks than the fund.
Securities indexes assume reinvestment of all distributions and interest
payments, and the performance of the fund will differ. It is not possible
to invest directly in an index.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
A guide to the financial statements
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values as
of the last day of the reporting period. Holdings are organized by asset
type and industry sector, country, or state to show areas of concentration
and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and non-investment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for
the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that remain
in the portfolio -- any change in unrealized gains or losses over the
period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of
the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed here
may not match the sources listed in the Statement of operations because
the distributions are determined on a tax basis and may be paid in a
different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also
includes the current reporting period. For open-ended funds, a separate
table is provided for each share class.
Report of independent accountants
For the fiscal year ended September 30, 1999
To the Trustees and Shareholders of
Putnam American Government Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly,
in all material respects, the financial position of Putnam American
Government Income Fund (the "fund") at September 30, 1999, and the results
of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the fund's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of investments owned at September 30, 1999 by
correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 10, 1999
<TABLE>
<CAPTION>
The fund's portfolio
September 30, 1999
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (87.7%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
U.S. Government Agency Mortgage Obligations (65.4%)
- --------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
$21,506,528 7s, with due dates from August 1, 2012 to
November 1, 2012 $ 21,513,195
100,000,000 5 3/4s, April 15, 2008 94,187,000
7,096,416 5 1/2s, with due dates from March 1, 2011 to
April 1, 2011 6,686,102
Federal National Mortgage Association
Pass-Through Certificates
775,682 7s, with due dates from January 1, 2011 to
May 1, 2011 774,952
29,766,689 6 1/2s, with dates from January 1, 2027
to November 1, 2028 28,557,987
142,730,352 6 1/2s, with dates from December 1, 2008
to October 1, 2013 140,054,159
100,000,000 6 3/8s, June 15, 2009 97,969,000
2,578,746 6s, July 1, 2013 2,480,419
100,000,000 5 5/8s, May 14, 2004 97,016,000
Government National Mortgage Association
Pass-Through Certificates
15,529,026 9 1/2s, with due dates from December 15, 2017 to
March 15, 2029 16,578,924
17,364,086 9s, with due dates from June 15, 2018 to July 15, 2024 18,248,530
227,041 9s, with due dates from November 15, 2008 to
May 15, 2009 239,384
6,029,093 8 1/2s, with due dates from August 15, 2016 to
December 15, 2024 6,277,428
81,256 8 1/2s, with due dates from February 15, 2005 to
April 15, 2006 84,836
31,668,598 8s, with due dates from July 15, 2016 to March 15, 2028 32,405,896
8,413,149 8s, with due dates from January 15, 2001 to April 15, 2008 8,649,646
90,940,637 7 1/2s, with due dates from February 15, 2022 to
January 15, 2028 91,484,609
344,977,066 7s, with due dates from November 15, 2022 to
December 15, 2028 338,745,252
136,492,864 6 1/2s, with due dates from December 15, 2023 to
March 15, 2029 130,480,447
--------------
1,132,433,766
U.S. Treasury Obligations (22.3%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
12,040,000 11 7/8s, November 15, 2003 14,604,159
11,900,000 11 5/8s, November 15, 2004 14,798,721
50,000,000 9 7/8s, November 15, 2015 66,968,500
53,935,000 8 1/8s, August 15, 2019 63,836,928
7,988,000 7 1/2s, November 15, 2024 9,083,874
100,000,000 6 1/8s, August 15, 2029 100,984,000
31,831,000 5 1/2s, August 15, 2028 28,488,745
6,070,000 5 5/8s, May 15, 2008 5,891,663
1,000,000 5 3/8s, June 30, 2003 985,470
4,000,000 5 1/4s, May 15, 2004 3,909,360
75,000,000 5s, February 28, 2001 74,414,251
1,525,000 4 3/4s, November 15, 2008 1,388,224
--------------
385,353,895
--------------
Total U.S. Government and Agency Obligations
(cost $1,559,597,886) $1,517,787,661
SHORT-TERM INVESTMENTS (11.9%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$36,565,000 Interest in $369,466,000 joint repurchase agreement
dated September 30, 1999 with Morgan Stanley &
Co. Inc. due October 1, 1999 with respect to various
U.S. Treasury obligations -- maturity value of
$36,570,282 for an effective yield of 5.20% $ 36,565,000
85,000,000 Interest in $474,986,000 joint repurchase agreement
dated September 30, 1999 with S.B.C. Warburg Inc.
due October 1, 1999 with respect to various
U.S. Treasury obligations -- maturity value of
$85,012,514 for an effective yield of 5.30% 85,000,000
85,000,000 Interest in $750,000,000 joint tri-party repurchase
agreement dated September 30, 1999 with Goldman
Sachs & Co. due October 1, 1999 with respect to
various U.S. Treasury obligations -- maturity value of
$85,012,490 for an effective yield of 5.29% 85,000,000
--------------
Total Short-Term Investments (cost $206,565,000) $ 206,565,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,766,162,886) (b) $1,724,352,661
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,730,422,781.
(b) The aggregate identified cost on a tax basis is $1,766,140,601, resulting in gross unrealized appreciation and
depreciation of $7,649,205 and $49,437,145, respectively, or net unrealized depreciation of $41,787,940.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,766,162,886) (Note 1) $1,724,352,661
- -----------------------------------------------------------------------------------------------
Cash 704
- -----------------------------------------------------------------------------------------------
Interest and other receivables 17,184,505
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,900,539
- -----------------------------------------------------------------------------------------------
Total assets 1,743,438,409
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 9,011,567
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,410,189
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 189,985
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 79,097
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 6,341
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,150,307
- -----------------------------------------------------------------------------------------------
Other accrued expenses 168,142
- -----------------------------------------------------------------------------------------------
Total liabilities 13,015,628
- -----------------------------------------------------------------------------------------------
Net assets $1,730,422,781
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1, 4 and 5) $2,108,785,772
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Notes 1 and 3) (336,552,766)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
assets and liabilities in foreign currencies (41,810,225)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,730,422,781
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,557,539,310 divided by 184,891,798 shares) $8.42
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.42)* $8.84
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($165,019,579 divided by 19,667,402 shares)** $8.39
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($240,084 divided by 28,548 shares)** $8.41
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($7,623,808 divided by 902,717 shares) $8.45
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.45)* $8.73
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30, 1999
<S> <C>
Interest Income: $ 99,009,467
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 8,886,659
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,021,251
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 36,192
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 20,248
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 3,650,995
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,197,761
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 941
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 23,984
- -----------------------------------------------------------------------------------------------
Reports to shareholders 64,385
- -----------------------------------------------------------------------------------------------
Registration fees 150
- -----------------------------------------------------------------------------------------------
Auditing 67,790
- -----------------------------------------------------------------------------------------------
Legal 50,181
- -----------------------------------------------------------------------------------------------
Postage 196,026
- -----------------------------------------------------------------------------------------------
Other 144,294
- -----------------------------------------------------------------------------------------------
Total expenses 16,360,857
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (386,936)
- -----------------------------------------------------------------------------------------------
Net expenses 15,973,921
- -----------------------------------------------------------------------------------------------
Net investment income 83,035,546
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (26,790,166)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (89,045,787)
- -----------------------------------------------------------------------------------------------
Net loss on investments (115,835,953)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(32,800,407)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
-------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 83,035,546 $ 87,466,663
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (26,790,166) 42,372,651
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments (89,045,787) 43,680,120
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (32,800,407) 173,519,434
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (76,799,616) (89,363,617)
- ---------------------------------------------------------------------------------------------------------------
Class B (5,462,673) (2,093,444)
- ---------------------------------------------------------------------------------------------------------------
Class C (6,381) --
- ---------------------------------------------------------------------------------------------------------------
Class M (239,117) (98,251)
- ---------------------------------------------------------------------------------------------------------------
In excess of net investment income
Class A (7,299,290) --
- ---------------------------------------------------------------------------------------------------------------
Class B (519,191) --
- ---------------------------------------------------------------------------------------------------------------
Class C (607) --
- ---------------------------------------------------------------------------------------------------------------
Class M (22,726) --
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions
(Notes 4 and 5) 263,242,606 (77,444,612)
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 140,092,598 4,519,510
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 1,590,330,183 1,585,810,673
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $-- and $--, respectively) $1,730,422,781 $1,590,330,183
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.11 $8.65 $8.39 $8.65 $8.21
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .46(c) .50(c) .54 .52 .55
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.65) .49 .23 (.21) .50
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.19) .99 .77 .31 1.05
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.46) (.53) (.51) (.53) (.56)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.04) -- -- (.04) --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.50) (.53) (.51) (.57) (.61)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.42 $9.11 $8.65 $8.39 $8.65
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (2.12) 11.83 9.49 3.64 13.42
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,557,539 $1,500,157 $1,553,706 $1,800,683 $2,183,766
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .98 1.01 .97 .95 .94
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.30 5.72 6.34 6.14 6.62
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 240.06(d) 316.47 253.26 245.46 468.86
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements with PFTC. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
(d) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam High Quality Bond Fund.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.08 $8.61 $8.35 $8.62 $8.19
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .39(c) .41(c) .48 .49 .46(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.64) .53 .23 (.26) .51
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.25) .94 .71 .23 .97
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.40) (.47) (.45) (.46) (.49)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.04) -- -- (.04) --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.44) (.47) (.45) (.50) (.54)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.39 $9.08 $8.61 $8.35 $8.62
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (2.83) 11.20 8.72 2.77 12.32
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $165,020 $86,302 $30,935 $23,067 $9,099
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.73 1.76 1.72 1.70 1.68
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.56 4.87 5.59 5.46 5.76
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 240.06(d) 316.47 253.26 245.46 468.86
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements with PFTC. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
(d) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam High Quality Bond Fund.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share July 26, 1999+
operating performance to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of period $8.42
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .07(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments --
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .07
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.41
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 0.80*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $240
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .32*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .87*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 240.06(d)
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements with PFTC. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
(d) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam High Quality Bond Fund.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Feb. 14, 1995+
operating performance Year ended September 30 to Sept. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.14 $8.66 $8.38 $8.65 $8.14
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .44(c) .46(c) .53 .53 .29(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.65) .53 .24 (.26) .62
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.21) .99 .77 .27 .91
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.44) (.51) (.49) (.50) (.37)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income (.04) -- -- (.04) --
- ------------------------------------------------------------------------------------------------------------------------------------
From return of capital -- -- -- -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.48) (.51) (.49) (.54) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.45 $9.14 $8.66 $8.38 $8.65
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (2.36) 11.76 9.45 3.24 11.44*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $7,624 $3,871 $1,170 $1,108 $672
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.23 1.26 1.22 1.20 .78*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.06 5.34 6.10 5.94 4.03*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 240.06(d) 316.47 253.26 245.46 468.86
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements with PFTC. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
(d) Portfolio turnover excludes the impact of assets received from the acquisition of Putnam High Quality Bond Fund.
</TABLE>
Notes to financial statements
September 30, 1999
Note 1
Significant accounting policies
Putnam American Government Income Fund (the "fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks high current income, with
preservation of capital as its secondary objective.
The fund offers class A, class B, class C and class M shares. Effective
July 26, 1999, the fund began offering class C shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge but pay a higher ongoing distribution fee than
class A shares, and are subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Class C shares are
subject to the same fees and expenses as class B shares, except that class
C shares have a one year 1.00% contingent deferred sales charge and do not
convert to class A shares. Class M shares are sold with a maximum front
end sales charge of 3.25% and pay an ongoing distribution fee that is
higher than class A shares but lower than class B and class C shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amount of
increases and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are readily
available are stated at market value, which is determined using the last
reported sale price, or, if no sales are reported -- as in the case of
most securities traded over-the-counter -- the last reported bid price.
Short-term investments having remaining maturities of 60 days or less are
stated at amortized cost, which approximates market value, and other
investments are stated at fair value following procedures approved by the
Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested cash
balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
manager, a wholly-owned subsidiary of Putnam Investments, Inc. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the market
value of which at the time of purchase is required to be in an amount at
least equal to the resale price, including accrued interest. Collateral
for certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the fund and the
counterparty. Putnam Management is responsible for determining that the
value of these underlying securities is at all times at least equal to the
resale price, including accrued interest.
D) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on
the identified cost basis. Interest income is recorded on the accrual
basis. Discounts on original issue discount bonds are accreted according
to the yield-to-maturity basis.
E) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated investment
companies. It is also the intention of the fund to distribute an amount
sufficient to avoid imposition of any excise tax under Section 4982 of the
Internal Revenue Code of 1986, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
At September 30, 1999, the fund had a capital loss carryover of
approximately $301,280,000 available to offset future net capital gain, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------- ------------------
$37,523,000 September 30, 2001
7,767,000 September 30, 2002
255,990,000 September 30, 2003
F) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date. At
certain times, the fund may pay distributions at a level rate even though,
as a result of market conditons or investment decisions, the fund may not
achieve projected investment results for a given period. Capital gain
distributions, if any, are recorded on the ex-dividend date and paid at
least annually. The amount and character of income and gains to be
distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
differences include temporary and permanent differences of losses on wash
sales transactions, post-October loss deferrals, paydown gains and losses
on certain future contracts and market discount. Reclassifications are
made to the fund's capital accounts to reflect income and gains available
for distribution (or available capital loss carryovers) under income tax
regulations. For the year ended September 30, 1999, the fund reclassified
$7,314,055 to decrease distribution in excess of net investment income and
$6,978,240 to decrease paid-in-capital, with an increase to accumulated
net realized loss of $335,815. The calculation of net investment income
per share in the financial highlights table excludes these adjustments.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the the following annual rates: 0.65% of the first
$500 million of average net assets, 0.55% of the next $500 million, 0.50%
of the next $500 million, 0.45% of the next $5 billion, 0.425% of the next
$5 billion, 0.405% of the next $5 billion, 0.39% of the next $5 billion,
and 0.38% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended September 30, 1999, fund expenses were reduced by
$386,936 under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the
Statement of operations exclude these credits. The fund could have
invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered
into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $1,798
has been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B, class C and class M shares pursuant to Rule 12b-1 under
the Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam
Investments Inc., for services provided and expenses incurred by it in
distributing shares of the fund. The Plans provide for payments by the
fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%, 1.00%,
1.00% and 1.00% of the average net assets attributable to class A, class
B, class C and class M shares, respectively. The Trustees have approved
payment by the fund to an annual rate of 0.25%, 1.00%, 1.00% and 0.50% of
the average net assets attributable to class A, class B, class C and class
M shares respectively.
For the year ended September 30, 1999, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $235,188 and $3,334 from the
sale of class A and class M shares, respectively and $316,669 and $63 in
contingent deferred sales charges from redemptions of class B and class C
shares. A deferred sales charge of up to 1% is assessed on certain
redemptions of class A shares. For the year ended September 30, 1999,
Putnam Mutual Funds Corp., acting as underwriter received $30,105 on class
A redemptions.
Note 3
Purchases and sales of securities
During the year ended September 30, 1999, cost of purchases and proceeds
from sales of investment securities other than short-term investments
aggregated $3,736,529,598 and $3,547,915,227, respectively. There were no
purchases and sales of U.S. government obligations cost basis.
Note 4
Capital shares
At September 30, 1999, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended September 30, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 68,464,446 $600,200,128
- -----------------------------------------------------------------------------
Shares issued in
connection with
the merger of
Putnam High
Quality Bond 36,135,089 306,786,904
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,397,009 46,830,368
- -----------------------------------------------------------------------------
109,996,544 953,817,400
Shares
repurchased (89,695,209) (782,899,168)
- -----------------------------------------------------------------------------
Net increase 20,301,335 $170,918,232
- -----------------------------------------------------------------------------
Year ended September 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 29,817,962 $ 264,047,180
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,334,109 46,827,065
- -----------------------------------------------------------------------------
35,152,071 310,874,245
Shares
repurchased (50,258,469) (443,308,545)
- -----------------------------------------------------------------------------
Net decrease (15,106,398) $(132,434,300)
- -----------------------------------------------------------------------------
Year ended September 30, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 20,474,709 $178,407,530
- -----------------------------------------------------------------------------
Shares issued in
connection with
the merger of
Putnam High
Quality Bond 4,188,773 35,437,018
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 520,684 4,483,875
- -----------------------------------------------------------------------------
25,184,166 218,328,423
Shares
repurchased (15,018,282) (130,345,803)
- -----------------------------------------------------------------------------
Net increase 10,165,884 $ 87,982,620
- -----------------------------------------------------------------------------
Year ended September 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 8,932,737 $79,060,202
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 180,504 1,583,742
- -----------------------------------------------------------------------------
9,113,241 80,643,944
Shares
repurchased (3,202,832) (28,221,826)
- -----------------------------------------------------------------------------
Net increase 5,910,409 $52,422,118
- -----------------------------------------------------------------------------
For the period July 26, 1999
(commencement of operations)
to September 30, 1999
- -----------------------------------------------------------------------------
Class C Shares Amount
- -----------------------------------------------------------------------------
Shares sold 133,079 $1,114,472
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 768 6,385
- -----------------------------------------------------------------------------
133,847 1,120,857
Shares
repurchased (105,299) (882,713)
- -----------------------------------------------------------------------------
Net increase 28,548 $ 238,144
- -----------------------------------------------------------------------------
Year ended September 30, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 563,063 $4,932,289
- -----------------------------------------------------------------------------
Shares issued in
connection with
the merger of
Putnam High
Quality Bond 323,217 2,750,574
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 23,681 204,944
- -----------------------------------------------------------------------------
909,961 7,887,807
Shares
repurchased (430,898) (3,784,197)
- -----------------------------------------------------------------------------
Net increase 479,063 $4,103,610
- -----------------------------------------------------------------------------
Year ended September 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 372,928 $3,311,218
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,008 70,712
- -----------------------------------------------------------------------------
380,936 3,381,930
Shares
repurchased (92,479) (814,360)
- -----------------------------------------------------------------------------
Net increase 288,457 $2,567,570
- -----------------------------------------------------------------------------
Note 5
Acquisition of Putnam
High Quality Bond Fund
On July 12, 1999, the fund issued 36,135,089, 4,188,773, and 323,217 of
class A, class B, and class M shares respectively, in exchange for
31,929,070, 3,705,276, and 286,163 of class A, class B and class M shares
of Putnam High Quality Bond Fund to acquire that fund's net assets in a
tax-free exchange approved by the shareholders. The net assets of the fund
and Putnam High Quality Bond Fund on July 9, 1999, were $1,452,560,868 and
$344,974,496 respectively. On July 9, 1999, Putnam High Quality Bond Fund
had unrealized depreciation of $12,281,956.
The aggregate net assets of the fund immediately following the acquisition
were $1,797,535,364.
Federal tax information
(Unaudited)
The Form 1099 you receive in January 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
Our commitment to quality service
* CHOOSE AWARD-WINNING SERVICE
Putnam Investments has won the DALBAR Service Award 8 times in the past 9
years. In 1997 and 1998, Putnam was the only company to win all three
DALBAR awards: for service to investors, to financial advisors, and to
variable annuity contract holders.*
* HELP YOUR INVESTMENTS GROW
Set up a systematic program for investing with as little as $25 a month
from a Putnam money market fund or from your checking or savings account.+
* SWITCH FUNDS EASILY
Within the same class of shares, you can move money from one account to
another without a service charge. (This privilege is subject to change or
termination.)
* ACCESS YOUR MONEY QUICKLY
You can get checks sent regularly or redeem shares any business day at the
then-current net asset value, which may be more or less than the original
cost of the shares.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a helpful
Putnam representative. To learn more about Putnam, visit our Web site.
www.putnaminv.com
To make an additional investment in this or any other Putnam fund, contact
your financial advisor or call our toll-free number.
1-800-225-1581
*DALBAR, Inc., an independent research firm, presents the awards to financial
services firms that provide consistently excellent service.
+Regular investing, of course, does not guarantee a profit or protect against
a loss in a declining market.
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds. Please
call your financial advisor or Putnam at 1-800-225-1581 to obtain a prospectus
for any Putnam fund. It contains more complete information, including charges
and expenses. Please read it carefully before you invest or send money.
GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Europe Growth Fund
Global Equity Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Tax Smart Equity Fund
Vista Fund
Voyager Fund
Voyager Fund II
GROWTH AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Small Cap Value Fund
Utilities Growth and Income Fund
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
TAX-FREE INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New Jersey,
New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK] **
California, New York
ASSET ALLOCATION FUNDS
Putnam Asset Allocation Funds-three investment portfolios that spread your
money across a variety of stocks, bonds, and money market investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Putnam Diversified Income Trust II
[DBL. DAGGER] Closed to new investors. Some exceptions may apply. Contact
Putnam for details.
[SECTION MARK] Not available in all states.
** An investment in a money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at www.putnaminv.com.
Fund information
WEB SITE
www.putnaminv.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Edward H. D'Alelio
Vice President
Michael Martino
Vice President and Fund Manager
Kevin M. Cronin
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
This report is for the information of shareholders of Putnam American
Government Income Fund. It may also be used as sales literature when
preceded or accompanied by the current prospectus, which gives details of
sales charges, investment objectives, and operating policies of the fund,
and the most recent copy of Putnam's Quarterly Performance Summary. For
more information or to request a prospectus, call toll free:
1-800-225-1581.
You can also learn more at Putnam Investments' Web site: www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
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For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
AN027-56138 033/292/895 11/99
