Putnam
American Government
Income Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-00
[SCALE LOGO OMITTED]
FROM THE TRUSTEES
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years during
which the global securities markets, the mutual fund industry, and
Putnam itself have experienced tremendous growth and change.
As we look to the future, we are certain that the changes will be
breathtaking in their scope. What will not change is the Trustees'
dedication to serving the best interests of our shareholders.
We welcome the challenges that lie ahead and are confident that Putnam
and your Board will continue to face those challenges successfully as
they have for more than 60 years. We look forward to helping you meet
your financial objectives for many years to come.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
November 15, 2000
REPORT FROM FUND MANAGEMENT
Kevin M. Cronin
and the Mortgage Team
The bond market witnessed some dramatic shifts during Putnam American
Government Income Fund's fiscal year, the 12 months ended September 30,
2000. Accordingly, your fund's management team altered sector
allocations as we sought to take advantage of the relative value offered
by Treasuries and mortgage-backed securities (MBSs). Ultimately your
fund was able to post a performance that was generally in line with the
market and its peers.
Total return for 12 months ended 9/30/00
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
-----------------------------------------------------------------------
6.32% 1.27% 5.52% 0.52% 5.50% 4.50% 6.00% 2.59%
-----------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 6.
* YIELD CURVE INVERTS, THEN RESUMES MORE NORMAL SHAPE
During the first half of your fund's fiscal year, interest rates rose
for three months and then fell sharply over the following quarter. The
initial rise, which took place during the fourth quarter of 1999,
resulted from concerns that the U.S. economy was growing too fast and
that inflation was imminent. The Federal Reserve Board continued to
implement a program of short-term rate increases in an effort to slow
growth and head off inflation.
In the first quarter of 2000, the yield curve inverted as a result of
rising short-term interest rates that coincided with a sharp decline in
the yield on the 30-year Treasury bond. The Fed continued to raise
rates, bringing the federal funds rate to 6.00% by the end of March. At
the same time, interest rates declined on the long end primarily because
of the federal government's decision to use the budget surplus to pay
down federal debt by buying back 30-year Treasury bonds. The increase in
demand caused by these purchases pushed long-term bond prices up,
bringing yields down.
[GRAPHIC OMITTED: vertical bar chart AVERAGE EFFECTIVE MATURITY AND DURATION]
AVERAGE EFFECTIVE MATURITY AND DURATION
9/30/99 3/31/00 9/30/00
Average effective maturity 9.1 9.1 10.5
Duration 5.2 5.7 5.5
Footnote reads:
This chart depicts the fund's average effective maturity and duration at
6-month intervals over the 12 months ended 9/30/00. 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.
The inverted yield curve was sustained through much of the second
quarter as well, as the Fed added another, more substantial rate
increase in May. However, this trend started to reverse in June. An
unexpected increase in unemployment caused the market to breathe a sigh
of relief; many market observers believed that the Fed's rate policy was
starting to have the desired effect. As we progressed from July through
the end of the fiscal year, it became even clearer that the Fed would
hold off implementing further rate increases. In response, interest
rates declined in the third quarter of 2000. While daily activity
appeared volatile as the quarter passed, in retrospect the market
remained relatively stable.
* BACKDROP CALLS FOR MOVEMENTS INTO AND OUT OF SECTORS
During the course of your fund's fiscal year, relative value and
performance potential shifted back and forth between Treasuries and
MBSs. As long-term rates declined during the beginning of 2000,
Treasuries were the place to be, and your fund was positioned to
benefit. Meanwhile, the difference, or spread, between Treasury and MBS
yields increased, hurting the latter's performance. As relative prices
of MBSs became more attractive, we began to bulk up on them toward the
end of the first quarter, while selling off Treasuries that had
performed well. As the spread decreased and the yield curve reverted to
a steep shape, we sold off some MBS holdings. More recently we have been
adding back to the MBS stake.
[GRAPHIC OMITTED: pie chart PORTFOLIO ALLOCATION (9/30/00)]
PORTFOLIO ALLOCATION (9/30/00)*
Short-term
investments -- 5.3%
U.S. Treasury
securities -- 33.6%
Mortgage-backed
securities -- 61.1%
Footnote reads:
*Based on total market value of investments. The allocation to
mortgage-backed securities is primarily concentrated in bonds issued by
the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal
National Mortgage Association (Fannie Mae), and the Government National
Mortgage Association (Ginnie Mae). Allocations will vary over time.
"[T]his year bond funds are actually beating many stock funds, while
also offering a much smoother ride. . . . Bond funds have bounced on the
perception that the U.S. economy has slowed and that the Federal Reserve
is done raising interest rates for the rest of the year."
-- The Wall Street Journal, 10/9/00
During the past six months, we have altered the content of your fund's
MBS holdings. These securities are backed by pools of home mortgages all
having the same interest rate and maturity. Interest and principal
payments received each month from homeowners' mortgage payments are
passed through to owners of the mortgage-backed security.
[GRAPHIC OMITTED: worm chart U.S. TREASURY YIELD CURVE AT 9/30/99 AND 9/30/00]
U.S. TREASURY YIELD CURVE AT 9/30/99 AND 9/30/00
9/30/99 9/30/00
3 mo. 4.85% 6.20%
6 mo. 4.96% 6.28%
1 yr. 5.18% 6.08%
2 yr. 5.60% 5.96%
5 yr. 5.76% 5.84%
10 yr. 5.88% 5.79%
30 yr. 6.05% 5.88%
Footnote reads:
Source: Bloomberg, Inc.
Earlier on, we favored discount mortgages offering a 6% coupon because
they were an especially safe investment during a more uncertain time.
More recently we have invested to a large degree in higher-coupon (7.5%)
securities made up of 15-year mortgages that had underperformed earlier
in the year and were selling at attractive levels. These MBSs may
initially appear more susceptible to prepayment risk -- the risk that
the mortgage holders might pay off the mortgage early to take advantage
of lower rates, leaving the fund with assets to reinvest in
lower-yielding securities. On the other hand, they are in fact seasoned
mortgages, meaning that their owners have not taken advantage of prior
opportunities over the first 15 years that they have had their mortgages
to refinance at lower levels.
We have also gradually increased your fund's duration during its fiscal
year. Duration is a measure of the fund's sensitivity to changes in
interest rates; a longer duration means the fund will benefit more if
interest rates continue to go down. A shorter duration is more likely to
protect the portfolio's value in periods of rising rates but can limit
its appreciation potential when rates decline. It should be noted,
though, that our current stance is a neutral one. Earlier in the year,
we maintained a defensive, lower-duration posture.
* OUTLOOK FOR GOVERNMENT SECURITIES GENERALLY POSITIVE
Looking ahead, we have a generally positive outlook. We believe the Fed
is on hold and do not expect it will make any moves with the federal
funds rate or the discount rate until next year at the earliest. The Fed
maintains a bias toward raising rates to head off inflation, but we
would not be surprised if that outlook changes after the Fed's November
meeting.
Overall, the environment should be positive for both Treasuries and
MBSs. We anticipate a period of relative stability. Under such
conditions, the incremental yield the fund earns from MBSs and agency
securities should help performance. We will continue our efforts to
unearth value opportunities in the mortgage market as the turmoil from
the first quarter gradually recedes. If we achieve a sustained period of
calm, we expect MBSs and other non-Treasury sectors to perform
relatively well.
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 9/30/00, 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.
Mortgage-backed securities may be subject to prepayment risk.
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.
TOTAL RETURN FOR PERIODS ENDED 9/30/0
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
------------------------------------------------------------------------------
1 year 6.32% 1.27% 5.52% 0.52% 5.50% 4.50% 6.00% 2.59%
------------------------------------------------------------------------------
5 years 32.05 25.80 27.40 25.45 27.06 27.06 30.68 26.45
Annual average 5.72 4.70 4.96 4.64 4.91 4.91 5.50 4.81
------------------------------------------------------------------------------
10 years 89.72 80.79 75.68 75.68 75.82 75.82 85.31 79.23
Annual average 6.61 6.10 5.80 5.80 5.81 5.81 6.36 6.01
------------------------------------------------------------------------------
Life of fund 202.99 188.53 165.96 165.96 169.24 169.24 188.64 179.30
Annual average 7.37 7.04 6.48 6.48 6.56 6.56 7.04 6.81
------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/00
Lehman Brothers Intermediate Consumer
Treasury Bond Index price index
-----------------------------------------------------------------------
1 year 6.08% 3.46%
-----------------------------------------------------------------------
5 years 34.07 13.32
Annual average 6.04 2.53
-----------------------------------------------------------------------
10 years 100.91 30.82
Annual average 7.22 2.72
-----------------------------------------------------------------------
Life of fund 247.11 63.77
Annual average 8.31 3.22
-----------------------------------------------------------------------
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,
if 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 9/30/90
Lehman Bros.
Fund's class A Intermediate Treasury Consumer price
Date shares at POP Bond Index index
9/30/90 9,425 10,000 10,000
9/30/91 10,911 11,354 10,339
9/30/92 11,736 12,781 10,648
9/30/93 12,851 13,762 10,934
9/30/94 12,071 13,554 11,258
9/30/95 13,691 14,986 11,545
9/30/96 14,189 15,747 11,891
9/30/97 15,535 16,968 12,155
9/30/98 17,372 18,802 12,329
9/30/99 17,005 18,939 12,645
9/30/00 $18,079 $20,091 $13,082
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 $17,568 and $17,582, respectively, and
no contingent deferred sales charges would apply; a $10,000 investment
in the fund's class M shares would have been valued at $18,531 ($17,923
at public offering price). See first page of performance section for
performance calculation method.
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 9/30/00
Class A Class B Class C Class M
------------------------------------------------------------------------------
Distributions
(number) 12 12 12 12
------------------------------------------------------------------------------
Income $0.4800 $0.4160 $0.4250 $0.4560
------------------------------------------------------------------------------
Capital gains -- -- -- --
------------------------------------------------------------------------------
Total $0.4800 $0.4160 $0.4250 $0.4560
------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
------------------------------------------------------------------------------
9/30/99 $8.42 $8.84 $8.39 $8.41 $8.45 $8.73
------------------------------------------------------------------------------
9/30/00 8.45 8.87 8.42 8.43 8.48 8.76
------------------------------------------------------------------------------
Current return
(end of period)
------------------------------------------------------------------------------
Current dividend
rate1 5.68% 5.41% 4.99% 4.98% 5.38% 5.21%
------------------------------------------------------------------------------
Current 30-day
SEC
yield2 5.90 5.71 5.15 5.15 5.64 5.53
------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Based only on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class 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, may pose different risks than the
fund, 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 noninvestment 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-end funds, a
separate table is provided for each share class.
REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal year ended September 30, 2000
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, 2000, and the results of its operations, the changes in
its net assets and the financial highlights for the periods indicated,
in conformity with accounting principles generally accepted in the United
States of America. 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 auditing standards generally
accepted in the United States of America, 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, 2000 by correspondence
with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 7, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
September 30, 2000
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (97.3%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
U.S. Government Agency Mortgage Obligations (62.7%) (a)
-------------------------------------------------------------------------------------------------------------------
$ 151,500,000 Federal National Mortgage Association
7 1/2s, TBA, October 1, 2015 $ 152,589,285
Federal National Mortgage Association
Pass-Through Certificates
9,067,736 8s, with due dates from September 1, 2029
to August 1, 2030 9,189,515
4,936,884 7 1/2s, with due dates from March 1, 2030
to April 1, 2030 4,925,529
449,367,269 7 1/2s, with due dates from August 1, 2014
to September 1, 2015 452,733,024
4,104,898 6s, September 1, 2029 3,832,949
Financing Corp. Strip
16,335,000 zero %, with due dates from October 6, 2011
to April 6, 2014 6,987,310
5,234,000 Ser. A, zero %, August 8, 2013 2,478,404
1,062,000 Ser. C, zero %, May 30, 2014 411,610
8,622,000 Ser. 1, zero %, with due dates from May 11, 2011
to May 11, 2013 3,848,567
1,000,000 Ser. 2, zero %, May 30, 2012 447,450
183,000 Ser. 3, zero %, November 30, 2013 73,431
1,250,000 Ser. 4, zero %, October 6, 2012 545,025
709,000 Ser. 5, zero %, with due dates from August 8, 2011
to August 8, 2013 306,433
2,374,000 Ser. 6, zero %, with due dates from August 3, 2011
to February 3, 2014 1,071,371
3,461,000 Ser. 11, zero %, with due dates from February 8, 2012
to February 8, 2014 1,433,780
31,071,000 Ser. 13, zero %, with due dates from June 27, 2012
to December 27, 2015 11,287,364
2,000,000 Ser. 16, zero %, April 5, 2013 840,520
1,654,000 Ser. 17, zero %, October 5, 2011 776,652
13,820,000 Ser. 19, zero %, June 6, 2012 6,173,256
3,130,000 Financing Corp. Tiger Strip,Ser. FO, zero %, August 8, 2013 1,284,145
Government National Mortgage Association
Pass-Through Certificates
4,321,764 9 1/2s, with due dates from November 15, 2028
to March 15, 2029 4,529,848
21,665,418 9s, with due dates from April 15, 2016
to July 15, 2024 22,715,902
186,553 9s, with due dates from November 15, 2008
to May 15, 2009 195,763
4,928,990 8 1/2s, with due dates from August 15, 2016
to December 15, 2024 5,083,195
57,451 8 1/2s, with due dates from February 15, 2005
to April 15, 2006 59,474
132,352,973 8s, with due dates from July 15, 2016 to June 15, 2030 134,835,960
Government National Mortgage Association
Pass-Through Certificates
6,576,599 8s, with due dates from January 15, 2001 to April 15, 2008 6,746,469
66,549,175 7 1/2s, with due dates from February 15, 2022
to January 15, 2028 66,920,384
37,367,121 7s, with due dates from November 15, 2022
to April 15, 2028 36,852,916
14,077,575 6 1/2s, with due dates from October 15, 2025
to January 15, 2029 13,559,811
9,166,450 6s, with due dates from October 15, 2023
to June 15, 2029 8,599,231
--------------
961,334,573
U.S. Treasury Obligations (34.6%)
-------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
122,400,000 10 5/8s, August 15, 2015 175,777,416
108,000,000 6 1/4s, May 15, 2030 113,501,520
55,000,000 6 1/8s, August 15, 2029 56,177,550
14,000,000 6 1/8s, November 15, 2027 14,129,080
31,831,000 5 1/2s, August 15, 2028 29,533,120
139,085,000 U.S. Treasury Note, 6 1/8s, August 15, 2007 140,453,596
--------------
529,572,282
--------------
Total U.S. Government and Agency Obligations
(cost $1,487,922,131) $1,490,906,855
<CAPTION>
SHORT-TERM INVESTMENTS (5.5%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 41,500,000 Interest in $843,280,000 joint repurchase agreement dated
September 29, 2000 with Morgan Stanley Dean Witter due
October 2, 2000 with respect to various U.S. Government
Agency obligations -- maturity value of $41,522,929 for an
effective yield of 6.63% $ 41,500,000
42,482,000 Interest in $800,000,000 joint repurchase agreement dated
September 29, 2000 with S.B.C. Warburg, Inc. due
October 2, 2000 with respect to various U.S. Government
Agency obligations -- maturity value of $42,505,542 for an
effective yield of 6.65% 42,482,000
--------------
Total Short-Term Investments (cost $83,982,000) $ 83,982,000
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,571,904,131) (b) $1,574,888,855
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,531,810,410.
(b) The aggregate identified cost on a tax basis is $1,572,144,384,
resulting in gross unrealized appreciation and depreciation of
$11,041,894 and $8,297,423, respectively, or net unrealized appreciation
of $2,744,471.
TBA after the name of a security represents to be announced
securities (Note 1).
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2000
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,571,904,131) (Note 1) $1,574,888,855
-------------------------------------------------------------------------------------------
Interest and other receivables 11,743,541
-------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 5,580,438
-------------------------------------------------------------------------------------------
Receivable for securities sold 109,681,662
-------------------------------------------------------------------------------------------
Total assets 1,701,894,496
Liabilities
-------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 10,125,742
-------------------------------------------------------------------------------------------
Payable for securities purchased 153,275,391
-------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 3,043,412
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,173,067
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 282,185
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 97,899
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,243
-------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 986,110
-------------------------------------------------------------------------------------------
Other accrued expenses 96,037
-------------------------------------------------------------------------------------------
Total liabilities 170,084,086
-------------------------------------------------------------------------------------------
Net assets $1,531,810,410
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1, 4 and 5) $1,965,514,649
-------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 2,135,032
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (438,823,995)
-------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,984,724
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,531,810,410
Computation of net asset value and offering price
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,401,125,576 divided by 165,803,301 shares) $8.45
-------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.45)* $8.87
-------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($120,615,600 divided by 14,330,952 shares)** $8.42
-------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($3,011,896 divided by 357,100 shares)** $8.43
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($7,057,338 divided by 832,582 shares) $8.48
-------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.48)* $8.76
-------------------------------------------------------------------------------------------
* 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, 2000
<S> <C>
Interest income: $108,292,122
-------------------------------------------------------------------------------------------
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 8,938,793
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,012,195
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 39,314
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 15,872
-------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 3,647,802
-------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,313,531
-------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 13,104
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 35,301
-------------------------------------------------------------------------------------------
Other 490,626
-------------------------------------------------------------------------------------------
Total expenses 16,506,538
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (474,790)
-------------------------------------------------------------------------------------------
Net expenses 16,031,748
-------------------------------------------------------------------------------------------
Net investment income 92,260,374
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (45,335,128)
-------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 44,794,949
-------------------------------------------------------------------------------------------
Net loss on investments (540,179)
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 91,720,195
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended September 30
---------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 92,260,374 $ 83,035,546
--------------------------------------------------------------------------------------------------
Net realized loss on investments (45,335,128) (26,790,166)
--------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 44,794,949 (89,045,787)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 91,720,195 (32,800,407)
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income
Class A (84,358,852) (76,799,616)
--------------------------------------------------------------------------------------------------
Class B (6,617,503) (5,462,673)
--------------------------------------------------------------------------------------------------
Class C (64,013) (6,381)
--------------------------------------------------------------------------------------------------
Class M (385,247) (239,117)
--------------------------------------------------------------------------------------------------
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) (198,906,951) 263,242,606
--------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (198,612,371) 140,092,598
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 1,730,422,781 1,590,330,183
--------------------------------------------------------------------------------------------------
End of year (including undistributed
net investment income of
$2,135,032 and $--, respectively) $1,531,810,410 $1,730,422,781
--------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.42 $9.11 $8.65 $8.39 $8.65
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .49(c) .46(c) .50(c) .54 .52
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .02(d) (.65) .49 .23 (.21)
-----------------------------------------------------------------------------------------------------
Total from
investment operations .51 (.19) .99 .77 .31
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.48) (.46) (.53) (.51) (.53)
-----------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.04) -- -- (.04)
-----------------------------------------------------------------------------------------------------
Total distributions (.48) (.50) (.53) (.51) (.57)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.45 $8.42 $9.11 $8.65 $8.39
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 6.32 (2.12) 11.83 9.49 3.64
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,401,126 $1,557,539 $1,500,157 $1,553,706 $1,800,683
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .97 .98 1.01 .97 .95
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.84 5.30 5.72 6.34 6.14
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 447.42 240.06(f) 316.47 253.26 245.46
-----------------------------------------------------------------------------------------------------
+ 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) The amount shown for a share outstanding does not correspond with
the aggregate net gain (loss) on investments for the period due to
timing of sales and repurchases of fund shares in relation to
fluctuating market values of the investments of the fund.
(e) The amount represents less than $0.01 per share.
(f) 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
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.39 $9.08 $8.61 $8.35 $8.62
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .42(c) .39(c) .41(c) .48 .49
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .03(d) (.64) .53 .23 (.26)
-----------------------------------------------------------------------------------------------------
Total from
investment operations .45 (.25) .94 .71 .23
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.42) (.40) (.47) (.45) (.46)
-----------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.04) -- -- (.04)
-----------------------------------------------------------------------------------------------------
Total distributions (.42) (.44) (.47) (.45) (.50)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.42 $8.39 $9.08 $8.61 $8.35
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.52 (2.83) 11.20 8.72 2.77
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $120,616 $165,020 $86,302 $30,935 $23,067
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.72 1.73 1.76 1.72 1.70
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.09 4.56 4.87 5.59 5.46
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 447.42 240.06(f) 316.47 253.26 245.46
-----------------------------------------------------------------------------------------------------
+ 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) The amount shown for a share outstanding does not correspond with
the aggregate net gain (loss) on investments for the period due to
timing of sales and repurchases of fund shares in relation to
fluctuating market values of the investments of the fund.
(e) The amount represents less than $0.01 per share.
(f) Portfolio turnover excludes the impact of assets received from the
acquisition of Putnam High Quality Bond Fund.
</TABLE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS C
--------------------------------------------------------------
For the period
Per-share Year ended July 26, 1999+
operating performance Sept. 30 to Sept. 30
--------------------------------------------------------------
2000 1999
--------------------------------------------------------------
Net asset value,
beginning of period $8.41 $8.42
--------------------------------------------------------------
Investment operations
--------------------------------------------------------------
Net investment income (c) .42 .07
--------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .03(d) --(e)
--------------------------------------------------------------
Total from
investment operations .45 .07
--------------------------------------------------------------
Less distributions:
--------------------------------------------------------------
From net
investment income (.43) (.07)
--------------------------------------------------------------
In excess of net
investment income -- (.01)
--------------------------------------------------------------
Total distributions (.43) (.08)
--------------------------------------------------------------
Net asset value,
end of period $8.43 $8.41
--------------------------------------------------------------
Ratios and supplemental data
--------------------------------------------------------------
Total return at
net asset value (%)(a) 5.50 0.80*
--------------------------------------------------------------
Net assets, end of period
(in thousands) $3,012 $240
--------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.72 .32*
--------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.09 .87*
--------------------------------------------------------------
Portfolio turnover (%) 447.42 240.06(f)
--------------------------------------------------------------
+ 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) The amount shown for a share outstanding does not correspond with
the aggregate net gain (loss) on investments for the period due to
timing of sales and repurchases of fund shares in relation to
fluctuating market values of the investments of the fund.
(e) The amount represents less than $0.01 per share.
(f) Portfolio turnover excludes the impact of assets received from the
acquisition of Putnam High Quality Bond Fund.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS M
-----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.45 $9.14 $8.66 $8.38 $8.65
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .46(c) .44(c) .46(c) .53 .53
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .03(d) (.65) .53 .24 (.26)
-----------------------------------------------------------------------------------------------------
Total from
investment operations .49 (.21) .99 .77 .27
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.46) (.44) (.51) (.49) (.50)
-----------------------------------------------------------------------------------------------------
In excess of net
investment income -- (.04) -- -- (.04)
-----------------------------------------------------------------------------------------------------
Total distributions (.46) (.48) (.51) (.49) (.54)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.48 $8.45 $9.14 $8.66 $8.38
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 6.00 (2.36) 11.76 9.45 3.24
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $7,057 $7,624 $3,871 $1,170 $1,108
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.22 1.23 1.26 1.22 1.20
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.59 5.06 5.34 6.10 5.94
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 447.42 240.06(f) 316.47 253.26 245.46
-----------------------------------------------------------------------------------------------------
+ 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) The amount shown for a share outstanding does not correspond with
the aggregate net gain (loss) on investments for the period due to
timing of sales and repurchases of fund shares in relation to
fluctuating market values of the investments of the fund.
(e) The amount represents less than $0.01 per share.
(f) Portfolio turnover excludes the impact of assets received from the
acquisition of Putnam High Quality Bond Fund.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
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, primarily through U.S. government securities, with preservation
of capital as its secondary objective.
The fund offers class A, class B, class C and class M shares. Class A
shares are sold with a maximum front-end sales charge of 4.75%. Class B
shares, which convert to class A shares after approximately eight years,
do not pay a front-end sales charge, but pay a higher ongoing
distribution fee than class A shares, and are subject to a contingent
deferred sales charge, if those shares are redeemed within six years of
purchase. Class 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 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 that 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 of the financial statements and the reported
amounts 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 sales price on its principal exchange, or if no sales
are reported -- as in the case of some 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. Other investments, including
restricted securities, 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 zero
coupon bonds are accreted according to the yield-to-maturity basis.
E) TBA purchase commitments The fund may enter into "TBA" (to be
announced) purchase commitments to purchase securities for a fixed unit
price at a future date beyond customary settlement time. Although the
unit price has been established, the principal value has not been
finalized. However, the amount of the commitments will not fluctuate
more than 0.01% from the principal amount. The fund holds, and maintains
until settlement date, cash or high-grade debt obligations in an amount
sufficient to meet the purchase price, or the fund may enter into
offsetting contracts for the forward sale of other securities it owns.
Income on the securities will not be earned until settlement date. TBA
purchase commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the
risk of decline in the value of the fund's other assets. Unsettled TBA
purchase commitments are valued at the current market value of the
underlying securities, according to the procedures described under
"Security valuation" above.
Although the fund will generally enter into TBA purchase commitments
with the intention of acquiring securities for their portfolio or for
delivery pursuant to options contracts it has entered into, the fund may
dispose of a commitment prior to settlement if Putnam Management deems
it appropriate to do so.
F) TBA sale commitments The fund may enter into TBA sale commitments to
hedge its portfolio positions or to sell mortgage-backed securities it
owns under delayed delivery arrangements. Proceeds of TBA sale
commitments are not received until the contractual settlement date.
During the time a TBA sale commitment is outstanding, equivalent
deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover"
for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures
described under "Security valuation" above. The contract is
"marked-to-market" daily and the change in market value is recorded by
the fund as an unrealized gain or loss. If the TBA sale commitment is
closed through the acquisition of an offsetting purchase commitment, the
fund realizes a gain or loss. If the fund delivers securities under the
commitment, the fund realizes a gain or a loss from the sale of the
securities based upon the unit price established at the date the
commitment was entered into.
G) 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, 2000, the fund had a capital loss carryover of
approximately $401,793,000 available to offset future capital gains, if
any. This amount includes approximately $55,759,000 of capital loss
carryovers acquired in connection with the fund's acquisition of the net
assets of Putnam High Quality Bond Fund in 1999. The amount of the
capital loss carryover that can be used to offset realized capital gains
by the fund in any one year may be limited by the Internal Revenue Code
and Regulations. To the extent that capital loss carryovers are used to
offset realized capital gains, it is unlikely that gains so offset would
be distributed to shareholders since any such distribution might be
taxable as ordinary income.
Loss Carryover Expiration
-------------- ------------------
$ 91,615,000 September 30, 2001
7,767,000 September 30, 2002
255,990,000 September 30, 2003
1,667,000 September 30, 2006
44,754,000 September 30, 2008
H) Distributions to shareholders Distributions to shareholders 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
conditions or investment decisions, the fund may not achieve projected
investment results for a given period. Capital gains distributions, if
any, are recorded on the ex-dividend date and paid at least annually.
The amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences include
temporary and permanent differences of losses on wash sale transactions,
post-October loss deferrals, book accretion/amortization adjustments and
paydown gains and losses on mortgage-backed securities. Reclassifications
are made to the fund's capital accounts to reflect income and gains
available for distribution (or available capital loss carryovers) under
income tax regulations. For the year ended September 30, 2000, the fund
reclassified $1,300,273 to increase undistributed net investment income
and $55,635,828 to increase paid-in-capital, with an increase to
accumulated net realized losses of $56,936,101. The calculation of net
investment income per share in the financial highlights table excludes
these adjustments.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.65% 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.
Under the subcustodian contract between the subcustodian bank and PFTC,
the subcustodian bank has a lien on the securities of the fund to the
extent permitted by the fund's investment restrictions to cover any
advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At September 30, 2000, the payable to the
subcustodian bank represents the amount due for cash advance for the
settlement of a security purchased.
For the year ended September 30, 2000, fund expenses were reduced by
$474,790 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $1,591
has been allocated to the fund, and an additional fee for each Trustees
meeting attended. 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 a 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 Retail Management, Inc., 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 Retail Management, Inc. 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 at 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, 2000, Putnam Retail Management, Inc.,
acting as underwriter received net commissions of $106,856 and $360 from
the sale of class A and class M shares, respectively, and received
$507,300 and $2,473 in contingent deferred sales charges from
redemptions of class B and class C shares, respectively. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended September 30, 2000, Putnam Retail Management,
Inc., acting as underwriter received $29,916 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended September 30, 2000, cost of purchases and proceeds
from sales of U.S. government and agency obligations other than
short-term investments aggregated $6,464,297,421 and $6,495,185,106,
respectively.
Note 4
Capital shares
At September 30, 2000, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended September 30, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 35,014,986 $ 291,569,399
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,103,837 50,668,803
---------------------------------------------------------------------------
41,118,823 342,238,202
Shares
repurchased (60,207,320) (499,715,069)
---------------------------------------------------------------------------
Net decrease (19,088,497) $(157,476,867)
---------------------------------------------------------------------------
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
Fund 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, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 7,271,124 $ 60,313,944
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 604,793 5,002,163
---------------------------------------------------------------------------
7,875,917 65,316,107
Shares
repurchased (13,212,367) (108,904,337)
---------------------------------------------------------------------------
Net decrease (5,336,450) $(43,588,230)
---------------------------------------------------------------------------
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
Fund 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, 2000
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 466,582 $3,874,149
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,614 71,549
---------------------------------------------------------------------------
475,196 3,945,698
Shares
repurchased (146,644) (1,216,807)
---------------------------------------------------------------------------
Net increase 328,552 $2,728,891
---------------------------------------------------------------------------
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, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 341,947 $2,849,404
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 36,564 304,404
---------------------------------------------------------------------------
378,511 3,153,808
Shares
repurchased (448,646) (3,724,553)
---------------------------------------------------------------------------
Net decrease (70,135) $ (570,745)
---------------------------------------------------------------------------
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
Fund 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
---------------------------------------------------------------------------
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 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
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
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 Century Growth Fund
New Opportunities Fund
OTC & Emerging Growth Fund
Research Fund
Tax Smart Equity Fund
Technology Fund
Vista Fund
Voyager Fund
Voyager Fund II
GROWTH AND INCOME FUNDS
Balanced Fund
Balanced Retirement Fund
Classic Equity 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
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 Growth and Income Fund 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.putnaminvestments.com.
FUND INFORMATION
WEB SITE
www.putnaminvestments.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
John A. Hill, 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, III
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
Kevin M. Cronin
Vice President and Fund Manager
Richard A. Monaghan
Vice President
Richard G. Leibovitch
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
and Putnam's Quarterly Ranking 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.putnaminvestments.com.
Not FDIC Insured, May Lose Value, No Bank Guarantee
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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PUTNAM
INVESTMENTS
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For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
AN027 65470 033/292/895 11/00
