PUTNAM EQUITY INCOME FUND
FORM N-1A
PART B
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
APRIL 1, 1996 , as revised July 12, 1996
This SAI is not a prospectus and is only authorized for
distribution when accompanied or preceded by the prospectus of
the fund dated April 1, 1996, as revised from time to time. This
SAI contains information which may be useful to investors but
which is not included in the prospectus. If the fund has more
than one form of current prospectus, each reference to the
prospectus in this SAI shall include all of the fund's
prospectuses, unless otherwise noted. The SAI should be read
together with the applicable prospectus. Investors may obtain a
free copy of the applicable prospectus from Putnam Investor
Services, Mailing address: P.O. Box 41203, Providence, RI 02940-
1203.
Part I of this SAI contains specific information about the fund.
Part II includes information about the fund and the other Putnam
funds.
<PAGE>
Table of Contents
Part I
SECURITIES RATINGS. . . . . . . . . . . . . . . . . . . . . . . .I-3
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . I- 5
CHARGES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . I- 8
INVESTMENT PERFORMANCE . . . . . . . . . . . . . . . . . . . . .I- 12
ADDITIONAL OFFICERS. . . . . . . . . . . . . . . . . . . . . . .I- 13
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS . . . . . . . .I- 14
Part II
MISCELLANEOUS INVESTMENT PRACTICES . . . . . . . . . . . . . . . . . . II-1
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-25
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-30
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . .II-40
HOW TO BUY SHARES. . . . . . . . . . . . . . . . . . . . . . . II- 42
DISTRIBUTION PLANS . . . . . . . . . . . . . . . . . . . . . . . . . .II-54
INVESTOR SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . .II-55
SIGNATURE GUARANTEES . . . . . . . . . . . . . . . . . . . . . II- 61
SUSPENSION OF REDEMPTIONS. . . . . . . . . . . . . . . . . . . . . . .II-61
SHAREHOLDER LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . .II-61
STANDARD PERFORMANCE MEASURES. . . . . . . . . . . . . . . . . II- 62
COMPARISON OF PORTFOLIO PERFORMANCE. . . . . . . . . . . . . . . . . .II-63
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-67
<PAGE>
SAI
PART I
SECURITIES RATINGS
The following rating services describe rated securities as
follows:
Moody's Investors Service, Inc.
Bonds
Aaa -- Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt- edged". Interest payments
are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what
are generally known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than
the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Standard & Poor's
Bonds
AAA -- Debt rated`AAA' has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal
is extremely strong.
AA -- Debt rated`AA' has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only
in small degree.
A -- Debt rated`A' has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB -- Debt rated`BBB' is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in
this category than in higher rated categories.
BB-B-CCC-CC-C -- Debt rated`BB',`B',`CCC',`CC' and`C' is regarded
as having predominantly speculative characteristics with respect
to capacity to pay interest and repay principal. `BB' indicates
the least degree of speculation and `C' the highest. While such
debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- Debt rated `BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The `BB' rating
category is also used for debt subordinated to senior debt that
is assigned an actual or implied `BBB-' rating.
B -- Debt rated `B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The `B' rating category is also
used for debt subordinated to senior debt that is assigned an
actual or implied `BB' or `BB-' rating.
CCC -- Debt rated `CCC' has a currently identifiable
vulnerability to default, and is dependent upon favorable
business, financial, and economic conditions to meet timely
payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal.
The `CCC' rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied `B' or `B-'
rating.
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed
without a vote of a majority of the outstanding voting
securities, the fund may not and will not:
(1) Borrow money in excess of 10% of the value (taken at the
lower of cost or current value) of its total assets (not
including the amount borrowed) at the time the borrowing is made,
and then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such
borrowings will be repaid before any additional investments are
purchased.
(2) Underwrite securities issued by other
persons except to the extent that, in connection with the
disposition of its portfolio investments, it may deemed to be an
underwriter under federal securities laws.
(3) Purchase or sell real estate, although
it may purchase securities of issuers which deal in real estate,
securities which are secured by interests in real estate ,
and securities which represent interests in real
estate , and it may acquire and dispose of real estate or
interests in real estate acquired through the exercise of its
rights as a holder of debt obligations secured by real estate or
interests therein .
(4) Purchase or sell commodities or
commodity contracts, except that the fund may buy or sell
financial futures contracts and related options.
(5) Make loans, except by purchase of debt
obligations in which the fund may invest consistent with its
investment policies, by
entering into repurchase
agreements ,
or by lending its portfolio securities
.
(6) With respect to 75% of its total assets, invest in
the securities of any issuer if, immediately after such
investment,
more than 5% of the total assets of the fund
( taken at current value ) would be invested in the
securities of such issuer; provided that this limitation does not
apply to obligations issued or guaranteed as to interest
or principal by the U.S. government or its agencies or
instrumentalities.
(7) Purchase securities restricted as to
resale, if, as a result, such investments would exceed 15% of the
value of the fund's net assets, excluding restricted securities
that have been determined by the Trustees of the fund (or the
person designated by them to make such determinations) to be
readily marketable.
(8) Purchase securities (other than
securities of the U.S. government, its agencies or
instrumentalities), if as a result of such purchase more than 25%
of total fund assets would be invested in any one industry.
(9) With respect to 75% of its total assets, acquire
more than 10% of the outstanding voting securities of any
issuer .
It is contrary to the fund's present policy, which may be changed
without shareholder approval, to:
(1) Invest in securities of registered open-end investment
companies, except as they may be acquired as part of a merger or
consolidation or acquisition of assets or by purchases in the
open market involving only customary brokers' commissions.
(2) Invest in securities of an issuer, which, together with any
predecessor, has been in operation for less than three years, and
in equity securities for which market quotations are not readily
available (but excluding securities restricted as to resale) if,
as a result, the aggregate of such investments would exceed 5% of
the value of the fund's net assets; provided, however, that this
restriction shall not apply to any obligation of the U.S.
government or its instrumentalities or agencies.
(3) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts.
(4) Make investments for the purpose of gaining control of a
company's management.
(5) Invest in (a) securities which at the time of such
investment are not readily marketable, (b) securities restricted
as to resale (excluding securities determined by the Trustees of
the fund (or the person designated by the Trustees of the fund to
make such determinations) to be readily marketable), and (c)
repurchase agreements maturing in more than seven days, if, as a
result, more than 15% of the fund's net assets (taken at current
value) would be invested in securities described in (a), (b) and
(c) above.
(6) Invest in warrants if, as a result, such investments (valued
at the lower cost or market) would exceed 5% of the value of the
fund's net assets; provided that not more than 2% of the fund's
net assets may be invested in warrants not listed on the New York
or American Stock Exchanges.
(7) Purchase or sell real property (including limited
partnership interests), except that the fund may (a) purchase or
sell readily marketable interests in real estate investment
trusts or readily marketable securities of companies which invest
in real estate (b) purchase or sell securities that are secured
by interests in real estate or interests therein, or (c) acquire
real estate through exercise of its rights as a holder of
obligations secured by real estate or interests therein or sell
real estate so acquired.
(8) Invest in securities of any issuer, if, to the
knowledge of the fund, officers and Trustees of the fund and
officers and directors of Putnam Management who beneficially own
more than 0.5% of the securities of that issuer together
beneficially own more than 5%.
(9) Purchase securities on margin, except such short-term
credits as may be necessary for the clearance of purchases and
sales of securities, and except that it may make margin payments
in connection with financial futures contracts or related
options.
(10) Make short sales of securities or maintain a short position
for the account of the fund unless at all times when a short
position is open it owns an equal amount of such securities or
owns securities which, without payment of any further
consideration, are convertible into or exchangeable for
securities of the same issue as, and in equal amount to, the
securities sold short.
(11) Pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 33 1/3% of its total assets (taken at cost)
in connection with permitted borrowings.
Changes in the above policies will be reflected in the fund's
prospectus or in this SAI. The fund does not intend to
purchase or sell index futures or related options for other than
hedging purposes, if, as a result, the sum of the initial margin
deposits on the fund's existing index futures and related options
positions and premiums paid for outstanding options on index
futures contracts would exceed 5% of the fund's net assets.
The fund has undertaken to certain state securities authorities
that certain of these policies will not be changed without
approval of such authorities so long as shares of the fund are
registered for sale in such states. Changes in these policies
could result in increased investment risk.
Although certain of the fund's fundamental investment
restrictions permit it to borrow money to a limited extent, it
does not currently intend to do so and did not do so last year.
------------------------
All percentage limitations on investments will apply at the time
of the making of an investment and shall not be considered
violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment.
The Investment Company Act of 1940 provides that a "vote of a
majority of the outstanding voting securities" of the fund means
the affirmative vote of the lesser of (l) more than 50% of the
outstanding shares of the fund, or (2) 67% or more of the shares
present at a meeting if more than 50% of the outstanding shares
of the fund are represented at the meeting in person or by proxy.
CHARGES AND EXPENSES
Management fees
Under a Management Contract dated July 11, 1996 , the fund
pays a quarterly fee to Putnam Management based on the average
net assets of the fund, as determined at the close of each
business day during the quarter, at an annual rate of 0.65% of
the first $500 million, 0.55% of the next $500 million, 0.505 of
the next $500 million, 0.45% of the next $5 billion, 0.425% of
the next 45 billion, 0.405% of the next $5 billion, 0.38% of any
amount thereafter. For the past three fiscal years, pursuant to
the Management Contract (and a management contract in effect
prior to July 11, 1996 under which the management fee payable to
Putnam Management was paid at the rate of 0.75% of the first
$100 million of average net assets, 0.65% of the next $100
million, 0.55% of the next $300 million, 0.50% of the next $1
billion, 0.45% of the next $1 billion and 0.40% of any amount
over $2.5 billion , the fund incurred the following
fees:
Fiscal Management
year fee paid
------ ----------
1995 $2,488,268
1994 $2,186,967
1993 $2,099,538
<PAGE>
Brokerage commissions
The following table shows brokerage commissions paid during the
fiscal periods indicated.
Fiscal Brokerage
year commissions
------ ------------
1995 $670,271
1994 $670,423
1993 $756,374
The following table shows transactions placed with brokers and
dealers during the most recent fiscal year to recognize research,
statistical and quotation services Putnam Management considered
to be particularly useful to it and its affiliates.
Dollar
value Percent of
of these total Amount of
transactions transactions commissions
------------ ------------ -----------
$237,758,043 51.83% $375,559
Administrative expense reimbursement
The fund reimbursed Putnam Management in the following amount for
administrative services during fiscal 1995, including the
following amount for compensation of certain officers of the fund
and contributions to the Putnam Investments, Inc. Profit Sharing
Retirement Plan for their benefit:
Portion of total
reimbursement for
compensation
Total and
reimbursement contributions
------------- ----------------
$9,508 $8,774
Trustee fees
Each Trustee receives a fee for his or her services. Each
Trustee also receives fees for serving as Trustee of other Putnam
funds. The Trustees periodically review their fees to assure
that such fees continue to be appropriate in light of their
responsibilities as well as in relation to fees paid to trustees
of other mutual fund complexes. The Trustees meet monthly over a
two-day period, except in August. The Compensation Committee,
which consists solely of Trustees not affiliated with Putnam
Management and is responsible for recommending Trustee
compensation, estimates that Committee and Trustee meeting time
together with the appropriate preparation requires the equivalent
of at least three business days per Trustee meeting. The
following table shows the year each Trustee was first elected a
Trustee of the Putnam funds, the fees paid to each Trustee by the
fund for fiscal 1995 and the fees paid to each Trustee by all of
the Putnam funds during calendar year 1995:
COMPENSATION TABLE
Total
Aggregate compensation
compensation from all
Trustees from the fund* Putnam funds**
- --------------------------------------------------------------
Jameson A. Baxter/1994 $1,043 $150,854
Hans H. Estin/1972 $1,048 $150,854
John A. Hill/1985*** $1,041 $149,854
Elizabeth T. Kennan/1992 $1,043 $148,854
Lawrence J. Lasser/1992 $1,043 $150,854
Robert E. Patterson/1984 $1,058 $152,854
Donald S. Perkins/1982 $1,044 $150,854
William F. Pounds/1971 $1,041 $149,854
George Putnam/1957 $1,048 $150,854
George Putnam, III/1984 $1,048 $150,854
Eli Shapiro/1995**** $656 $95,372
A.J.C. Smith/1986 $1,036 $149,854
W. Nicholas Thorndike/1992 $1,058 $152,854
* Includes an annual retainer and an attendance fee
for each meeting attended.
** Reflects total payments received from all Putnam funds in
the most recent calendar year. As of December 31, 1995,
there were 99 funds in the Putnam family.
*** Includes compensation deferred pursuant to a Trustee
Compensation Deferral Plan. The total amount of deferred
compensation payable to Mr. Hill by all Putnam funds as of
November 30, 1995 was $47,586, including income earned on
such amounts.
**** Elected as a Trustee in April, 1995.
The Trustees have approved Retirement Guidelines for Trustees of
the Putnam funds. These Guidelines provide generally that a
Trustee who retires after reaching age 72 and who has at least 10
years of continuous service will be eligible to receive a
retirement benefit from each Putnam fund for which he or she
served as a Trustee. The amount and form of such benefit is
subject to determination annually by the Trustees and, unless
otherwise determined by the Trustees, will be an annual cash
benefit payable for life equal to one-half of the Trustee
retainer fees paid by each fund at the time of retirement.
Several retired Trustees are currently receiving benefits
pursuant to the Guidelines and it is anticipated that the current
Trustees will receive similar benefits upon their retirement.
A Trustee who retired in calendar 1995 and was eligible to
receive benefits under these Guidelines would have received an
annual benefit of $66,749, based upon the aggregate retainer fees
paid by the Putnam funds for such year. The Trustees reserve the
right to amend or terminate such Guidelines and the related
payments at any time, and may modify or waive the foregoing
eligibility requirements when deemed appropriate.
For additional information concerning the Trustees, see
"Management" in Part II of this SAI.
Share ownership
At December 31, 1995, the officers and Trustees of the fund as a
group owned less than 1% of the outstanding shares of each class
and to the knowledge of the fund no person owned of record or
beneficially 5% or more of the shares of any class of the fund.
Distribution fees
During fiscal 1995, the fund paid the following 12b-1 fees to
Putnam Mutual Funds:
Class A Class B Class M
------- ------- -------
$858,831 $511,456 $25,091
Class A sales charges and contingent deferred sales charges
Putnam Mutual Funds received sales charges with respect to class
A shares in the following amounts during the periods indicated:
Sales charges
retained by Putnam Contingent
Total Mutual Funds deferred
Fiscalfront-end after sales
year sales chargesdealer concessionscharges
- ---------------------------------------------
1995 $905,569 $145,866 $638
1994 $439,254 $63,412 $0
1993 $574,362 $36,613 $0
<PAGE>
Class B contingent deferred sales charges
Putnam Mutual Funds received contingent deferred sales charges
upon redemptions of class B shares in the following amounts
during the periods indicated:
Fiscal Contingent deferred
year sales charges
- ------- -------------------
1995 $91,028
1994 $50,066
1993 $8,079
Class M sales charges
Putnam Mutual Funds received sales charges with respect to class
M shares in the following amount during the 1995 fiscal year:
Sales charges
retained by Putnam
Mutual Funds
Total after
sales charges dealer concessions
------------- ------------------
$93,386 $14,424
Investor servicing and custody fees and expenses
During the 1995 fiscal year, the fund incurred $735,690 in fees
and out-of-pocket expenses for investor servicing and custody
services provided by Putnam Fiduciary Trust Company.
INVESTMENT PERFORMANCE
Standard performance measures
(for periods ended November 30, 1995)
Class A Class B Class M***
Inception date: 6/15/77 9/13/93 12/2/94
Total
return NAV* POP** NAV CDSC NAV POP
- ----------------------------------------------------------------
1 year 33.17% 25.49% 32.30% 27.30% --- ---
5 years 16.07 14.71 --- --- --- ---
10 years 10.99 10.33 --- --- --- ---
Life of class --- --- 13.88 12.71 32.89% 28.19%
Class A Class B Class M
Yield POP NAV POP
30-day
Yield 2.51% 1.94% 2.10%
*net asset value
**public offering price
***Represents cumulative, rather than average annual ,
total return .
Data represent past performance and are not indicative of future
results. Total return and yield at POP for class A and class M
shares reflect the deduction of the maximum sales charge of
5.75% and 3.50%, respectively. Total return at CDSC for class B
shares reflects the deduction of the applicable contingent
deferred sales charge ("CDSC"). The maximum class B CDSC is
5.0%. See "Standard performance measures" in Part II of this SAI
for information on how performance is calculated. Past
performance is no guarantee of future results.
On March 7, 1991, the shareholders of the fund approved the
fund's current investment objectives and current distribution
policies. The investment objective of the fund before March 7,
1991 was to seek as high a level of current return as Putnam
Management believed not to involve undue risk, primarily by
investing in dividend-paying common stocks and securities
convertible into common stocks and writing covered call options
to increase its current return. Under the fund's former
distribution policies, at certain times the fund paid quarterly
distributions at a level rate even though the fund did not
achieve projected investment results for a given period. As a
result, the fund's distributions at times included a return of
capital. Consequently, the performance information shown
above covering the periods before March 7, 1991 does not
reflect the fund's performance under its current investment
objectives or distribution policies.
ADDITIONAL OFFICERS
In addition to the persons listed as officers of the fund in Part
II of this SAI, each of the following persons is also a Vice
President of the fund and Vice President of certain of the Putnam
funds. Officers of Putnam Management hold the same offices in
Putnam Management's parent company, Putnam Investments, Inc.
Peter Carman, Senior Managing Director of Putnam Management.
Prior to August, 1993, Mr. Carman was Chief Investment Officer,
Chairman of the U.S. Equity Investment Policy Committee and a
Director of Sanford C. Bernstein & Company, Inc.
Thomas V. Reilly, Managing Director of Putnam Management.
Edward P. Bousa, Senior Vice President of Putnam Management.
Vice President of certain of the Putnam funds. Prior to October,
1992, Mr. Bousa was Vice President and Portfolio Manager at
Fidelity Investments.
Kenneth J. Taubes, Senior Vice President of Putnam Management.
Prior to June, 1991, Mr. Taubes was Senior Vice President of the
Finance Division of U.S. Trust Company.
Rosemary H. Thomsen, Senior Vice President of Putnam Management.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, MA,
02109, are the fund's independent accountants, providing audit
services, tax return review and other tax consulting services and
assistance and consultation in connection with the review of
various Securities and Exchange Commission filings. The Report
of Independent Accountants, financial highlights and financial
statements included in the fund's Annual Report for the fiscal
year ended November 30, 1995, filed electronically on January 30,
1996 (File No. 811-2742), are incorporated by reference into this
SAI. The financial highlights included in the prospectus and
incorporated by reference into this SAI and the financial
statements incorporated by reference into the prospectus and this
SAI have been so included and incorporated in reliance upon the
report of the independent accountants, given on their authority
as experts in auditing and accounting.
