Prospectus
March 30, 1997 , as
revised October 30, 1997
Putnam Preferred Income Fund
Class A and M shares
INVESTMENT STRATEGY: INCOME
This prospectus explains concisely what investors should know
before investing in Putnam Preferred Income Fund (the "fund").
Please read it carefully and keep it for future reference.
Investors can find more detailed information in the March 30,
1997 statement of additional information (the "SAI"), as amended
from time to time. For a free copy of the SAI or other
information, call Putnam Investor Services at 1-800-225-1581. The
SAI has been filed with the Securities and Exchange Commission
(the "Commission") and is incorporated into this prospectus by
reference. The Commission maintains a Web site
(http://www.sec.gov) that contains the SAI, material incorporated
by reference into this prospectus and the SAI, and other
information regarding registrants that file electronically with
the Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
BOSTON*LONDON*TOKYO
<PAGE>
ABOUT THE FUND
Expenses summary
This section describes the sales charges, management fees, and
annual operating expenses that apply to various classes of the
fund's shares. Use it to help you estimate the impact of
transaction costs and recurring expenses on your
investment over time.
Financial highlights
Study this table to see, among other things, how the fund
performed each year for the past 10 years or since it began
investment operations if it has been in operation for less than
10 years.
Objective
Read this section to make sure the fund's objective is consistent
with your own.
How the fund pursues its objective
This section explains in detail how the fund seeks its investment
objective.
How performance is shown
This section describes and defines the measures used to assess
fund performance. All data are based on past investment results
and do not predict future performance.
How the fund is managed
Consult this section for information about the fund's management,
allocation of its expenses, and how it purchases and
sells securities .
Organization and history
In this section, you will learn when the fund was introduced, how
it is organized, how it may offer shares, and who its Trustees
are.
ABOUT YOUR INVESTMENT
Alternative sales arrangements
Read this section for descriptions of the classes of shares this
prospectus offers and for points you should consider when making
your choice.
How to buy shares
This section describes the ways you may purchase shares and tells
you the minimum amounts required to open various types of
accounts. It explains how sales charges are determined and how
you may become eligible for reduced sales charges .
Distribution plan
This section tells you what distribution fees are charged against
class M shares.
How to sell shares
In this section you can learn how to sell fund shares, directly
to the fund, by check or through an investment dealer.
How to exchange shares
Find out in this section how you may exchange fund shares for
shares of other Putnam funds. The section also explains how
exchanges can be made without sales charges and the conditions
under which sales charges may be required.
How the fund values its shares
This section explains how the fund determines the value of its
shares.
How the fund makes distributions to shareholders; tax information
This section describes the various options you have in choosing
how to receive fund dividends. It also discusses the tax status
of the payments and counsels you to seek specific advice about
your own situation.
ABOUT PUTNAM INVESTMENTS, INC.
Read this section to learn more about the companies that provide
marketing, investment management, and shareholder account
services to Putnam funds and their shareholders.
<PAGE>
About the fund
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing.
The following table summarizes the maximum transaction costs from
investing in the fund and expenses based on the most recent
fiscal year. The examples show the cumulative expenses
attributable to a hypothetical $1,000 investment over specified
periods.
Class A shares Class M shares
Shareholder transaction expenses
Maximum sales charge imposed on
purchases (as a percentage of
offering price) 3.25% 2.00%
Deferred sales charge (as a
percentage of the lower of
original purchase price or
redemption proceeds) NONE* NONE
Annual fund operating expenses
(as a percentage of average net assets)
Total fund
Management 12b-1 Other operating
fees fees expenses expenses
---------- ----- -------- -----------
Class A 0.65% NONE 0.24% 0.89%
Class M 0.65% 0.25% 0.24% 1.14%
The table is provided to help you understand the expenses of
investing and your share of fund operating expenses. The
expenses shown in the table do not reflect the application of
credits that reduce fund expenses.
Examples
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return and redemption at the end of each
period:
1 3 5 10
year years years years
Class A $41 $60 $80 $139
Class M $31 $55 $82 $156
The examples do not represent past or future expense levels.
Actual expenses may be greater or less than those shown. Federal
regulations require the examples to assume a 5% annual return,
but actual annual return varies.
* A deferred sales charge of up to 1.00% is assessed on
certain redemptions of class A shares that were
purchased without an initial sales charge. See "How to
buy shares - Class A shares."
FINANCIAL HIGHLIGHTS
The following table presents per share financial information for
class A and class M shares. This information has been audited
and reported on by the independent accountants. The "Report of
independent accountants" and financial statements included in the
fund's annual report to shareholders for the 1996 fiscal year are
incorporated by reference into this prospectus. The fund's
annual report, which contains additional unaudited performance
information, is available without charge upon request.
<PAGE>
<TABLE><CAPTION>
Financial highlights**
(For a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1996 1995 1994 1993 1992 1991
Class M Class A
Net asset value,
beginning of period $8.58 $8.12 $8.59 $7.88 $8.81 $8.34 $8.00 $7.42
Investment operations
Net investment income .56 .33 .58 .57 .56 .60 .68 .70
Net realized and unrealized
gain (loss) on investments .11 .46 .12 .73 (.93) .47 .34 .57
Total from investment
operations .67 .79 .70 1.30 (.37) 1.07 1.02 1.27
Less distributions:
From net investment income (.56) (.33) (.58) (.59) (.56) (.60) (.68) (.69)
In excess of net
invesment income --(d) -- --(d) -- -- -- -- --
Total distributions (.56) (.33) (.58) (.59) (.56) (.60) (.68) (.69)
Net asset value,
end of period $8.69 $8.58 $8.71 $8.59 $7.88 $8.81 $8.34 $8.00
Total investment return
at net asset value (%)(a) 8.22 9.88* 8.61 17.05 (4.41) 13.07 13.08 17.86
<PAGE>
Net assets, end of period
(in thousands) $5,333 $729 $117,502 $120,591 $119,822 $144,185 $142,378 $129,688
Ratio of expenses to
average net assets (%)(b) 1.14 .67* .89 .90 .81 .83 .83 .93
Ratio of net investment income
to average net assets (%) 6.41 3.73* 6.90 6.91 6.64 6.83 8.23 8.98
Portfolio turnover (%) 29.51 34.76 29.51 34.76 32.84 114.53 188.68 157.11
Average Commission rate paid$.0564 $.0564<PAGE>
Financial highlights*
(continued)
</TABLE>
<TABLE><CAPTION>
<C> <C> <C> <C>
Year ended November 30
1990 1989 1988 1987
$8.25 $8.18 $8.42 $9.93
.75 .78 .82 .76
(.80) .09 (.25) (1.30)
(.05) .87 .57 (.54)
(.78) (.80) (.81) (.75)
(.78) (.80) (.81) (.97)
$7.44 $8.25 $8.18 $8.42
(0.53) 11.00 6.99 (6.11)
$137,136 $134,316 $195,960 $304,386
.95 .83 .77 .69
9.55 9.18 9.75 7.92
208.58 178.42 135.50 174.79<PAGE>
* Not annualized
** The table has been restated to reflect a 5-for-1 share split declared by the fund to shareholders of record on
November 29, 1994.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended November 30, 1995 includes amounts paid through
brokerage service and expense offset arrangements. Prior year ratios exclude these amounts.
(c) Average commission raid paid on security trades is required for fiscal periods beginning on or after Sepetmeber
1, 1995.
(d) Distributions in excess of net investmentincome amounted to less than $0.01 per share for each class.
</TABLE>
<PAGE>
OBJECTIVE
Putnam Preferred Income Fund seeks a high level of income that
qualifies for the 70% corporate dividends-received deduction for
federal income tax purposes, with minimum fluctuations in
principal. The dividends-received deduction is not available to
non-corporate investors or to Subchapter S corporations or to
any shareholder that did not hold the shares of the fund on the
ex-dividend date an for at least 45 additional days during the
90-day period surrounding the ex-dividend date (unless the
shareholder took certain actions before September 5, 1997) .
The fund is not intended to be a complete investment program, and
there is no assurance it will achieve its investment objective.
HOW THE FUND PURSUES ITS OBJECTIVE
Basic investment strategy
The fund seeks to achieve its objective by investing at least
80% of its total assets (taken at current value) in investment-
grade adjustable rate preferred stocks and auction preferred
stocks or common or preferred stocks which pay dividends that are
generally higher than the average dividend paid by the stocks
included in the Standard & Poor's 500 Composite Stock Price
Index. Under normal market conditions, the fund will invest at
least 65% of its total assets in preferred stocks. The fund may
also invest up to 20% of its total assets in government and
investment-grade corporate debt securities and high quality,
short-term money market instruments, including repurchase
agreements, and cash.
Alternative investment strategies
At times, Putnam Investment Management, Inc., the fund's
investment manager ("Putnam Management"), may judge that
conditions in the securities markets make pursuing the fund's
basic investment strategy inconsistent with the best interests of
its shareholders. At such times Putnam Management may
temporarily use alternative strategies primarily designed to
reduce fluctuations in the value of the fund's assets.
It is impossible to predict when, or for how long, the fund will
use these alternative strategies.
The fund may invest in adjustable rate preferred stocks and
auction preferred stocks that are rated at least "baa" or "BBB"
by a nationally recognized securities ratings agency, such as
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
("S&P"), or, if unrated, that are determined by Putnam Management
to be of comparable quality. Securities rated "baa" or "BBB" are
considered medium-grade obligations, having an adequate present
capacity to pay dividends, although adverse conditions or
changing circumstances may lead to a weakened capacity to pay
dividends. The dividend rates on adjustable rate preferred
stocks are adjusted periodically based on changes in interest
rates, generally on specified U.S. Treasury securities. Auction
preferred stocks are similar to short-term corporate money market
instruments in that the dividend rate is a short-term rate reset
in a bidding process generally at least every 49 days, and the
shareholder normally may dispose of the investment at par at the
time the rate is reset. Generally, the maximum dividend rate is
a stated percentage of a particular measure of short-term
interest rates. For more information about adjustable rate and
auction preferred stocks and the rating services' descriptions of
preferred stock and commercial paper, see the SAI. The foregoing
investment limitation will be measured at the time of purchase
and, to the extent that a security is assigned a different rating
by one or more of the various rating agencies, Putnam Management
will use the highest rating assigned by any agency.
Risk factors
The fund will, under normal market conditions, invest more than
25% of its total assets in the public utilities industries,
except when investing for temporary defensive purposes.
Companies in the public utilities industries include companies
engaged in the manufacture, production, generation, transmission,
sale or distribution of electric or gas energy or other types of
energy and companies engaged in telecommunications, including
telephone, telegraph, satellite, microwave and other
communications media (but not companies engaged in public
broadcasting or cable television). Putnam Management will deem a
particular company to be in the public utilities industries if at
the time of investment Putnam Management determines that at least
50% of the company's assets, revenues or profits are derived from
one or more of those industries.
Since the fund's investments will generally be concentrated in
the public utilities industries, the value of its shares can be
expected to change in light of factors affecting those
industries, and may fluctuate more widely than the value of
shares of a portfolio that invests in a broader range of
industries. Many utility companies, especially electric, gas and
other energy-related utility companies, have historically been
subject to risks of increases in fuel and other operating costs,
changes in interest rates on borrowings for capital improvement
programs, changes in applicable laws and regulations, changes in
technology which may render existing plants, equipment or
products obsolete, the effects of energy conservation and
operating constraints and increased costs associated with
compliance with environmental regulations. In particular,
regulatory changes with respect to nuclear and conventionally-
fueled power generating facilities could increase costs or impair
the ability of utility companies to operate such facilities or
obtain adequate return on invested capital. Generally, prices
charged by utilities are regulated in the United States and in
foreign countries with the intention of protecting the public
while ensuring that utility companies earn a return sufficient to
allow them to attract capital in order to grow and continue to
provide appropriate services. There can be no assurance that
such pricing policies or rates of return will continue in the
future.
In recent years, regulatory changes have increasingly allowed
utility companies to provide services and products outside their
traditional geographic areas and lines of business, creating new
areas of competition within the utilities industries. This trend
toward deregulation and the emergence of new entrants have caused
non-regulated providers of utility services to become a
significant part of the utilities industries. Putnam Management
believes that the emergence of competition and deregulation will
result in certain utility companies being able to earn more than
their traditional regulated rates of return, while others may be
forced to defend their core business from increased competition
and may be less profitable. Although Putnam Management seeks to
take advantage of favorable investment opportunities that may
arise from these structural changes, there can be no assurance
that the fund will benefit from any such changes.
Foreign investments
The fund may invest in securities of foreign issuers that are not
actively traded in U.S. markets. These foreign investments
involve certain special risks described below.
Foreign securities are normally denominated and traded in foreign
currencies. As a result, the value of the fund's foreign
investments and the value of its shares may be affected favorably
or unfavorably by changes in currency exchange rates relative to
the U.S. dollar. The fund may engage in a variety of foreign
currency exchange transactions in connection with its foreign
investments, including transactions involving futures contracts,
forward contracts and options.
Investments in foreign securities may subject the fund to other
risks as well. For example, there may be less information
publicly available about a foreign issuer than about a U.S.
issuer, and foreign issuers are not generally subject to
accounting, auditing and financial reporting standards and
practices comparable to those in the United States. The
securities of some foreign issuers are less liquid and at times
more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions and other fees are also generally
higher than in the United States. Foreign settlement procedures
and trade regulations may involve certain risks (such as delay in
payment or delivery of securities or in the recovery of the
fund's assets held abroad) and expenses not present in the
settlement of investments in U.S. markets.
In addition, the fund's investments in foreign securities may be
subject to the risk of nationalization or expropriation of
assets, imposition of currency exchange controls or restrictions
on the repatriation of foreign currency, confiscatory taxation,
political or financial instability and diplomatic developments
which could affect the value of the fund's investments in certain
foreign countries. Dividends or interest on, or proceeds from
the sale of, foreign securities may be subject to foreign
withholding taxes, and special U.S. tax considerations may apply.
Legal remedies available to investors in certain foreign
countries may be more limited than those available with respect
to investments in the United States or in other foreign
countries. The laws of some foreign countries may limit the
fund's ability to invest in securities of certain issuers
organized under the laws of those foreign countries.
The risks described above are typically increased in connection
with investments in less developed and developing nations, which
are sometimes referred to as "emerging markets." For example,
political and economic structures in these countries may be in
their infancy and developing rapidly, causing instability. High
rates of inflation or currency devaluations may adversely affect
the economies and securities markets of such countries.
Investments in emerging markets may be considered speculative.
The fund expects that its investments in foreign securities
generally will not exceed 20% of its total assets, although the
fund's investments in foreign securities may exceed this amount
from time to time. Certain of the foregoing risks may also apply
to some extent to securities of U.S. issuers that are denominated
in foreign currencies or that are traded in foreign markets, or
securities of U.S. issuers having significant foreign operations.
For more information about foreign securities and the risks
associated with investment in such securities, see the SAI.
Portfolio turnover
The length of time the fund has held a particular security is not
generally a consideration in investment decisions. A change in
the securities held by the fund is known as "portfolio turnover."
As a result of the fund's investment policies, under certain
market conditions its portfolio turnover rate may be higher than
that of other mutual funds.
Portfolio turnover generally involves some expense, including
brokerage commissions or dealer markups and other transaction
costs in connection with the sale of securities and
reinvestment in other securities. These transactions may result
in realization of taxable capital gains. Portfolio turnover
rates are shown in the section "Financial highlights."
<PAGE>
Financial futures and options
The fund may buy and sell index futures contracts. An
"index future" is a contract to buy or sell units of a particular
securities index at an agreed price on a specified future date.
Depending on the change in value of the index between the time
the fund enters into and terminates an index futures contract,
the fund realizes a gain or loss.
The fund may buy and sell put and call options on indexes
directly. The fund may also purchase and sell futures contracts
and related options on U.S. Treasury securities, including U.S.
Treasury bills, notes and bonds ("U.S. government securities")
and options directly on U.S. government securities.
The fund will engage in these transactions for hedging purposes
and, to the extent permitted by applicable law, for non-hedging
purposes, such as to manage the effective duration of the fund's
portfolio or as a substitute for direct investment.
The use of futures and options involves certain special risks,
may result in realization of taxable income or capital gains and
could affect the eligibility of distributions by the fund for the
corporate dividends-received deduction. Futures and options
transactions involve costs and may result in losses.
Certain risks arise from the possibility of imperfect
correlations among movements in the prices of financial futures
and options purchased or sold by the fund, of the underlying
index or U.S. government securities and, in the case of hedging
transactions, of the securities that are the subject of a hedge.
Other risks arise from the potential inability to close out
futures or options positions. There can be no assurance that a
liquid secondary market will exist for any futures contract or
option at a particular time. Certain provisions of the Internal
Revenue Code and certain regulatory requirements may limit the
use of futures and options transactions. The successful use of
these strategies further depends on the ability of Putnam
Management to forecast interest rates and market movements
correctly.
A more detailed explanation of financial futures and options
transactions, and the risks associated with them, is included in
the SAI.
Other investment practices
The fund may also engage to a limited extent in the following
investment practices, each of which involves certain special
risks and may produce income not eligible for the dividends-
received deduction. The SAI contains more detailed information
about these practices, including limitations designed to reduce
these risks.
Options. The fund may seek to increase its current return by
writing covered call and put options on securities it owns or in
which it may invest. The fund receives a premium from writing a
call or put option, which increases the return if the option
expires unexercised or is closed out at a net profit.
When the fund writes a call option, it gives up the opportunity
to profit from any increase in the price of the security above
the exercise price of the option; when it writes a put option, it
takes the risk that it will be required to purchase a security
from the option holder at a price above the current market price
of the security. The fund may terminate an option that it has
written prior to its expiration by entering into a closing
purchase transaction in which it purchases an option having the
same terms as the option written.
The fund may also buy and sell put and call options, including
combinations of put and call options on the same underlying
security. The fund will not purchase put options if as a result
more than 5% of its net assets would at the time be invested in
such options. The use of these strategies may be further limited
by applicable law.
Securities loans, repurchase agreements and forward commitments.
The fund may lend portfolio securities amounting to not more than
25% of its assets to broker-dealers and may enter into repurchase
agreements on up to 25% of its assets. These transactions must be
fully collateralized at all times. The fund may also purchase
securities for future delivery, which may increase its overall
investment exposure and involves a risk of loss if the value of
the securities declines prior to the settlement date. These
transactions involve some risk if the other party should default
on its obligation and the fund is delayed or prevented from
recovering the collateral or completing the transaction.
Diversification
The fund is a "diversified" investment company under the
Investment Company Act of 1940. This means that with respect to
75% of its total assets, the fund may not invest more than 5% of
its total assets in the securities of any one issuer (except U.S.
government securities). The remaining 25% of its total assets is
not subject to this restriction. To the extent the fund invests
a significant portion of its assets in the securities of a
particular issuer, it will be subject to an increased risk of
loss if the market value of such issuer's securities declines.
<PAGE>
Derivatives
Certain of the instruments in which the fund may invest, such as
futures contracts and options are considered to be "derivatives."
Derivatives are financial instruments whose value depends upon,
or is derived from, the value of an underlying asset, such as a
security or an index. Further information about these
instruments and the risks involved in their use is included
elsewhere in this prospectus and in the SAI.
Limiting investment risk
Specific investment restrictions help to limit investment risks
for the fund's shareholders. These restrictions prohibit the
fund, with respect to 75% of its total assets, from acquiring
more than 10% of the voting securities of any one issuer.* They
also prohibit the fund from investing more than:
(a) 5% of its total assets in securities of any one issuer (other
than obligations issued or guaranteed by the U.S. government or
its agencies or instrumentalities);* or
(b) 15% of its net assets in any combination of securities that
are not readily marketable, in securities restricted as to resale
(excluding securities determined by the Trustees (or the person
designated by the Trustees to make such determinations) to be
readily marketable), and in repurchase agreements maturing in
more than seven days.
Restrictions marked with an asterisk (*) above are summaries of
fundamental investment policies. See the SAI for the full text
of these policies and the fund's other fundamental investment
policies. Except for investment policies designated as
fundamental in this prospectus or the SAI, the investment
policies described in this prospectus and in the SAI are not
fundamental investment policies. The Trustees may change any
non-fundamental investment policy without shareholder approval.
As a matter of policy, the Trustees would not materially change
the fund's investment objective without shareholder approval.
HOW PERFORMANCE IS SHOWN
Fund's advertisements may, from time to time, include performance
information. "Yield" for each class of shares is calculated by
dividing the annualized net investment income per share during a
recent 30-day period by the maximum public offering price per
share of the class on the last day of that period.
Yield is based on the price of the shares, including the
deduction of the maximum initial sales charge. "Tax-equivalent"
yield for each class of shares shows the effect on performance of
the fund's distributions qualifying for the dividends-received
deduction, based on Putnam Management's estimate of the
percentage of fund distributions which qualify. It reflects the
approximate yield that an investment paying non-qualifying
distributions must earn for corporate shareholders in stated
federal income tax brackets to produce an after-tax yield
equivalent to a class's after-tax yield.
"Total return" for the one-, five- and ten-year periods (or for
the life of a class, if shorter) through the most recent calendar
quarter represents the average annual compounded rate of return
on an investment of $1,000 in the fund invested at the maximum
public offering price. Total return may also be presented for
other periods or based on investment at reduced sales charge
levels. Any quotation of investment performance not reflecting
the maximum sales charge would be reduced if the sales charge
were used.
All data are based on the fund's past investment results and do
not predict future performance. Investment performance, which
will vary, is based on many factors, including market conditions,
portfolio composition, fund operating expenses and which class of
shares the investor purchases. Investment performance also often
reflects the risks associated with the fund's investment
objective and policies. These factors should be considered when
comparing the fund's investment results with those of other
mutual funds and other investment vehicles.
Quotations of investment performance for any period when an
expense limitation was in effect will be greater than if the
limitation had not been in effect. Fund performance may be
compared to that of various indexes. See the SAI.
HOW THE FUND IS MANAGED
The Trustees are responsible for generally overseeing the conduct
of fund business. Subject to such policies as the Trustees may
determine, Putnam Management furnishes a continuing investment
program for the fund and makes investment decisions on its
behalf. Subject to the control of the Trustees, Putnam
Management also manages the fund's other affairs and business.
The fund pays Putnam Management a quarterly fee for these
services based on average net assets. See "Expenses summary" and
the SAI.
The following officer of Putnam Management has had primary
responsibility for the day-to-day management of the fund's
portfolio since the year stated below:
Business experience
Year (at least 5 years)
------- -------------------------
Jeanne L. Mockard 1995 Employed as an investment
Senior Vice President professional by Putnam
Management since 1990.
The fund pays all expenses not assumed by Putnam Management,
including Trustees' fees, auditing, legal, custodial, investor
servicing and shareholder reporting expenses and payments under
its class M distribution plan (which are in turn allocated to
class M shares). The fund also reimburses Putnam Management for
the compensation and related expenses of certain fund officers
and their staff who provide administrative services. The total
reimbursement is determined annually by the Trustees.
Putnam Management places all orders for purchases and sales of
fund securities. In selecting broker-dealers, Putnam
Management may consider research and brokerage services furnished
to it and its affiliates. Subject to seeking the most favorable
price and execution available, Putnam Management may consider
sales of fund shares (and, if permitted by law, shares of the
other Putnam funds) as a factor in the selection of broker-
dealers.
ORGANIZATION AND HISTORY
Putnam Preferred Income Fund is a Massachusetts business trust
organized on September 30, 1983. A copy of the Agreement and
Declaration of Trust, which is governed by Massachusetts law, is
on file with the Secretary of State of The Commonwealth of
Massachusetts. Prior to March 1, 1995, the fund was known as
Putnam Corporate Asset Trust.
The fund is an open-end, diversified management investment
company with an unlimited number of authorized shares of
beneficial interest. The Trustees may, without shareholder
approval, create two or more series of shares representing
separate investment portfolios. Any such series of shares may be
divided without shareholder approval into two or more classes of
shares having such preferences and special or relative rights and
privileges as the Trustees determine. The fund's shares are not
currently divided into series. Only the fund's class A and class
M shares are offered by this prospectus. The fund may also offer
other classes of shares with different sales charges and
expenses. Because of these different sales charges and expenses,
the investment performance of the classes will vary. For more
information, including your eligibility to purchase any other
class of shares, contact your investment dealer or Putnam Mutual
Funds (at 1-800-225-1581).
Each share has one vote, with fractional shares voting
proportionately. Shares of all classes will vote together as a
single class except when otherwise required by law or as
determined by the Trustees. Shares are freely transferable, are
entitled to dividends as declared by the Trustees and, if the
fund were liquidated, would receive the net assets of the fund.
The fund may suspend the sale of shares at any time and may
refuse any order to purchase shares. Shareholders have no
preemptive rights. Although the fund is not required to hold
annual meetings of its shareholders, shareholders holding at
least 10% of the outstanding shares entitled to vote have the
right to call a meeting to elect or remove Trustees, or to take
other actions as provided in the Agreement and Declaration of
Trust.
If you own fewer shares than the minimum set by the Trustees
(presently 20 shares), the fund may choose to redeem your shares.
You will receive at least 30 days' written notice before the fund
redeems your shares, and you may purchase additional shares at
any time to avoid a redemption. The fund may also redeem shares
if you own shares above a maximum amount set by the Trustees.
There is presently no maximum, but the Trustees may establish one
at any time, which could apply to both present and future
shareholders.
The fund's Trustees: George Putnam,* Chairman. President of the
Putnam funds. Chairman and Director of Putnam Management and
Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director,
Marsh & McLennan Companies, Inc.; William F. Pounds, Vice
Chairman. Professor of Management, Alfred P. Sloan School of
Management, Massachusetts Institute of Technology; Jameson Adkins
Baxter, President, Baxter Associates, Inc.; Hans H. Estin, Vice
Chairman, North American Management Corp.; John A. Hill,
Chairman and Managing Director, First Reserve Corporation;
Ronald J. Jackson, Former Chairman, President and Chief Executive
Officer of Fisher-Price, Inc. , Trustee of Salem Hospital
and Overseer of the Peabody Essex Museum; Elizabeth T.
Kennan, President Emeritus and Professor, Mount Holyoke College;
Lawrence J. Lasser,* Vice President of the Putnam funds.
President, Chief Executive Officer and Director of Putnam
Investments, Inc. and Putnam Management. Director, Marsh &
McLennan Companies, Inc.; Robert E. Patterson, Executive Vice
President and Director of Acquisitions , Cabot Partners
Limited Partnership; Donald S. Perkins,* Director of various
corporations, including Cummins Engine Company, Lucent
Technologies, Inc., Springs Industries, Inc. and Time Warner
Inc.; George Putnam, III,* President, New Generation Research,
Inc.; A.J.C. Smith,* Chairman and Chief Executive Officer
, Marsh & McLennan Companies, Inc.; W. Thomas Stephens,
President and Chief Executive Officer of MacMillan Bloedel Ltd.,
Director of Mail-Well Inc., Qwest Communications, The Eagle
Picher Trust and New Century Energies; and W. Nicholas
Thorndike, Director of various corporations and charitable
organizations, including Data General Corporation, Bradley Real
Estate, Inc. and Providence Journal Co. Also, Trustee of
Massachusetts General Hospital and Eastern Utilities Associates.
The Trustees are also Trustees of the other Putnam funds.
Those marked with an asterisk (*) are or may be deemed to be
"interested persons" of the fund, Putnam Management or Putnam
Mutual Funds.
<PAGE>
About Your Investment
ALTERNATIVE SALES ARRANGEMENTS
Class A shares. An investor who purchases class A shares pays a
sales charge at the time of purchase. As a result, class A
shares are not subject to any charges when they are redeemed,
except for certain sales at net asset value that are subject to a
contingent deferred sales charge ("CDSC"). Certain purchases of
class A shares qualify for reduced sales charges. See "How to
buy shares -- Class A shares."
Class M shares. An investor who purchases class M shares pays a
sales charge at the time of purchase that is lower than the sales
charge applicable to class A shares. Certain purchases of class
M shares qualify for reduced sales charges. Class M shares bear
a 12b-1 fee at the annual rate of 0.25% of the fund's average net
assets attributable to class M shares. See "How to buy shares --
Class M shares" and "Distribution plan."
Which arrangement is best for you? The decision as to which
class of shares provides a more suitable investment for an
investor depends on a number of factors, including the amount and
the intended length of the investment. For example, investors
who plan to hold their shares for relatively short periods might
consider class M shares. For more information about these sales
arrangements, consult an investment dealer or Putnam Investor
Services. Shares may only be exchanged for shares of the same
class of another Putnam fund. See "How to exchange shares."
HOW TO BUY SHARES
You can open a fund account with as little as $500 and make
additional investments at any time with as little as $50. You
can buy fund shares three ways - through most investment dealers,
through Putnam Mutual Funds (at 1-800-225-1581), or
through a systematic investment plan. If you do not have a
dealer, Putnam Mutual Funds can refer you to one.
Buying shares through Putnam Mutual Funds. Complete the order
form and send it to Putnam Investor Services with your check,
Federal Reserve Draft or other negotiable bank draft, drawn on a
U.S. bank and payable in U.S. dollars, to the order of the fund.
Buying shares through systematic investing. You can make regular
investments of $25 or more per month through automatic deductions
from your bank checking or savings account. Application forms
are available from your investment dealer or through Putnam
Investor Services.
Investments in the fund may also be made through Putnam Mutual
Funds by wiring funds. An investor must, prior to each
transmission of wired funds, call Putnam Investor Services' Wire
Control Department toll-free at 1-800-225-2465, extension 2330 to
obtain a "control" number and receive instructions for wiring
funds. In opening a new account, a completed order form must
subsequently be mailed to Putnam Mutual Funds. Any commercial
bank can transmit funds by wire. To be sure that a bank wire
order is received on the same day it is sent, an investor's bank
should wire funds as early in the day as possible. The bank
sending funds may charge for the service. The fund's agent
reserves the right to charge investors for receipt of wired
funds, but no charge is currently imposed for this service.
Shares are sold at the public offering price based on the net
asset value next determined after Putnam Investor Services
receives your order. In most cases, in order to receive that
day's public offering price, Putnam Investor Services must
receive your order before the close of regular trading on the New
York Stock Exchange. If you buy shares through your investment
dealer, the dealer must receive your order before the close of
regular trading on the New York Stock Exchange to receive that
day's public offering price.
Class A shares
The public offering price of class A shares is the net asset
value plus a sales charge that varies depending on the size of
your purchase. The fund receives the net asset value. The sales
charge is allocated between your investment dealer and Putnam
Mutual Funds as shown in the following table, except when Putnam
Mutual Funds, in its discretion, allocates the entire amount to
your investment dealer.
Sales charge Amount of
as a percentage of: sales charge
------------------- reallowed to
Net dealers as a
Amount of transaction amount Offering percentage of
at offering price ($) invested price offering price
- -----------------------------------------------------------------
Under 100,000 3.36% 3.25% 3.00%
100,000 but under 250,000 2.56 2.50 2.25
250,000 but under 500,000 2.04 2.00 1.75
500,000 but under 1,000,000 1.52 1.50 1.25
There is no initial sales charge on purchases of class A shares
of $1 million or more. However, a CDSC of 1.00% or 0.50%,
respectively, will be imposed within the first or second year
after purchase on redemptions by any investor that purchased fund
shares without an initial sales charge as part of an investment
of $1 million or more.
Shares purchased by investors investing $1 million or more in
class A shares whose dealer of record waived its commission with
the approval of Putnam Mutual Funds are not subject to the CDSC.
In determining whether a CDSC is payable, shares not subject to
any charge will be redeemed first, followed by shares held
longest during the CDSC period. Any CDSC will be based on the
lower of the shares' cost and current net asset value. Any
shares acquired by reinvestment of distributions will be redeemed
without a CDSC. Putnam Mutual Funds receives the entire amount of
any CDSC you pay. See the SAI for more information about the
CDSC.
Except as stated below, Putnam Mutual Funds pays investment
dealers of record commissions on sales of class A shares of $1
million or more based on an investor's cumulative purchases
during the one-year period beginning with the date of the initial
purchase at net asset value. Each subsequent one-year measuring
period for these purposes will begin with the first net asset
value purchase following the end of the prior period. Such
commissions are paid at the rate of 1.00% of the amount under $3
million, 0.50% of the next $47 million and 0.25% thereafter.
Class M shares
The public offering price of class M shares is the net asset
value plus a sales charge that varies depending on the size of
your purchase. The fund receives the net asset value. The sales
charge is allocated between your investment dealer and Putnam
Mutual Funds as shown in the following table, except when Putnam
Mutual Funds, at its discretion, allocates the entire amount to
your investment dealer.
Sales charge Amount of
as a percentage of: sales charge
------------------- reallowed to
Net dealers as a
Amount of transaction amount Offering percentage of
at offering price ($) invested price offering price
- -----------------------------------------------------------------
Under 100,000 2.04% 2.00% 1.80%
100,000 but under 250,000 1.52 1.50 1.30
250,000 but under 500,000 1.01 1.00 1.00
500,000 and above None None None
- -----------------------------------------------------------------
Members of qualified groups may purchase class M
shares without a sales charge.
<PAGE>
General
You may be eligible to buy fund shares at reduced sales charges.
Consult your investment dealer or Putnam Mutual Funds for details
about Putnam's combined purchase privilege, cumulative quantity
discount, statement of intention, group sales plan, and other
plans. Descriptions are also included in the order form and in
the SAI.
The fund may sell class A and class M shares at net asset value
without an initial sales charge or a CDSC to current and retired
Trustees (and their families), current and retired employees (and
their families) of Putnam Management and affiliates, registered
representatives and other employees (and their families) of
broker-dealers having sales agreements with Putnam Mutual Funds,
employees (and their families) of financial institutions having
sales agreements with Putnam Mutual Funds (or otherwise having an
arrangement with a broker-dealer or financial institution with
respect to sales of fund shares), financial institution trust
departments investing an aggregate of $1 million or more in
Putnam funds, clients of certain administrators of tax-qualified
plans, tax-qualified plans when proceeds from repayments of loans
to participants are invested (or reinvested) in Putnam funds,
"wrap accounts" for the benefit of clients of broker-dealers,
financial institutions or financial planners adhering to certain
standards established by Putnam Mutual Funds and investors
meeting certain requirements who sold shares of certain Putnam
closed-end funds pursuant to a tender offer by the closed-end
fund.
In addition, the fund may sell shares at net asset value without
an initial sales charge or a CDSC in connection with the
acquisition by the fund of assets of an investment company or
personal holding company. The CDSC will be waived on redemptions
of shares arising out of the death or post-purchase disability of
a shareholder or settlor of a living trust account, and on
redemptions in connection with certain withdrawals from IRA or
other retirement plans. Up to 12% of the value of shares subject
to a systematic withdrawal plan may also be redeemed each year
without a CDSC. The SAI contains additional information about
purchasing shares at reduced sales charges.
Shareholders of other Putnam funds may be entitled to exchange
their shares for, or reinvest distributions from their funds in,
fund shares at net asset value.
<PAGE>
If you are considering redeeming shares or transferring shares to
another person shortly after purchase, you should pay for those
shares with a certified check to avoid any delay in redemption or
transfer. Otherwise, payment may be delayed until the purchase
price of those shares has been collected or, if you redeem by
telephone, until 15 calendar days after the purchase date. To
eliminate the need for safekeeping, certificates will not be
issued for your shares unless you request them.
Putnam Mutual Funds will from time to time, at its expense,
provide additional promotional incentives or payments to dealers
that sell shares of the Putnam funds. These incentives or
payments may include payments for travel expenses, including
lodging, incurred in connection with trips taken by invited
registered representatives and their guests to locations within
and outside the United States for meetings or seminars of a
business nature. In some instances, these incentives or payments
may be offered only to certain dealers who have sold or may sell
significant amounts of shares. Certain dealers may not sell all
classes of shares.
DISTRIBUTION PLAN
The class M plan provides for payments by the fund to Putnam
Mutual Funds at the annual rate of up to 1.00% of the fund's
average net assets attributable to class M shares. The Trustees
currently limit payments under the class M plan to the annual
rate of 0.25%.
The amount paid to dealers at the time of the sale of class M
shares is set forth above under "How to buy shares -- Class M
shares." In addition, to further compensate dealers (including
qualifying financial institutions) for services provided in
connection with sales of class M shares and the maintenance of
shareholder accounts, Putnam Mutual Funds makes quarterly
payments to qualifying dealers.
The payments are based on the average net asset value of class M
shares attributable to shareholders for whom the dealers are
designated as the dealer of record. Putnam Mutual Funds makes the
payments at an annual rate of 0.25% of such average net asset
value of class M shares.
Payments under the class M plan are intended to compensate
Putnam Mutual Funds for services provided and expenses incurred
by it as principal underwriter of the fund's shares, including
the payments to dealers mentioned above. Putnam Mutual Funds may
suspend or modify such payments to dealers.
The payments are also subject to the continuation of the class M
distribution plan, the terms of service agreements between
dealers and Putnam Mutual Funds, and any applicable limits
imposed by the National Association of Securities Dealers, Inc.
HOW TO SELL SHARES
Shareholders can sell their shares to the fund any day the
New York Stock Exchange is open, either directly to the fund, by
check, by telephone or through an investment dealer. For the
convenience of shareholders and to enable them to earn daily
dividends as long as possible, the fund has arranged the
following procedures.
Selling shares directly to the fund. Send a signed letter of
instruction or stock power form to Putnam Investor Services,
along with any certificates that represent shares to be sold.
Corporate investors must also include a copy of the corporate
vote establishing the individual's authority to sell the shares,
certified by an officer of the corporation. An investor will
receive the next net asset value calculated after the fund
receives the request in proper form less any applicable CDSC. In
order to receive that day's net asset value, Putnam Investor
Services must receive the request before the close of regular
trading on the New York Stock Exchange.
If an investor sells shares having a net asset value of $100,000
or more, signatures of registered owners or their legal
representatives must be guaranteed by a bank, broker-dealer or
certain other financial institutions. See the SAI for more
information about where to obtain a signature guarantee. Stock
power forms are available from investment dealers, Putnam
Investor Services and many commercial banks. If a shareholder
wants redemption proceeds sent to an address other than the
address as it appears on Putnam's records, a signature guarantee
is required.
Selling shares by check. Shareholders wishing to use the fund's
check-writing service must complete the signature card provided
with the order form. Corporate investors must also complete the
corporate resolution provided with the order form. Upon
receiving the properly completed order form, signature card and
resolution, the fund will send the investor checks which may be
made payable to the order of any person in the amount of $500 or
more. When a check is presented for payment, a sufficient
number of full and fractional shares in the shareholder's account
will be redeemed to cover the amount of the check. An additional
amount of shares will be redeemed to cover any applicable CDSC.
Shares to be redeemed by this method may not be represented by
share certificates.
Shareholders using fund checks are subject to the bank's rules
governing checking accounts. There is currently no charge to the
shareholder for the use of checks. The shareholder should make
sure that there are sufficient shares in the account to cover the
amount of any check drawn, since the net asset value of shares
will fluctuate. If insufficient shares are in the account, the
check will be returned and no shares will be redeemed. Because
dividends declared on shares held in the account, prior
redemptions, and possible changes in net asset value may cause
the value of the account to change, it is impossible to determine
in advance the account's total value. Accordingly, shareholders
should not write a check for the entire value of the account or
close the account by writing a check. The check-writing service
is not available for tax qualified retirement plans.
Selling shares by telephone. Shareholders may sell shares by
telephone with proceeds directed to a designated bank account by
calling toll-free 1-800-225-1581. On the following business day,
the amounts withdrawn from the shareholder's account will be
either mailed by check or wired to the bank account designated on
the application. (To wire proceeds, the amount must be $1,000 or
more and the designated bank must be a commercial bank within the
United States.) An investor may change the designated bank
account by sending a written request to Putnam Investor Services
with the investor's signature guaranteed by a bank, broker-dealer
or certain other financial institutions. See the SAI for more
information about how to obtain a signature guarantee. Corporate
investors must include a copy of the corporate vote establishing
the individual's authority to make the change, certified by an
officer of the corporation.
If a shareholder would like to redeem shares by telephone and
have the proceeds sent to the shareholder's address as it appears
on the records of Putnam Investor Services, the shareholder may
use Putnam's Telephone Redemption Privilege to redeem shares
valued up to $100,000 , unless Putnam Investor Services
has been notified of an address change within the preceding 15
days. Unless an investor indicates otherwise on the account
application, Putnam Investor Services will be authorized to act
upon redemption and transfer instructions received by telephone
from a shareholder, or any person claiming to act as his or her
representative, who can provide Putnam Investor Services with
shareholder's account registration and address as it appears on
Putnam Investor Services' records.
Putnam Investor Services will employ these and other reasonable
procedures to confirm that instructions communicated by telephone
are genuine; if it fails to employ reasonable procedures, Putnam
Investor Services may be liable for any losses due to
unauthorized or fraudulent instructions. The telephone
redemption privilege is not available if certificates were issued
for shares which remain outstanding. During periods of unusual
market changes and shareholder activity, shareholders may
experience delays in contacting Putnam Investor Services by
telephone. In this event, they may wish to submit a written
redemption request as described above, or contact their dealer as
described below.
<PAGE>
Selling shares through an investment dealer. The dealer must
receive the request before the close of regular trading on the
New York Stock Exchange to receive that day's net asset value.
The dealer will be responsible for furnishing all necessary
documentation to Putnam Mutual Funds, and may charge the investor
for its services.
Putnam Investor Services must receive a properly completed order
form before any redemption may be made, and may require
additional documentation to change instructions. Current
shareholders that did not request redemptions by check or by
telephone on the initial order form must properly complete and
return to the fund an authorization form prior to making such
redemptions. These documents may be obtained from Putnam
Investor Services. A shareholder may revoke authorization for
check or telephone redemptions by written notice at any time.
Such notice of revocation will become effective when received by
Putnam Investor Services.
The fund reserves the right to terminate or modify the terms of
the check or telephone redemption services, or to charge
shareholders for the use of these services at any time.
The fund generally sends payment for shares the business day
after a request is received. Under unusual circumstances, the
fund may suspend redemptions, or postpone payment for more than
seven days, as permitted by federal securities law.
HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of
certain other Putnam funds at net asset value. Not all Putnam
funds offer all classes of shares. If you exchange shares
subject to a CDSC, the transaction will not be subject to the
CDSC. However, when a shareholder redeems the shares acquired
through the exchange, the redemption may be subject to the CDSC,
depending upon when the shares were originally purchased .
The CDSC will be computed using the schedule of any fund into or
from which the shareholder has exchanged shares that would result
in your paying the highest CDSC applicable to the class of
shares. For purposes of computing the CDSC, the length of time
the shares have been owned will be measured from the date of
original purchase and will not be affected by any exchange. Class
A shares of most other Putnam funds bear a 12b-1 fee, and class M
shares of most other Putnam funds bear a higher 12b-1 fee than
class M shares of the fund.
To exchange your shares, simply complete an Exchange
Authorization Form and send it to Putnam Investor Services. The
form is available from Putnam Investor Services. For federal
income tax purposes, an exchange is treated as a sale of shares
and generally results in a capital gain or loss. A Telephone
Exchange Privilege is currently available for amounts up to
$500,000. Putnam Investor Services' procedures for telephonic
transactions are described above under "How to sell shares." The
Telephone Exchange Privilege is not available if you were issued
certificates for shares that remain outstanding. Ask your
investment dealer or Putnam Investor Services for prospectuses of
other Putnam funds. Shares of certain Putnam funds are not
available to residents of all states.
The exchange privilege is not intended as a vehicle for
short-term trading. Excessive exchange activity may interfere
with portfolio management and have an adverse effect on all
shareholders. In order to limit excessive exchange activity and
in other circumstances where Putnam Management or the Trustees
believe doing so would be in the best interests of the fund, the
fund reserves the right to revise or terminate the exchange
privilege, limit the amount or number of exchanges or reject any
exchange. Shareholders would be notified of any such action to
the extent required by law. Consult Putnam Investor Services
before requesting an exchange. See the SAI to find out more
about the exchange privilege.
HOW THE FUND VALUES ITS SHARES
The fund calculates the net asset value of a share of each class
by dividing the total value of its assets, less liabilities, by
the number of its shares outstanding. Shares are valued as of
the close of regular trading on the New York Stock Exchange each
day the Exchange is open.
Portfolio securities for which market quotations are readily
available are valued at market value. Certain preferred stocks,
for which reliable market quotations are not considered to be
readily available, are valued at fair value on the basis of
valuations furnished by pricing services approved by the
Trustees, which determine valuations for normal institutional-
size trading units of such securities using methods based on
market transactions for comparable securities and various
relationships between securities which are generally recognized
by institutional traders. Short-term investments that will
mature in 60 days or less are valued at amortized cost, which
approximates market value. All other securities and assets are
valued at their fair value following procedures approved by the
Trustees.
HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION
The fund will declare a distribution each day in an amount which
is based on Putnam Management's projections of the fund's
estimated net investment income. Normally, the fund will pay
these distributions monthly. The amount of each daily
distribution may differ from accrual net investment income
determined in accordance with generally accepted accounting
principles. See "Distributions" in the SAI. The fund will
distribute any net realized capital gains at least annually.
Distributions from capital gains are made after applying any
available capital loss carryovers. A capital loss carryover is
currently available, although there can be no assurance that the
fund will be able to take full advantage of such capital loss
carryover. Because of the large size of this capital loss
carryover, it is unlikely that the fund will make distributions
from net realized capital gains in the near future.
Distributions paid by the fund with respect to class A shares
will generally be greater than those paid with respect to class M
shares because expenses attributable to class M shares will
generally be higher.
You begin earning distributions on the business day that Putnam
Mutual Funds receives payment for your shares. It is your
responsibility to see that your dealer forwards payment promptly.
Investors can choose from three distribution options:
- - Reinvest all distributions in additional fund shares
without a sales charge;
- - Receive distributions from net investment income and
short-term capital gains in cash while reinvesting long-
term capital gains distributions in additional shares
without a sales charge; or
- - Receive all distributions in cash.
Investors can change their distribution option by notifying
Putnam Investor Services in writing. If an investor does not
select an option when the account is opened, all distributions
will be reinvested. All distributions not paid in cash will be
reinvested in shares of the class on which the distributions are
paid. Investors will receive a statement confirming reinvestment
of distributions in additional fund shares (or in shares of other
Putnam funds for Dividends Plus accounts) promptly following the
quarter in which the reinvestment occurs.
If a check representing a fund distribution is not cashed within
a specified period, Putnam Investor Services will notify the
investor that he or she has the option of requesting another
check or reinvesting the distribution in the fund or in another
Putnam fund. If Putnam Investor Services does not receive an
election, the distribution will be reinvested in the fund.
Similarly, if correspondence sent by the fund or Putnam Investor
Services is returned as "undeliverable," fund distributions will
automatically be reinvested in the fund or in another Putnam
fund.
The fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other
requirements necessary for it to be relieved of federal taxes on
income and gains it distributes to shareholders.
A corporate shareholder of the fund may take a 70% dividends-
received deduction with respect to a dividend paid by the fund if
the fund effectively designates the dividend as eligible for the
deduction and the shareholder has held the shares of the fund
with respect to which the dividend is paid on the ex-dividend
date and for at least 45 additional days during the 90-day period
surrounding the ex-dividend date. The holding period may not
apply, however, to certain dividends received or accrued before
August 5, 1999, provided the shareholder took certain actions
before September 5, 1997. Such holding period will not
include any period during which the shareholder holds an option
to sell or is the writer of an option to buy substantially
identical stock (unless the option meets certain tests for
"qualified covered calls," including the requirement that such
option not be "deep-in-the-money" in accordance with prescribed
rules). From time to time, Congress considers legislation that
would alter the rules governing the dividends received deduction.
Such legislation could be enacted at any time, and could have an
adverse effect on the fund's yield for corporate shareholders.
If the shareholder incurs indebtedness that is "directly
attributable" to the acquisition or holding of fund shares,
dividends paid by the fund with respect to such shares will not
be eligible for the dividends-received deduction. The dividends-
received deduction is not available to non-corporate shareholders
or to Subchapter S corporations.
The fund may designate dividends as eligible for the dividends-
received deduction only to the extent that such dividends are
derived from dividends paid to the fund with respect to which the
fund could have taken the dividends-received deduction if it had
been a regular corporation. The difference between a
shareholder's adjusted current earnings and taxable income caused
by the dividends-received deduction will be a factor in
determining whether the corporate alternative minimum tax
applies.
All fund distributions will be taxable to you as ordinary
income to the extent derived from the fund's investment income
and net short-term gains (that is, net gains from securities held
for not more than a year). Distributions designated by the fund
as deriving from net gains on securities held for more than one
year but not more than 18 months and from net gains on securities
held for more than 18 months will be taxable to you as
such, regardless of how long you have held the shares
. Distributions will be taxable as described above
whether received in cash or in shares through the reinvestment of
distributions.
Early in each calendar year Putnam Investor Services will
notify investors of the amount and tax status of distributions
paid to them for the preceding year.
The foregoing is a summary of certain federal income tax
consequences of investing in the fund. Investors should
consult their tax advisers to determine the precise effect
of an investment in the fund on their particular tax
situation (including possible liability for state and local
taxes).
<PAGE>
About Putnam Investments, Inc.
Putnam Management has been managing mutual funds since 1937.
Putnam Mutual Funds is the principal underwriter of the fund and
of other Putnam funds. Putnam Fiduciary Trust Company is the
custodian of the fund. Putnam Investor Services, a division of
Putnam Fiduciary Trust Company, is the investor servicing and
transfer agent of the fund.
Putnam Management, Putnam Mutual Funds and Putnam Fiduciary Trust
Company are subsidiaries of Putnam Investments, Inc., which is
wholly owned by Marsh & McLennan Companies, Inc., a publicly-
owned holding company whose principal businesses are
international insurance and reinsurance brokerage, employee
benefit consulting and investment management.
<PAGE>
Make the most of your Putnam privileges
As a Putnam mutual fund shareholder, you have access to a number
of services that can help you build a more effective and flexible
financial program. Here are some of the ways you can use these
privileges to make the most of your Putnam mutual fund
investment.
SYSTEMATIC INVESTMENT PLAN
Invest as much as you wish ($25 or more) on any business day of
the month except for the 29th, 30th, or 31st. The amount you
choose will be automatically transferred each month from your
checking or savings account.
SYSTEMATIC WITHDRAWAL
Make regular withdrawals of $50 or more monthly, quarterly, or
semiannually from your Putnam mutual fund account valued at
$10,000 or more. Your automatic withdrawal may be made on any
business day of the month except for the 29th, 30th, or 31st.
SYSTEMATIC EXCHANGE
Transfer assets automatically from one Putnam account to another
on a regular, prearranged basis. There is no additional charge
for this service.
FREE EXCHANGE PRIVILEGE
Exchange money between Putnam funds in the same class of shares
without charge. The exchange privilege allows you to adjust your
investments as your objectives change. A signature guarantee is
required for exchanges of more than $500,000 and shares of all
Putnam funds may not be available to all investors.
<PAGE>
DIVIDENDS PLUS
Diversify your portfolio by investing dividends and other
distributions from one Putnam fund automatically into another at
net asset value.
STATEMENT OF INTENTION
To reduce a front-end sales charge, you may agree to invest a
minimum dollar amount over 13 months. Depending on your fund,
the minimum is $25,000, $50,000, or $100,000. Whenever you make
an investment under this arrangement, you or your investment
advisor should notify Putnam Mutual Funds that a Statement of
Intention is in effect.
Investors may not maintain, within the same fund, simultaneous
plans for systematic investment or exchange (into the fund) and
systematic withdrawal or exchange (out of the fund). These
privileges are subject to change or termination.
For more information about any of these services and privileges,
call your investment advisor or a Putnam customer service
representative toll free at 1-800-225-1581.
<PAGE>
Putnam Family of Funds*
PUTNAM GROWTH FUNDS
Putnam Asia Pacific Growth Fund
Putnam Capital Appreciation Fund
Putnam Diversified Equity Trust
Putnam Emerging Markets Fund
Putnam Europe Growth Fund
Putnam Global Growth Fund
Putnam Global Natural Resources Fund
Putnam Growth Opportunities Fund
Putnam Health Sciences Trust
Putnam International Growth Fund
Putnam International New Opportunities Fund
Putnam International Voyager Fund
Putnam Investors Fund
Putnam New Opportunities Fund++
Putnam OTC & Emerging Growth Fund+
Putnam Vista Fund
Putnam Voyager Fund
Putnam Voyager Fund II
PUTNAM GROWTH AND INCOME FUNDS
Putnam Balanced Retirement Fund
Putnam Convertible Income-Growth Trust
Putnam Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Putnam Growth and Income Fund II
Putnam International Growth and Income Fund
Putnam New Value Fund
Putnam Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Putnam American Government Income Fund
Putnam Diversified Income Trust
Putnam Diversified Income Trust II
Putnam Federal Income Trust
Putnam Global Governmental Income Trust
Putnam High Yield Advantage Fund
Putnam High Yield Total Return Fund
Putnam High Yield Trust++
Putnam Income Fund
Putnam Intermediate U.S. Government Income Fund
Putnam Preferred Income Fund
Putnam U.S. Government Income Trust
PUTNAM TAX-FREE INCOME FUNDS
Putnam Municipal Income Fund
Putnam Tax Exempt Income Fund
Putnam Tax-Free High Yield Fund
Putnam Tax-Free Insured Fund
Putnam State tax-free income funds+++
Arizona, California, Florida, Massachusetts, Michigan,
Minnesota, New Jersey, New York, Ohio, and Pennsylvania
LIFESTAGE(SM) FUNDS
Putnam Asset Allocation Funds -- three investment portfolios that
spread your money across a variety of stocks, bonds, and money
market investments seeking to help maximize your return and
reduce your risk.
The three portfolios:
Balanced Portfolio
Conservative Portfolio
Growth Portfolio
PUTNAM MONEY MARKET FUNDS**
Putnam Money Market Fund
Putnam California Tax Exempt Money Market Fund
Putnam New York Tax Exempt Money Market Fund
Putnam Tax Exempt Money Market Fund
*As of 9/30/97.
+Formerly Putnam OTC Emerging Growth Fund.
++New investments restricted; se your financial advisor for
details.
+++Not available in all states.
**Investments in money market funds are neither insured nor
guaranteed by the U.S. government. These funds are managed to
maintain a steady net asset value of $1.00 per share, although
there is no assurance this net asset value will be maintained in
the future.
Please call your financial advisor or Putnam Mutual Funds to
obtain a prospectus for any Putnam fund. It contains more
complete information, including charges and expenses. Read it
carefully before you invest or send money.
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PUTNAM PREFERRED INCOME FUND
One Post Office Square
Boston, MA 02109
FUND INFORMATION:
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
INVESTOR SERVICING AGENT
Putnam Investor Services
Mailing address:
P.O. Box 41203
Providence, RI 02940-1203
CUSTODIAN
Putnam Fiduciary Trust Company
One Post Office Square
Boston, MA 02109
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
PUTNAMINVESTMENTS
One Post Office Square
Boston, Massachusetts
Toll-free 1-800-225-1581
