PUTNAM VARIABLE TRUST
PROSPECTUS - May 1, 1996, as revised January 1, 1997
Putnam Variable Trust (the "Trust") offers shares of beneficial
interest in separate investment portfolios (collectively, the
"funds") for purchase by separate accounts of various insurance
companies. The funds, which have different investment objectives
and policies, offered by this prospectus are: Putnam VT Asia
Pacific Growth Fund, Putnam VT Diversified Income Fund, Putnam VT
Global Asset Allocation Fund, Putnam VT Global Growth Fund,
Putnam VT Growth and Income Fund, Putnam VT High Yield Fund,
Putnam VT International Growth Fund, Putnam VT International
Growth and Income Fund, Putnam VT International New Opportunities
Fund, Putnam VT Money Market Fund, Putnam VT New Opportunities
Fund, Putnam VT New Value Fund, Putnam VT U.S. Government and
High Quality Bond Fund, Putnam VT Utilities Growth and Income
Fund, Putnam VT Vista Fund and Putnam VT Voyager Fund.
An investment in Putnam VT Money Market Fund is neither
insured nor guaranteed by the U.S. government. There can be no
assurance that Putnam VT Money Market Fund will be able to
maintain a stable net asset value of $1.00 per share.
Putnam VT High Yield Fund invests primarily in, and Putnam VT
Diversified Income Fund may invest significantly in, lower-rated
bonds, commonly known as "junk bonds." Investments of this type
are subject to a greater risk of loss of principal and non-
payment of interest. Investors should carefully assess the risks
associated with an investment in either fund.
This prospectus explains concisely what you should know before
investing in the Trust and should be read in conjunction with the
prospectus for the separate account of the variable annuity or
variable life insurance product that accompanies this prospectus.
Please read it carefully and keep it for future reference.
Investors can find more detailed information about the Trust in
the May 1, 1996, as revised January 1, 1997, statement of
additional information (the "SAI"), as amended from time to time.
For a free copy of the SAI, call Putnam Investor Services at
1-800-521-0538. The SAI has been filed with the Securities and
Exchange Commission and is incorporated into this prospectus by
reference.
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 FUNDS 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.
SHARES OF THE FUNDS ARE PRESENTLY AVAILABLE AND ARE BEING
MARKETED EXCLUSIVELY AS A POOLED FUNDING VEHICLE FOR VARIABLE
ANNUITY CONTRACT AND VARIABLE LIFE INSURANCE POLICY SEPARATE
ACCOUNTS OF VARIOUS INSURANCE COMPANIES.
What you need to know
ABOUT THE TRUST
Financial highlights
.................................................................
Study this table to see, among other things, how the funds have
performed since their inception.
The Trust
.................................................................
This section explains the Trust's relationship to various
variable annuity and variable life insurance products and advises
prospective investors to read the prospectus issued by the
relevant insurance company for information about the annuity or
insurance product.
Investment objectives and policies of the funds
.................................................................
Each of the funds is managed according to its own specific
investment objective or objectives. Read this section to make
sure a fund's objectives are consistent with your own.
Common investment policies and techniques
.................................................................
Certain investment policies and techniques apply to two or more
of the funds. This section defines, describes, and explains
these policies and techniques.
How performance is shown
.................................................................
This section describes and defines the measures used to assess
a fund's performance. All data are based on a
fund's past investment results and do not predict future
performance.
How the Trust is managed
.................................................................
Consult this section for information about the Trust's
management, allocation of the Trust's expenses, and how
purchases and sales of securities are made for the Trust.
Organization and history
.................................................................
In this section, you will learn when the Trust was introduced,
how it is organized, how it may offer shares, and who its
Trustees are.
<PAGE>
ABOUT YOUR INVESTMENT
Sales and redemptions
.................................................................
This section describes the terms under which shares may be
purchased and redeemed.
How a fund values its shares
.................................................................
This section explains how a fund determines the value of its
shares.
How the funds make 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.
Financial information
.................................................................
This section informs you that each year you will receive
semiannual and annual reports of the Trust.
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.
APPENDIX
Securities ratings
<PAGE>
About the Trust
FINANCIAL HIGHLIGHTS
The following tables present per share financial information for
the life of each fund. This information has been audited and
reported on by the independent accountants. The "Report of
independent accountants" and financial statements included in the
Trust's annual report to shareholders for the 1995 fiscal year
are incorporated by reference into this prospectus. The Trust's
annual report, which contains additional unaudited performance
information, is available without charge upon request.
Financial information for Putnam VT International Growth Fund,
Putnam VT International Growth and Income Fund, Putnam VT
International New Opportunities Fund, Putnam VT New Value Fund
and Putnam VT Vista Fund is not included because the funds had
not commenced operations as of June 30, 1996.
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
Investment
Operations
Net
Less Distribution from:
Realized and
In Excess of
Net Unrealized
Total from Net Net Realized Net Realized
Year (Period)Net Asset Value , Investment Gain (Loss) on
Investment Investment Gain on Gain on
ended Beginning of Period Income Investments
Operations Income Investments Investments
<S> <C> <C> <C>
<C> <C> <C> <C>
Putnam VT Asia
Pacific Growth Fund
June 30, 1996+ $10.23 $.02 $.60
$.62 $(.15) $ - $-
December 31, 1995* 10.00 .06(a)(b) .17
.23 - - -
Putnam VT Diversified
Income Fund
June 30, 1996+ $11.03 $.28 $(.14)
$.14 $(.67) $ - $-
December 31, 1995 9.74 .71 1.09
1.80 (.51) - -
December 31, 1994 10.23 .61 (1.04)
(.43) (.06) - -
December 31, 1993** 10.00 .06 .17
.23 - - -
Putnam VT Global Asset
Allocation Fund
June 30, 1996+ $16.15 $.21 $.77
$.98 $(.44) $(.83) $-
December 31, 1995 13.19 .47 2.74
3.21 (.25) - -
December 31, 1994 14.29 .35 (.71)
(.36) (.29) (.43) (.02)
December 31, 1993 12.92 .30 1.87
2.17 (.55) (.25) -
December 31, 1992 12.77 .35 .41
.76 (.42) (.19) -
December 31, 1991 11.28 .45 1.64
2.09 (.54) (.06) -
December 31, 1990 11.26 .54 (.52)
.02 - - -
December 31, 1989 10.68 .56 1.10
1.66 (.88) (.15) -
December 31, 1988*** 10.00 .53(a) .15
.68 - - -
<PAGE>
Putnam VT Global
Growth Fund
June 30, 1996+ $15.18 $.12 $1.32
$1.44 $(.25) $(.57) $-
December 31, 1995 13.48 .20 1.85
2.05 (.11) (.24) -
December 31, 1994 13.68 .13 (.26)
(.13) (.05) (.02) -
December 31, 1993 10.48 .08 3.28
3.36 (.16) - -
December 31, 1992 10.61 .10 (.14)
(.04) (.09) - -
December 31, 1991 9.32 .11 1.28
1.39 (.10) - -
December 31, 1990**** 10.00 .11 (.79)
(.68) - - -
Putnam VT Growth and
Income Fund
June 30, 1996+ $21.47 $.24 $1.68
$1.92 $(.51) $(.89) $-
December 31, 1995 16.44 .53 5.31
5.84 (.51) (.30) -
December 31, 1994 17.38 .50 (.48)
.02 (.38) (.58) -
December 31, 1993 15.93 .38 1.83
2.21 (.39) (.37) -
December 31, 1992 15.33 .39 1.04
1.43 (.42) (.41) -
December 31, 1991 13.51 .43 2.09
2.52 (.53) (.17) -
December 31, 1990 13.41 .55 (.29)
.26 (.05) (.11) -
December 31, 1989 12.00 .45 2.04
2.49 (.60) (.48) -
December 31, 1988*** 10.00 .42(a) 1.58
2.00 - - -
Putnam VT High
Yield Fund
June 30, 1996+ $12.37 $.49 $.13
$.62 $(.91) $ - $-
December 31, 1995 11.46 .91 1.05
1.96 (1.05) - -
December 31, 1994 12.53 1.05 (1.17)
(.12) (.79) (.14) (.02)
December 31, 1993 11.17 .73 1.37
2.10 (.74) - -
December 31, 1992 10.12 1.26 .59
1.85 (.80) - -
December 31, 1991 7.91 .85 2.47
3.32 (1.11) - -
December 31, 1990 9.15 1.30 (2.20)
(.90) (.34) - -
December 31, 1989 10.76 1.12 (1.37)
(.25) (1.36) - -
December 31, 1988*** 10.00 1.04(a)(b) (.28)
.76 - - -
<PAGE>
Putnam VT Money
Market Fund
June 30, 1996+ $1.00 $.0243 $ -
$.0243 $(.0243) $ - $-
December 31, 1995 1.00 .0533 -
.0533 (.0533) - -
December 31, 1994 1.00 .0377 -
.0377 (.0377) - -
December 31, 1993 1.00 .0276 -
.0276 (.0276) - -
December 31, 1992 1.00 .0352 -
.0352 (.0352) - -
December 31, 1991 1.00 .0575 .0001
.0576 (.0575) (.0001) -
December 31, 1990 1.00 .0770 -
.0770 (.0770) - -
December 31, 1989 1.00 .0859 -
.0859 (.0859) - -
December 31, 1988*** 1.00 .0575 -
.0575 (.0575) - -
Putnam VT New
Opportunities Fund
June 30, 1996+ $15.63 $(.01) $2.51
$2.50 $ - $ - $-
December 31, 1995 10.82 - 4.84
4.84 - (.02) -
December 31, 1994***** 10.00 -(b) .82
.82 - - -
Putnam VT U.S. Government
and High Quality Bond Fund
June 30, 1996+ $13.74 $.39 $(.80)
$(.41) $(.82) $ - $-
December 31, 1995 12.22 .81 1.56
2.37 (.85) - -
December 31, 1994 13.53 .81 (1.24)
(.43) (.66) (.22) -
December 31, 1993 12.85 .63 .78
1.41 (.61) (.12) -
December 31, 1992 12.57 .60 .28
.88 (.54) (.06) -
December 31, 1991 11.36 .56 1.31
1.87 (.66) - -
December 31, 1990 10.82 .71 .08
.79 (.22) (.03) -
December 31, 1989 10.28 .62 .78
1.40 (.79) (.07) -
December 31, 1988*** 10.00 .66(a) (.38)
.28 - - -
Putnam VT Utilities
Growth and Income Fund
June 30, 1996+ $13.28 $.27 $.46
$.73 $(.51) $ - $-
December 31, 1995 10.68 .53 2.65
3.18 (.58) - -
December 31, 1994 12.00 .60 (1.44)
(.84) (.35) (.12) -
December 31, 1993 10.71 .30 1.13
1.43 (.12) (.02) -
December 31, 1992****** 10.00 .15(b) .56
.71 - - -
Putnam VT Voyager Fund
June 30, 1996+ $30.50 $.04 $3.51
$3.55 $(.10) $(1.71) $-
December 31, 1995 22.20 .10 8.76
8.86 (.07) (.49) -
December 31, 1994 22.41 .07 .14
.21 (.05) (.37) -
December 31, 1993 19.21 .04 3.50
3.54 (.07) (.27) -
December 31, 1992 17.94 .07 1.72
1.79 (.08) (.44) -
December 31, 1991 12.58 .11(a) 5.61
5.72 (.12) (.24) -
December 31, 1990 13.00 .18 (.45)
(.27) (.06) (.09) -
December 31, 1989 10.30 .12 3.20
3.32 (.16) (.46) -
December 31, 1988*** 10.00 .13(a) .17
.30 - - -
<PAGE>
Ratio of
Less Total
Net
Distributions Investment
Ratio of Investment
from: Net Asset Return at Net Assets
Expenses to Income to Average
Return of Total Value, End Net Asset End of Period
Average Net Average Net Portfolio commission
Capital Distributions of Period Value(%)(c)(in thousands)
Assets(%)(e) Assets(%) Turnover(%) rate paid(f)
<C> <C> <C> <C> <C>
<C> <C> <C> <C>
$- $(.15) $10.70 6.03(d) $92,563
.59(d) .59(d) 29.34(d) $.0222
- - 10.23 2.30(d) 25,045
.81(b)(d) .72(b)(d) 67.72(d)
$- $.67 $10.50 1.38(d) $391,098
.40(d) 3.79(d) 150.28(d)
- (.51) 11.03 19.13 303,721
.85 7.85 297.17
- (.06) 9.74 (4.23) 215,935
.80 7.60 165.17
- - 10.23 2.30(d) 80,449
.28(d) 1.45(d) 40.83(d)
$- $(1.27) $15.86 6.30(d) $627,730
.40(d) 1.54(d) 91.72(d) $.0482
- (.25) 16.15 24.71 535,666
.84 3.31 150.88
- (.74) 13.19 (2.50) 414,223
.76 3.19 150.21
- (.80) 14.29 17.48 297,307
.72 3.28 192.48
- (.61) 12.92 6.29 134,667
.79 3.84 141.87
- (.60) 12.77 19.02 82,071
.87 4.55 77.31
- - 11.28 .18 51,792
.88 5.31 52.97
(.05) (1.08) 11.26 16.08 40,200
.88 6.16 95.97
- - 10.68 6.76(d) 26,202
1.17(d) 5.55(d) 183.11(d)
$- $(.82) $15.80 9.71(d) $1,096,302
.37(d) .88(d) 37.67(d) $.0336
- (.35) 15.18 15.67 831,593
.75 1.49 82.53
- (.07) 13.48 (.96) 669,821
.77 1.21 41.55
- (.16) 13.68 32.40 352,786
.75 1.38 47.00
- (.09) 10.48 (.36) 86,854
.85 1.82 59.68
- (.10) 10.61 15.01 40,183
.99 2.01 48.67
- - 9.32 (6.80)(d) 13,203
.99(d) 2.35(d) 18.07(d)
<PAGE>
$- $(1.40) $21.99 9.16(d) $4,366,148
.27(d) 1.44(d) 20.79(d) $.0523
- (.81) 21.47 36.71 3,312,306
.57 3.34 50.87
- (.96) 16.44 .35 1,907,380
.62 3.64 46.43
- (.76) 17.38 14.27 1,407,382
.64 3.49 62.63
- (.83) 15.93 9.75 641,508
.69 3.79 39.58
- (.70) 15.33 19.05 325,861
.72 4.37 37.94
- (.16) 13.51 1.96 155,942
.75 5.02 49.39
- (1.08) 13.41 21.30 100,335
.74 5.73 73.40
- - 12.00 19.89(d) 26,205
.92(d) 4.08(d) 37.94(d)
$- $(.91) $12.08 5.15(d) $589,462
.38(d) 4.67(d) 28.00(d)
- (1.05) 12.37 18.32 498,467
.79 9.42 69.78
- (.95) 11.46 (.94) 327,119
.74 9.79 62.09
- (.74) 12.53 19.57 291,737
.67 9.88 85.59
- (.80) 11.17 18.98 118,804
.71 11.53 84.24
- (1.11) 10.12 44.83 42,823
.92 12.64 104.62
- (.34) 7.91 (9.98) 18,915
.93 13.81 86.05
- (1.36) 9.15 (2.65) 27,511
.84 12.59 65.44
- - 10.76 7.56(d) 19,506
.94(b)(d) 10.99(b)(d) 64.25(d)
$- $(.0243) $1.00 2.46(d) $356,510
.26(d) 2.44(d) -
- (.0533) 1.00 5.46 263,213
.57 5.43 -
- (.0377) 1.00 3.82 244,064
.55 3.90 -
- (.0276) 1.00 2.79 129,329
.42 2.77 -
- (.0352) 1.00 3.57 105,694
.48 3.49 -
- (.0576) 1.00 5.92 78,568
.50 5.74 -
- (.0770) 1.00 7.98 77,892
.53 7.67 -
- (.0859) 1.00 8.88 24,975
.63 8.62 -
- (.0575) 1.00 5.84(d) 14,001
.71(d) 6.70(d) -
$- $- $18.13 15.99(d) $1,205,342
.38(d) (.06)(d) 21.70(d) $.0506
(.01) (.03) 15.63 44.87 515,109
.84 (.03) 30.87
- - 10.82 8.20(d) 68,592
.47(b)(d) .03(b)(d) 32.77(d)
<PAGE>
$- $(.82) $12.51 (3.01)(d) $744,447
.34(d) 3.24(d) 98.46(d)
- (.85) 13.74 20.44 747,024
.70 6.22 149.18
- (.88) 12.22 (3.23) 640,458
.67 6.24 118.34
- (.73) 13.53 11.28 735,386
.64 6.16 94.01
- (.60) 12.85 7.49 435,906
.70 6.98 45.82
- (.66) 12.57 17.28 229,306
.74 7.57 59.29
- (.25) 11.36 7.51 98,549
.76 8.24 32.70
- (.86) 10.82 14.06 61,765
.76 8.32 27.81
- - 10.28 2.78(d) 28,406
.87(d) 7.04(d) 41.41(d)
$- $(.51) $13.50 5.63(d) $587,525
.36(d) 2.23(d) 36.61(d) $.0494
- (.58) 13.28 31.08 530,461
.68 4.72 60.33
- (.48) 10.68 (7.02) 384,169
.68 5.23 84.88
- (.14) 12.00 13.42 443,281
.69 5.02 50.79
- - 10.71 7.10(d) 83,522
.64(b)(d) 3.43(b)(d) 19.29(d)
$- $(1.81) $32.24 11.96(d) $2,763,083
.31(d) .16(d) 31.27(d) $.0536
- (.56) 30.50 40.67 2,000,232
.68 .49 57.51
- (.42) 22.20 1.04 1,026,972
.71 .40 62.44
- (.34) 22.41 18.70 675,198
.66 .33 55.85
- (.52) 19.21 10.36 317,225
.75 .56 48.17
- (.36) 17.94 46.09 156,741
.81 .78 55.04
- (.15) 12.58 (2.03) 48,414
.88 1.58 93.65
- (.62) 13.00 32.38 39,998
.82 1.93 91.82
- - 10.30 2.98(d) 7,981
1.35(d) 1.44(d) 103.99(d)
<FN>
(a) Per share net investment income has been determined on the
basis of the weighted average number of shares
outstanding during the period.
(b) Reflects an expense limitation in effect during the period.
As a result of such limitation, expenses of Putnam
VT Asia Pacific Growth Fund for the period ended December
31, 1995 reflect a reduction of approximately $0.03
per share, expenses of Putnam VT High Yield Fund for the
period ended December 31, 1988 reflect a reduction of
less than $0.01 per share, expenses of Putnam VT New
Opportunities Fund for the period ended December 31, 1994
reflect a reduction of approximately $0.02 per share, and
expenses of Putnam VT Utilities Growth and Income Fund
for the period ended December 31, 1992 reflect a reduction
of approximately $0.01 per share.
(c) Total investment return assumes dividend reinvestment and
does not reflect the effect of sales charges.
(d) Not annualized.
(e) The ratio of expenses to average net assets for the
periods ended on or after December 31, 1995
includes amounts paid through expense offset and brokerage
service arrangements. Prior period ratios exclude
these amounts.
(f) Funds that invest more than 10% of their net assets
in equity securities on which commissions are charged
on trades are required to disclose the average commission
rate paid per portfolio share for fiscal periods
beginning on or after September 1, 1995.
+ Unaudited
* For the period May 1, 1995 (commencement of
operations) to December 31, 1995.
** For the period September 15, 1993 (commencement of
operations) to December 31, 1993.
*** For the period February 1, 1988 (commencement of
operations) to December 31, 1988.
**** For the period May 1, 1990 (commencement of operations) to
December 31, 1990.
***** For the period May 2, 1994 (commencement of operations) to
December 31, 1994.
****** For the period May 4, 1992 (commencement of
operations) to December 31, 1992.
/TABLE
<PAGE>
THE TRUST
The Trust is designed to serve as a funding vehicle for insurance
separate accounts associated with variable annuity contracts and
variable life insurance policies. The Trust presently serves as
the funding vehicle for variable annuity contracts and variable
life insurance policies offered by separate accounts of various
insurance companies. You should consult the prospectus issued by
the relevant insurance company for more information about a
separate account. Shares of the Trust are offered to these
separate accounts through Putnam Mutual Funds Corp. ("Putnam
Mutual Funds"), the principal underwriter for the Trust.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
Each fund of the Trust has its own investment objective or
objectives which it pursues through its own investment policies
as described below. The particular objectives and policies of
the funds can be expected to affect the return of each fund and
the degree of market and financial risk to which each fund is
subject. For more information about the investment strategies
employed by the funds, see "Common investment policies and
techniques." The investment objectives and policies of each fund
may, unless otherwise specifically stated, be changed by the
Trustees without a vote of the shareholders. As a matter of
policy, the Trustees would not materially change the investment
objective or objectives of a fund without shareholder approval.
None of the funds is intended to be a complete investment
program, and there is no assurance that any fund will achieve its
objective or objectives.
Additional portfolios with differing investment objectives and
policies may be created from time to time for use as funding
vehicles for insurance company separate accounts or for other
insurance products. In addition, the Trustees may, subject to
any necessary regulatory approvals, eliminate any fund or divide
any fund into two or more classes of shares with such special or
relative rights and privileges as the Trustees may determine.
Glossary
The following terms are frequently used in this prospectus. Many
of these terms are explained in greater detail under "Common
investment policies and techniques."
"Putnam Management" -- Putnam Investment Management, Inc., the
Trust's investment manager
"S&P" -- Standard & Poor's
"Moody's" -- Moody's Investors Service, Inc.
"U.S. government securities" -- debt securities issued or
guaranteed by the U.S. government, by various of its agencies, or
by various instrumentalities established or sponsored by the U.S.
government. Certain U.S. government securities, including U.S.
Treasury bills, notes and bonds, mortgage participation
certificates guaranteed by Ginnie Mae, and Federal Housing
Administration debentures, are supported by the full faith and
credit of the United States. Other U.S. government securities
issued or guaranteed by federal agencies or government-sponsored
enterprises are not supported by the full faith and credit of the
United States. These securities include obligations supported by
the right of the issuer to borrow from the U.S. Treasury, such as
obligations of Federal Home Loan Banks, and obligations supported
only by the credit of the instrumentality, such as Fannie Mae
bonds.
"CMOs" -- collateralized mortgage obligations
"Ginnie Mae" -- Government National Mortgage Association
"Fannie Mae" -- Federal National Mortgage Association
"Freddie Mac" -- Federal Home Loan Mortgage Corporation
PUTNAM VT ASIA PACIFIC GROWTH FUND
Putnam VT Asia Pacific Growth Fund's investment objective is to
seek capital appreciation. In seeking capital appreciation, the
fund will invest primarily in securities of companies located in
Asia and in the Pacific Basin. The fund's investments will
normally include common stocks, preferred stocks, securities
convertible into common stocks or preferred stocks, and warrants
to purchase common stocks or preferred stocks. The fund may also
invest to a lesser extent in debt securities and other types of
investments if Putnam Management believes they would help achieve
the fund's objective. The fund may also hold a portion of its
assets in cash and money market instruments.
The fund may invest in securities of issuers located in any
country in Asia or the Pacific Basin where Putnam Management
believes there is potential for above-average capital
appreciation. Such countries may include, for example,
Australia, Hong Kong, India, Indonesia, Japan, Korea, Malaysia,
New Zealand, the People's Republic of China, the Philippines,
Singapore, Taiwan and Thailand.
It is anticipated that under normal market conditions the fund
will invest at least 85% of its assets in securities of companies
located in Asia and in the Pacific Basin which Putnam Management
believes have potential for capital appreciation. The fund will
consider an issuer of securities to be located in Asia or in the
Pacific Basin if it is organized under the laws of a country in
Asia or the Pacific Basin and has a principal office in a country
in Asia or the Pacific Basin, if it derives 50% or more of its
total revenues from business in Asia or the Pacific Basin, or if
its equity securities are traded principally on a securities
exchange in Asia or the Pacific Basin. It is anticipated that
under normal circumstances the fund will invest at least 65% of
its assets in securities of issuers meeting at least one of the
first two criteria described in the preceding sentence. For a
discussion of the risks associated with foreign investing, see
"Common investment policies and techniques -- Foreign
investments."
The fund will not limit its investments to any particular type of
company. The fund may invest in companies, large or small, whose
earnings are believed to be in a relatively strong growth trend,
or in companies in which significant further growth is not
anticipated but whose securities are thought to be undervalued.
It may invest in small and relatively less well-known companies.
These companies, which typically have equity market
capitalizations below $1 billion, may present greater
opportunities for capital appreciation, but may also involve
greater risk. They may have limited product lines, markets or
financial resources, or may depend on a limited management group.
Their securities may trade less frequently and in limited volume,
and only in the over-the-counter market or on a regional
securities exchange. As a result, these securities may fluctuate
in value more than securities of larger, more established
companies.
Debt securities in which the fund may invest will generally be
rated at the time of purchase at least Baa by Moody's or BBB by
S&P, or, if unrated, determined by Putnam Management to be of
comparable quality and in any event the fund will not invest in
debt securities rated below Baa by Moody's or BBB by S&P
(commonly known as "junk bonds"), or, if unrated, determined by
Putnam Management to be of comparable quality if, as a result,
more than 5% of the fund's assets would be invested in such
securities. Debt securities rated Baa or BBB have speculative
characteristics and adverse economic conditions may lead to a
weakened capacity to pay interest and repay principal.
The fund will not necessarily dispose of a security if its rating
is reduced below its rating at the time of purchase, although
Putnam Management will monitor the investment to determine
whether continued investment in the security will assist in
meeting the fund's investment objective.
In addition to engaging in the options and futures
transactions described under "Common investment policies and
techniques --Futures and options," the fund may purchase
warrants, issued by banks and other financial institutions, whose
values are based on the values from time to time of one or more
stock indices.
The fund may engage in defensive strategies when Putnam
Management judges that conditions in the securities markets make
pursuing the fund's basic investment strategy inconsistent with
the best interests of the fund's shareholders. When pursuing
such defensive strategies, the fund may invest without limit in
securities primarily traded in U.S. markets or in other markets
outside Asia or the Pacific Basin. See "Common investment
policies and techniques" below for a discussion of these
strategies. The fund may also engage in foreign currency
exchange transactions and in transactions in futures and options,
enter into repurchase agreements, loan its portfolio securities
and purchase securities for future delivery. See "Common
investment policies and techniques" below for a discussion of
these securities and types of transactions and the risks
associated with them.
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 the fund's 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, such fund will be subject to
an increased risk of loss if the market value of such issuer's
securities declines.
Putnam VT Asia Pacific Growth Fund will generally be managed in a
style similar to that of Putnam Asia Pacific Growth Fund.
PUTNAM VT DIVERSIFIED INCOME FUND
Putnam VT Diversified Income Fund seeks high current income
consistent with capital preservation. The fund pursues its
investment objective by allocating its investments among the
following three sectors of the fixed-income securities markets:
* a U.S. Government Sector, consisting primarily of debt
obligations of the U.S. government, its agencies and
instrumentalities;
* a High Yield Sector, consisting of high-yielding, lower-rated,
higher - risk U.S. and foreign fixed-income securities
(commonly known as "junk bonds"); and
* an International Sector, consisting of obligations of foreign
governments, their agencies and instrumentalities, and other
fixed-income securities denominated in foreign currencies.
<PAGE>
Putnam Management believes that diversifying the fund's
investments among these sectors, as opposed to investing
exclusively in any one sector, will better enable the fund to
preserve capital while pursuing its objective of high current
income. Historically, the markets for U.S. government
securities, high yielding corporate fixed-income securities, and
debt securities of foreign issuers have tended to behave
independently and have at times moved in opposite directions.
For example, U.S. government securities have generally been
affected negatively by inflationary concerns resulting from
increased economic activity. High-yield corporate fixed-income
securities, on the other hand, have generally benefitted from
increased economic activity due to improvements in the
credit quality of corporate issuers. The reverse has generally
been true during periods of economic decline. Similarly, U.S.
government securities have often been negatively affected by a
decline in the value of the dollar against foreign currencies,
while the bonds of foreign issuers held by U.S. investors have
generally benefitted from such decline. Putnam Management
believes that, when financial markets exhibit such a lack of
correlation, a pooling of investments among these markets may
produce greater preservation of capital over the long term than
would be obtained by investing exclusively in any one of the
markets.
Putnam Management will determine the amount of assets to be
allocated to each of the three market sectors in which the fund
will invest based on its assessment of the returns that can be
achieved from a portfolio which is invested in all three sectors.
In making this determination, Putnam Management will rely in part
on quantitative analytical techniques that measure relative risks
and opportunities of each market sector based on current and
historical market data for each sector, as well as on its own
assessment of economic and market conditions. Putnam Management
will continuously review this allocation of assets and make such
adjustments as it deems appropriate, although there are no fixed
limits on allocations among sectors, including investments in the
High Yield Sector. Because of the importance of sector
diversification to the fund's investment policies, Putnam
Management expects that a substantial portion of the fund's
assets will normally be invested in each of the three market
sectors. The fund's assets allocated to each of these market
sectors will be managed in accordance with particular investment
policies, which are summarized below. The fund may engage in
defensive strategies when Putnam Management judges that
conditions in the securities markets make pursuing the fund's
basic investment strategy inconsistent with the best interests of
the fund's shareholders. When pursuing such defensive
strategies, the fund may invest without limit in securities
primarily traded in U.S. markets. See "Common investment
policies and techniques" below for a discussion of these
strategies.
The fund may invest in premium securities, engage in foreign
currency exchange transactions, transactions in futures and
options, enter into repurchase agreements, loan its portfolio
securities and purchase securities for future delivery. See
"Common investment policies and techniques" below for a
discussion of these securities and types of transactions and the
risks associated with them. The fund may also hold a portion of
its assets in cash and money market instruments.
Putnam VT Diversified Income Fund will generally be managed in a
style similar to that of Putnam Diversified Income Trust.
U.S. Government Sector
The fund will invest assets allocated to the U.S. Government
Sector primarily in U.S. government securities. In purchasing
securities for the U.S. Government Sector, Putnam Management may
take full advantage of the entire range of maturities of U.S.
government securities and may adjust the average maturity of the
investments held in the portfolio from time to time, depending on
its assessment of relative yields of securities of different
maturities and its expectations of future changes in interest
rates. Under normal market conditions, the fund will invest at
least 20% of its net assets in U.S. government securities ,
and at least 65% of the assets allocated to the U.S. Government
Sector will be invested in U.S. government securities.
The fund may invest assets allocated to the U.S. Government
Sector in a variety of debt securities, including asset-backed
and mortgage-backed securities, such as CMOs and certain stripped
mortgage-backed securities, that are issued by private U.S.
issuers. For a description of these securities, and the risks
associated with them, see "Common investment policies and
techniques -- Mortgage-backed and asset-backed securities."
With respect to assets allocated to the U.S. Government Sector,
the fund will only invest in privately issued debt securities
that are rated at the time of purchase at least A by Moody's or
S&P, or in unrated securities that Putnam Management determines
are of comparable quality. The fund will not necessarily dispose
of a security if its rating is reduced below these levels,
although Putnam Management will monitor the investment to
determine whether continued investment in the security will
assist in meeting the fund's investment objective.
Risk factors. U.S. government securities are considered among
the safest of fixed-income investments , but their values,
like those of other debt securities, will fluctuate with changes
in interest rates. Changes in the value of portfolio securities
will not affect interest income from those securities, but
will be reflected in the fund's net asset value. Thus, a
decrease in interest rates will generally result in an increase
in the value of fund shares . Conversely, during periods of
rising interest rates, the value of fund shares will
generally decline. The magnitude of these fluctuations will
generally be greater for securities with longer maturities ,
and the fund expects that its portfolio will normally be weighted
towards longer maturities . Because of their added safety,
the yields available from U.S. government securities are
generally lower than the yields available from comparable
corporate debt securities .
While certain U.S. government securities, such as U.S. Treasury
obligations and Ginnie Mae certificates, are backed by the full
faith and credit of the U.S. government, other securities in
which the fund may invest are subject to varying degrees of risk
of default . These risk factors include the
creditworthiness of the issuer and , in the case of
mortgage-backed and asset-backed securities, the
ability of the underlying mortgagors or other borrowers to
meet their obligations.
High Yield Sector
The fund will invest assets allocated to the High Yield Sector
primarily in high yielding, lower-rated, higher risk U.S. and
foreign corporate fixed-income securities, including debt
securities, convertible securities and preferred stocks. As
discussed below, however, under certain circumstances the fund
may invest all or any part of the High Yield Sector portfolio in
higher-rated and unrated fixed-income securities. The fund will
not necessarily invest in the highest yielding securities
available if in Putnam Management's opinion the differences in
yield are not sufficient to justify the higher risks involved.
The High Yield Sector may invest in any security which is rated,
at the time of purchase, at least Caa by Moody's or CCC
by S&P or in any unrated security that Putnam
Management determines is of comparable quality, although up to 5%
of the net assets of the fund may be invested in securities rated
below Caa by Moody's or CCC by S&P, or in unrated securities
which Putnam Management determines are of comparable quality.
Securities rated below Caa by Moody's or CCC by S&P are of poor
standing and may be in default. The fund will not necessarily
dispose of a security if its rating is reduced below its rating
at the time of purchase, although Putnam Management will monitor
the investment to determine whether continued investment in the
security will assist in meeting the fund's investment objective.
The rating services' descriptions of these rating categories,
including the speculative characteristics of the lower
categories, are included in the Appendix to this prospectus.
<PAGE>
The table below shows the percentages of fund assets invested
during fiscal 1995 in securities assigned to the various rating
categories by S&P, or, if unrated by S&P, assigned to comparable
rating categories by Moody's, and in unrated securities
determined by Putnam Management to be of comparable quality.
Rated securities, Unrated securities of
as percentage of comparable quality, as
Rating net assets percentage of net assets
- ------ ------------- ------------------------
"AAA" 42.51% --
"AA" 15.92% --
"A" 0.38% --
"BBB" 0.21% --
"BB" 9.45% 1.19%
"B" 20.22% 0.94%
"CCC" 3.31% 0.04%
"D" -- 0.01%
------ -----
92.00% 2.18%
====== =====
For a description of the risks associated with investments in
fixed-income securities, including lower-rated fixed-income
securities, see "Common investment policies and techniques --
Lower-rated and other fixed-income securities."
The fund may invest assets allocated to the High Yield Sector in
participations and assignments of fixed and floating rate loans
made by financial institutions to governmental or corporate
borrowers. In addition to the more general investment
considerations applicable to fixed-income investments,
participations and assignments involve the risk that the
institution's insolvency could delay or prevent the flow of
payments on the underlying loan to the fund. The fund may have
limited rights to enforce the terms of the underlying loan, and
the liquidity of loan participations and assignments may be
limited.
The fund may also invest assets allocated to the High Yield
Sector in lower-rated securities of foreign corporate and
governmental issuers denominated either in U.S. dollars or in
foreign currencies. For a discussion of the risks associated
with foreign investing, see "Common investment policies and
techniques -- Foreign investments."
The fund may invest in securities of issuers in emerging
markets, as well as more developed markets. Investing in
emerging markets generally involves more risk than investing in
developed markets.
<PAGE>
International Sector
The fund will invest the assets allocated to the International
Sector in debt obligations and other fixed-income securities
denominated in non-U.S. currencies. These securities include:
* debt obligations issued or guaranteed by foreign national,
provincial, state, or other governments with taxing
authority, or by their agencies or instrumentalities;
* debt obligations of supranational entities (described below);
and
* debt obligations and other fixed-income securities of foreign
and U.S. corporate issuers.
When investing in the International Sector, the fund will
purchase only debt securities of issuers whose long-term debt
obligations are rated at least A at the time of purchase by
Moody's or S&P or that are unrated securities that Putnam
Management determines are of comparable quality. The fund will
not necessarily dispose of a security if its rating is reduced
below its rating at the time of purchase, although Putnam
Management will monitor the investment to determine whether
continued investment in the security will assist in meeting the
fund's investment objective. The fund may, however, make
investments in international debt securities rated below A with
respect to assets allocated to the High Yield Sector.
In the past, yields available from securities denominated in
foreign currencies have often been higher than those of
securities denominated in U.S. dollars. Although the fund has
the flexibility to invest in any country where Putnam Management
sees potential for high income, it presently expects to invest
primarily in securities of issuers in industrialized Western
European countries (including Scandinavian countries) and in
Canada, Japan, Australia, and New Zealand. Putnam Management
will consider expected changes in foreign currency exchange rates
in determining the anticipated returns of securities denominated
in foreign currencies.
The obligations of foreign governmental entities, including
supranational issuers, have various kinds of government support.
Obligations of foreign governmental entities include obligations
issued or guaranteed by national, provincial, state or other
governments with taxing power or by their agencies. These
obligations may or may not be supported by the full faith and
credit of a foreign government.
Supranational entities include international organizations
designated or supported by governmental entities to promote
economic reconstruction or development and international banking
institutions and related government agencies. Examples include
the International Bank for Reconstruction and Development (the
World Bank), the European Steel and Coal Community, the Asian
Development Bank, and the Inter-American Development Bank. The
governmental members or "stockholders" usually make initial
capital contributions to the supranational entity and in many
cases are committed to make additional capital contributions if
the supranational entity is unable to repay its borrowing. Each
supranational entity's lending activities are limited to a
percentage of its total capital (including "callable capital"
contributed by members at the entity's call), reserves, and net
income.
For a discussion of the risks associated with foreign
investments, see "Common investment policies and techniques --
Foreign investments."
PUTNAM VT GLOBAL ASSET ALLOCATION FUND
The investment objective of Putnam VT Global Asset Allocation
Fund is to seek a high level of long-term total return consistent
with preservation of capital. By seeking total return, the fund
seeks to increase the value of the shareholder's investment
through both capital appreciation and investment income. "Total
return" includes interest and dividend income, net of expenses,
and realized and unrealized capital gains and losses on
securities. The fund invests in a wide variety of equity and
fixed-income securities both of U.S. and foreign issuers. The
fund's portfolio may include securities in the following four
investment categories, which in the judgment of Putnam Management
represent large, well-differentiated classes of securities with
distinctive investment characteristics:
U.S. Equities
International Equities
U.S. Fixed Income
International Fixed Income
The amount of fund assets assigned to each investment category
will be reevaluated by Putnam Management at least quarterly based
on Putnam Management's assessment of the relative market
opportunities and risks of each investment category taking into
account various economic and market factors.
The fund may engage in defensive strategies when Putnam
Management judges that conditions in the securities markets make
pursuing the fund's basic investment strategy inconsistent with
the best interests of the fund's shareholders. When pursuing
such defensive strategies, the fund may invest without limit in
securities primarily traded in U.S. markets. See "Common
investment policies and techniques" below for a discussion of
these strategies. The fund may invest in premium securities,
engage in foreign currency exchange transactions and transactions
in futures and options, enter into repurchase agreements, loan
its portfolio securities and purchase securities for future
delivery. See "Common investment policies and techniques" below
for a discussion of these securities and types of transactions
and the risks associated with them. The fund may also hold a
portion of its assets in cash and money market instruments.
The portion of the fund's assets invested in each investment
category will be managed as a separate investment portfolio in
accordance with that category's particular investment objectives
and policies, independently of the fund's overall objective. The
following is a description of the investment objectives and
policies of each investment category:
U.S. Equities. The objective of the U.S. Equities category is to
seek both capital growth and, to a lesser extent, current income
through equity securities. This category's portfolio will
include equity securities selected primarily to provide one or
more of the following factors: growth in value, capital
protection and dependable income. Investments will be made in
companies, large or small, whose earnings are believed to be in a
relatively strong growth trend or whose securities are thought to
be undervalued. The fund may invest in small and relatively less
well-known companies. Investing in these companies may present
greater opportunities for capital appreciation, but also may
involve greater risk. They may have limited product lines,
markets or financial resources, or may depend on a limited
management group. Their securities may trade less frequently and
in limited volume, and only in the over-the-counter market or on
a regional securities exchange. As a result, these securities
may fluctuate in value more than securities of larger, more
established companies.
International Equities. The objective of the International
Equities category is to seek capital appreciation. This
category's portfolio will be invested in securities principally
traded in foreign securities markets. These securities will
primarily be common stocks or securities convertible into common
stocks. Investments will be made in companies, large or small,
whose earnings are believed to be in a relatively strong growth
trend or whose securities are thought to be undervalued. The
fund may invest in small and relatively less well-known
companies. Investing in these companies may present greater
opportunities for capital appreciation, but also may involve
greater risk. They may have limited product lines, markets or
financial resources, or may depend on a limited management group.
Their securities may trade less frequently and in limited volume.
As a result, these securities may fluctuate in value more than
securities of larger, more established companies. For a
discussion of the risks associated with foreign investments, see
"Common investment policies and techniques -- Foreign
investments."
U.S. Fixed Income. The objective of the U.S. Fixed Income
category is to seek high current income through a portfolio of
fixed-income securities which in the judgment of Putnam
Management does not involve undue risk to principal or income.
The U.S. Fixed Income category may invest in any fixed-income
securities Putnam Management considers appropriate, including
U.S. government securities, debt securities, mortgage-backed and
asset-backed securities, convertible securities and preferred
stocks of non-governmental issuers.
Whereas certain U.S. government securities in which the fund may
invest, such as U.S. Treasury obligations and Ginnie Mae
certificates, are supported by the full faith and credit of the
United States, other fixed-income securities in which the fund
may invest are subject to varying degrees of risk of default
depending upon, among other factors, the creditworthiness of the
issuer and the ability of the borrower, or, in the case of
mortgage-backed securities, the mortgagor, to meet its
obligations. While the credit risks presented by differing types
of fixed-income securities vary, the values of all fixed-income
securities change as interest rates fluctuate.
For a description of the risks associated with investments in
mortgage-backed and asset-backed securities, see "Common
investment policies and techniques -- Mortgage-backed and asset-
backed securities."
International Fixed Income. The investment objective of the
International Fixed Income category is to seek high current
income by investing principally in debt securities denominated in
foreign currencies which are issued by foreign governments and
governmental or supranational agencies. This category may also
invest in other privately issued debt securities, convertible
securities and preferred stocks principally traded in foreign
securities markets. For a discussion of the risks associated
with foreign investments, see "Common investment policies and
techniques -- Foreign investments."
General. Putnam Management will adjust the percentage of the
fund's assets in each investment category from time to time based
upon its market outlook and its analysis of longer-term trends.
The fund may from time to time invest in all or any one of the
investment categories as Putnam Management may consider
appropriate in response to changing market conditions.
The fund will not purchase fixed-income securities rated at the
time of purchase below Caa by Moody's or CCC by S&P, or, if
unrated, determined by Putnam Management to be of comparable
quality, if, as a result more than 5% of the fund's total assets
would be invested in securities of that quality. In addition,
the fund will not purchase fixed-income securities rated at the
time of purchase below Baa by Moody's or BBB by S&P, or, if
unrated, determined to be of comparable quality by Putnam
Management, if, as a result, more than 35% of the fund's total
assets would be invested in securities of that quality. The fund
will not necessarily dispose of a security if its rating is
reduced below its rating at the time of purchase, although Putnam
Management will monitor the investment to determine whether
continued investment in the security will assist in meeting the
fund's investment objective.
For a description of the risks of investing in fixed-income
securities, including lower-rated fixed-income securities
(commonly known as "junk bonds"), see "Common investment policies
and techniques -- Lower-rated and other fixed-income securities."
PUTNAM VT GLOBAL GROWTH FUND
Putnam VT Global Growth Fund seeks capital appreciation. The
fund is designed for investors seeking above-average capital
growth potential through a globally diversified portfolio of
common stocks. Dividend and interest income is only an
incidental consideration. In seeking capital appreciation, the
fund follows a global investment strategy of investing primarily
in common stocks traded in securities markets located in a number
of foreign countries and in the United States. The fund may at
times invest up to 100% of its assets in securities principally
traded in securities markets outside the United States, and will
under normal market conditions invest at least 65% of its assets
in at least three different countries, one of which may be the
United States. The fund may hold a portion of its assets in cash
and money market instruments.
The fund will not limit its investments to any particular type of
company. It may invest in companies, large or small, whose
earnings are believed to be in a relatively strong growth trend,
or in companies in which significant further growth is not
anticipated but the securities of which are thought to be
undervalued. It may invest in small and relatively less well-
known companies. Investing in these companies may present
greater opportunities for capital appreciation, but may also
involve greater risk. They may have limited product lines,
markets or financial resources, or may depend on a limited
management group. Their securities may trade less frequently and
in limited volume, and only in the over-the-counter market or on
a regional securities exchange. As a result, these securities
may fluctuate in value more than securities of larger, more
established companies.
Putnam Management believes that the securities markets of many
nations move relatively independently of one another, because
business cycles and other economic or political events that
influence one country's securities markets may have little effect
on securities markets in other countries. By investing in a
globally diversified portfolio, Putnam Management attempts to
reduce the risks associated with investing in the economy of only
one country. The countries which Putnam Management believes
offer attractive opportunities for investment may change from
time to time.
Foreign investments can involve risks that may not be present in
domestic securities. For a discussion of the risks associated
with foreign investments, see "Common investment policies and
techniques -- Foreign investments."
The fund may also engage in foreign currency exchange
transactions and transactions in futures and options, enter into
repurchase agreements, loan its portfolio securities and purchase
securities for future delivery. See "Common investment policies
and techniques" below for a discussion of these securities and
types of transactions and the risks associated with them. The
fund may engage in defensive strategies when Putnam Management
judges that conditions in the securities markets make pursuing
the fund's basic investment strategy inconsistent with the best
interests of the fund's shareholders. When pursuing such
defensive strategies, the fund may invest without limit in
securities primarily traded in U.S. markets. See "Common
investment policies and techniques" below for a discussion of
these strategies.
Putnam VT Global Growth Fund will generally be managed in a style
similar to that of Putnam Global Growth Fund.
PUTNAM VT GROWTH AND INCOME FUND
Putnam VT Growth and Income Fund seeks capital growth and current
income as its investment objectives. The fund invests primarily
in common stocks that offer potential for capital growth, current
income, or both. The fund may also purchase corporate bonds,
notes and debentures, preferred stocks , convertible
securities (both debt securities and preferred stocks) or U.S.
government securities, if Putnam Management determines that their
purchase would help further the fund's investment objectives.
The types of securities held by the fund may vary from time to
time in light of the fund's investment objectives, changes in
interest rates, and economic and other factors. The fund may
engage in defensive strategies when Putnam Management judges that
conditions in the securities markets make pursuing the fund's
basic investment strategy inconsistent with the best interests of
the fund's shareholders. See "Common investment policies and
techniques" below for a discussion of these strategies.
The fund may invest up to 20% of its assets in securities
principally traded in foreign markets. For a discussion of the
risks associated with foreign investments, see "Common investment
policies and techniques -- Foreign investments." The fund may
invest in both higher-rated and lower-rated fixed-income
securities. The risks associated with fixed-income securities,
including lower-rated fixed-income securities (commonly known as
"junk bonds"), are discussed below under "Common investment
policies and techniques -- Lower-rated and other fixed-income
securities."
The fund may hold a portion of its assets in cash and money
market instruments. The fund may also engage in foreign currency
exchange transactions and transactions in futures and options,
enter into repurchase agreements, loan its portfolio securities
and purchase securities for future delivery. See "Common
investment policies and techniques" below for a discussion of
these securities and types of transactions and the risks
associated with them.
Putnam VT Growth and Income Fund will generally be managed in a
style similar to that of The Putnam Fund for Growth and Income.
PUTNAM VT HIGH YIELD FUND
The primary investment objective of Putnam VT High Yield Fund is
to seek high current income. Capital growth is a secondary
objective when consistent with high current income.
The fund seeks high current income by investing primarily in
high-yielding, lower-rated fixed-income securities (commonly
known as "junk bonds"), constituting a portfolio which Putnam
Management believes does not involve undue risk to income or
principal. Normally, at least 80% of the fund's assets will be
invested in debt securities, convertible securities or preferred
stocks that are consistent with its primary investment objective
of high current income. The fund's remaining assets may be held
in cash or money market instruments, or invested in common stocks
and other equity securities when these types of investments
are consistent with the objective of high current income .
The fund may invest up to 20% of its assets in foreign
securities. For a discussion of the risks associated with
foreign investments, see "Common investment policies and
techniques -- Foreign investments." The fund may also invest in
premium securities, engage in foreign currency exchange
transactions, enter into repurchase agreements, loan its
portfolio securities and purchase securities for future delivery.
See "Common investment policies and techniques" below for a
discussion of these securities and types of transactions and the
risks associated with them. The fund may engage in defensive
strategies when Putnam Management judges that conditions in the
securities markets make pursuing the fund's basic investment
strategy inconsistent with the best interests of the fund's
shareholders. See "Common investment policies and techniques"
below for a discussion of these strategies.
The fund seeks its secondary objective of capital growth, when
consistent with its primary objective of high current income, by
investing in securities which may be expected to appreciate in
value as a result of declines in long-term interest rates or as a
result of favorable developments affecting the business or
prospects of the issuer which may improve the issuer's financial
condition and credit rating. Putnam Management believes that
such opportunities for capital appreciation often exist in the
securities of smaller capitalization companies which have the
potential for significant growth. These securities may
involve greater risks than the securities of larger, more
established issuers.
The fund may generally invest in any security which is rated, at
the time of purchase, at least Caa by Moody's or CCC by S&P, or
in any unrated security which Putnam Management determines is of
comparable quality. The fund will not necessarily dispose of a
security when its rating is reduced below its rating at the time
of purchase, although Putnam Management will monitor the
investment to determine whether continued investment in the
security will assist in meeting the fund's investment objectives.
Securities rated below Baa by Moody's and BBB by S&P are
considered to be of poor standing and predominantly speculative.
The fund may invest up to 15% of its assets in securities rated
below Caa by Moody's or CCC by S&P, including securities in the
lowest rating category of each rating agency, or in unrated
securities Putnam Management determines are of comparable
quality. Such securities may be in default and are generally
regarded by the rating agencies as having extremely poor
prospects of ever attaining any real investment standing. For a
discussion of the risks associated with investments in fixed-
income securities, including lower-rated fixed-income securities,
see "Common investment policies and techniques -- Lower-rated and
other fixed-income securities."
The table below shows the percentages of fund assets invested
during fiscal 1995 in securities assigned to the various rating
categories by S&P, or, if unrated by S&P, assigned to comparable
rating categories by Moody's, and in unrated securities
determined by Putnam Management to be of comparable quality.
<PAGE>
Rated securities, Unrated securities of
as percentage of comparable quality, as
Rating net assets percentage of net assets
- ------ ----------------- ------------------------
"AAA" -- --
"AA" -- --
"A" -- 0.03%
"BBB" 3.97% --
"BB" 22.79% 7.50%
"B" 47.13% 2.35%
"CCC" 6.66% 1.22%
"CC" -- --
"C" -- --
"D" 0.29% --
----- -----
80.84% 11.10%
===== =====
The fund may invest in participations and assignments of fixed
and floating rate loans made by financial institutions to
governmental or corporate borrowers. In addition to the more
general investment considerations applicable to fixed-income
investments, participations and assignments involve the risk that
the institution's insolvency could delay or prevent the flow of
payments on the underlying loan to the fund. The fund may have
limited rights to enforce the terms of the underlying loan, and
the liquidity of loan participations and assignments may be
limited.
Putnam VT High Yield Fund will generally be managed in a style
similar to that of Putnam High Yield Advantage Fund.
PUTNAM VT INTERNATIONAL GROWTH FUND
Putnam VT International Growth Fund seeks capital appreciation.
The fund seeks its objective by investing primarily in equity
securities of companies located in a country other than the
United States. The fund's investments will normally include
common stocks, preferred stocks, securities convertible into
common or preferred stocks, and warrants to purchase common or
preferred stocks. The fund may also invest to a lesser extent in
debt securities and other types of investments if Putnam
Management believes purchasing them would help achieve the fund's
objective. The fund will , under normal
circumstances , invest at least 65% of its total
assets in securities of issuers located in at least three
different countries other than the United States. The fund may
hold a portion of its assets in cash or money market instruments.
<PAGE>
The fund will consider an issuer of securities to be "located in
a country other than the United States" if it is organized under
the laws of a country other than the United States and has
a principal office outside the United States, or if it derives
50% or more of its total revenues from business outside United
States.
The fund will not limit its investments to any particular type of
company. The fund may invest in companies, large or small, whose
earnings are believed to be in a relatively strong growth trend,
or in companies in which significant further growth is not
anticipated but whose securities are , in the opinion of
Putnam Management, undervalued. It may invest in small and
relatively less well-known companies which meet these
characteristics.
Smaller companies may present greater opportunities for capital
appreciation, but may also involve greater risks. They may have
limited product lines, markets for financial resources, or may
depend on a limited management group. Their securities may trade
less frequently and in limited volume. As a result, the prices of
these securities may fluctuate more than prices of securities of
larger, more established companies.
The fund may invest in securities of issuers in
emerging markets , as well as more developed markets
. Investing in emerging markets generally involves more risk
than investing in developed markets .
Foreign investments can involve risks that may not be present in
domestic securities. For a discussion of the risks associated
with foreign investments, see "Common investment policies and
techniques -- Foreign investments."
The fund may also engage in foreign currency exchange
transactions and transactions in futures and options, enter into
repurchase agreements, loan its portfolio securities and purchase
securities for future delivery. See "Common investment policies
and techniques" below for a discussion of these securities and
types of transactions and the risks associated with them. The
fund may engage in defensive strategies when Putnam Management
judges that conditions in the securities markets make pursuing
the fund's basic investment strategy inconsistent with the best
interests of the fund's shareholders. When pursuing such
defensive strategies, the fund may invest without limit in
securities primarily traded in U.S. markets. See "Common
investment policies and techniques" below for a discussion of
these strategies.
Putnam VT International Growth Fund will generally be managed in
a style similar to that of Putnam International Growth Fund.
<PAGE>
PUTNAM VT INTERNATIONAL GROWTH AND INCOME FUND
Putnam VT International Growth and Income Fund seeks capital
growth. Current income is a secondary objective.
The fund will invest primarily in common stocks that offer
potential for capital growth, and may, consistent with its
investment objectives, invest in stocks that offer potential for
current income. Under normal market conditions, the fund expects
to invest substantially all of its assets in securities
principally traded on markets outside the United States. The
fund will normally diversify its investment among a number of
different countries and, except when investing for
defensive purposes, will invest at least 65% of its total assets
in at least three countries other than the United States. The
fund may invest in securities of issuers in emerging market
countries, as well as securities of issuers in more developed
countries. Investing in emerging market countries involves
special risks. For a discussion of the risks of foreign
investments, see "Common investment policies and techniques -
- - Foreign investments."
The fund may also purchase corporate bonds, notes and debentures,
preferred stocks, securities convertible into common stock or
other equity securities, or U.S. or foreign government securities
if Putnam Management determines that their purchase would help
further the fund's investment objectives.
The types of securities held by the fund may vary from time to
time in light of the fund's investment objectives, changes in
interest rates, and economic and other factors. When selecting
portfolio securities for the fund that have the potential for
capital growth, Putnam Management will seek to identify
securities that are significantly undervalued in relation to
underlying asset values or earnings potential. The fund may also
hold a portion of its assets in cash or high-quality money market
instruments.
The fund may invest a portion of its assets in securities of
small-capitalization companies (defined for these purposes as
companies with equity market capitalizations of less than $1
billion). These securities may involve certain special risks.
Such companies may have limited product lines, markets or
financial resources, and may be dependent on a limited management
group. Such securities may trade less frequently and in smaller
volume than more widely held securities. The values of these
securities may fluctuate more sharply than those of other
securities, and the fund may experience some difficultly in
establishing or closing out positions in these securities at
prevailing market prices. There may be less publicly available
information about the issuers of these securities or less market
interest in such securities than in the case of larger companies,
and it may take a longer period of time for the prices of such
securities to reflect the full value of their issuers' underlying
earnings potential or assets.
The fund may invest in fixed-income securities rated at the time
of purchase C or better by Moody's or S&P, and in unrated
securities which Putnam Management determines to be of comparable
quality. The risks associated with fixed-income securities,
including lower-rated fixed-income securities (commonly known as
"junk bonds"), are discussed below under "Common investment
policies and techniques -- Lower-rated and other fixed-income
securities."
Foreign investments can involve risks that may not be present in
domestic securities. For a discussion of the risks associated
with foreign investments, see "Common investment policies and
techniques -- Foreign investments."
The fund may also engage in foreign currency exchange
transactions and transactions in futures and options, enter into
repurchase agreements, loan its portfolio securities and purchase
securities for future delivery. See "Common investment policies
and techniques" below for a discussion of these securities and
types of transactions and the risks associated with them. The
fund may engage in defensive strategies when Putnam Management
judges that conditions in the securities markets make pursuing
the fund's basic investment strategy inconsistent with the best
interests of the fund's shareholders. When pursuing such
defensive strategies, the fund may invest without limit in
securities primarily traded in U.S. markets. See "Common
investment policies and techniques" below for a discussion of
these strategies.
Putnam VT International Growth and Income Fund will generally be
managed in a style similar to that of Putnam International Growth
and Income Fund.
PUTNAM VT INTERNATIONAL NEW OPPORTUNITIES FUND
Putnam VT International New Opportunities Fund seeks long-term
capital appreciation.
The fund seeks to invest in companies that have above-average
growth prospects due to the fundamental growth of their market
sector. Under normal market conditions, the fund expects to
invest substantially all of its total assets, other than cash or
short-term investments held pending investment , in common
stocks, preferred stocks, convertible preferred stocks,
convertible bonds and other equity securities principally traded
in securities markets outside the United States. The fund will
normally diversify its investments among a number of different
countries and, except when investing for defensive purposes, will
invest at least 65% of its assets in at least three different
countries other than the United States.
Putnam Management believes that different market sectors in
different countries will experience different rates of growth
depending on the state of economic development of each country.
As a result, Putnam Management seeks to identify those market
sectors which will experience above-average growth in three broad
categories of economies: less developed economies, developing
economies that have experienced sustained growth over the recent
past, and mature economies. Within the identified growth sectors
of each type of economy, Putnam Management seeks to invest in
particular companies that offer above-average growth prospects.
The sectors in which the fund will invest are likely to change
over time and may include a variety of industries. Subject to
the fund's investment restrictions, the fund may invest up to
one-half of its assets in any one sector. The fund's emphasis on
particular sectors may make the value of the fund's shares more
susceptible to any single economic, political or regulatory
development than the shares of an investment company which is
more widely diversified. As a result, the value of the fund's
shares may fluctuate more than the value of the shares of such an
investment company. The fund may also invest a portion of its
assets in market sectors other than those that Putnam Management
believes will experience above-average growth if Putnam
Management believes that such investments are consistent with the
fund's investment objective of long-term capital appreciation.
Companies in the fund's portfolio may include small, rapidly
growing companies with equity market capitalizations of less than
$1 billion. These companies may present greater opportunities
for capital appreciation, but may also involve greater risk.
They may have limited product lines, markets or financial
resources, or may depend on a limited management group. Their
securities may trade less frequently and in limited volume, and
only in the over-the-counter market or on a regional securities
exchange. As a result, these securities may fluctuate in value
more than those of larger, more established companies.
Because Putnam Management evaluates securities for the fund based
on their long-term potential for capital appreciation, the fund's
investments may not appreciate or yield significant income over
the shorter term, and, as a result, the fund's total return over
certain periods may be less than that of other equity mutual
funds.
The fund invests primarily in common stocks and other equity
securities, but may also invest up to 10% of its total assets in
non-convertible debt securities if Putnam Management believes
they would help achieve the fund's objective of long-term capital
appreciation. The fund may invest in securities in the lower-
rated categories. Securities in the lower-rated categories are
considered to be predominantly speculative and may be in default.
See "Common investment policies and techniques -- Lower-rated and
other fixed-income securities." The fund may also hold a portion
of its assets in cash or high-quality money market instruments.
The securities markets of less developed economies and of many
developing economies are sometimes referred to as "emerging
securities markets." Although the amount of the fund's assets
invested in emerging securities markets will vary over time,
Putnam Management currently expects that a substantial portion of
the fund's assets will be invested in emerging securities
markets. These markets are generally characterized by limited
trading volume and greater volatility and, as a result, the fund
may be subject to greater risks to the extent of its investments
in such markets.
Foreign investments can involve risks that may not be present in
domestic securities. For a discussion of the risks associated
with foreign investments, see "Common investment policies and
techniques -- Foreign investments."
The fund may also engage in foreign currency exchange
transactions and transactions in futures and options, enter into
repurchase agreements, loan its portfolio securities and purchase
securities for future delivery. See "Common investment policies
and techniques" below for a discussion of these securities and
types of transactions and the risks associated with them. The
fund may engage in defensive strategies when Putnam Management
judges that conditions in the securities markets make pursuing
the fund's basic investment strategy inconsistent with the best
interests of the fund's shareholders. When pursuing such
defensive strategies, the fund may invest without limit in
securities primarily traded in U.S. markets. See "Common
investment policies and techniques" below for a discussion of
these strategies.
Putnam VT International New Opportunities Fund will generally be
managed in a style similar to that of Putnam International New
Opportunities Fund.
PUTNAM VT MONEY MARKET FUND
Putnam VT Money Market Fund seeks as high a rate of current
income as Putnam Management believes is consistent with
preservation of capital and maintenance of liquidity. It is
designed for investors seeking current income with stability of
principal.
The fund invests in a portfolio of high-quality money market
instruments. Examples of these instruments include:
<PAGE>
* bank certificates of deposit (CDs): negotiable certificates
issued against funds deposited in a commercial bank for a
definite period of time and earning a specified return.
* bankers' acceptances: negotiable drafts or bills of
exchange, which have been "accepted" by a bank, meaning, in
effect, that the bank has unconditionally agreed to pay the
face value of the instrument on maturity.
* prime commercial paper: high-grade, short-term obligations
issued by banks, corporations and other issuers.
* corporate obligations: high-grade, short-term corporate
obligations other than prime commercial paper.
* municipal obligations: high-grade, short-term municipal
obligations.
* U.S. government securities: marketable securities issued or
guaranteed as to principal and interest by the U.S.
government or by its agencies or instrumentalities.
* repurchase agreements: with respect to U.S. Treasury or U.S.
government agency obligations.
The fund will invest only in high-quality securities that Putnam
Management believes present minimal credit risk. High-quality
securities are securities rated at the time of acquisition in one
of the two highest categories by at least two nationally
recognized rating services (or, if only one rating service has
rated the security, by that service) or if the security is
unrated, judged to be of equivalent quality by Putnam Management.
The fund will maintain a dollar-weighted average maturity of 90
days or less and will not invest in securities with remaining
maturities of more than 397 days. The fund may invest in
variable or floating rate securities which bear interest at rates
subject to periodic adjustment or which provide for periodic
recovery of principal on demand. Under certain conditions, these
securities may be deemed to have remaining maturities equal to
the time remaining until the next interest adjustment date or the
date on which principal can be recovered on demand.
The fund may invest in bank certificates of deposit and bankers'
acceptances issued by banks having deposits in excess of $2
billion (or the foreign currency equivalent) at the close of the
last calendar year. Should the Trustees decide to reduce this
minimum deposit requirement, shareholders will be notified and
this prospectus supplemented.
Considerations of liquidity and preservation of capital mean that
the fund may not necessarily invest in money market instruments
paying the highest available yield at a particular time.
Consistent with its investment objective, the fund will attempt
to maximize yields by portfolio trading and by buying and selling
portfolio investments in anticipation of or in response to
changing economic and money market conditions and trends. The
fund will also invest to take advantage of what Putnam Management
believes to be temporary disparities in yields of different
segments of the high-grade money market or among particular
instruments within the same segment of the market. These
policies, as well as the relatively short maturity of obligations
purchased by the fund, may result in frequent changes in the
fund's portfolio. Portfolio turnover may give rise to capital
gains. The fund does not usually pay brokerage commissions
in connection with the purchase or sale of portfolio securities.
See "Management -- Portfolio Transactions -- Brokerage and
research services" in the SAI for a discussion of underwriters'
commissions and dealers' spreads involved in the purchase and
sale of portfolio securities.
The portfolio of the fund will be affected by general changes in
interest rates resulting in increases or decreases in the value
of the obligations held by the fund. The value of the securities
in the fund's portfolio can be expected to vary inversely to
changes in prevailing interest rates. Although the fund's
investment policies are designed to minimize these changes and
maintain a net asset value of $1.00 per share, there is no
assurance that these policies will be successful. Withdrawals by
shareholders could require the sale of portfolio investments at a
time when such a sale might not otherwise be desirable.
The fund may invest without limit in the banking industry and in
commercial paper and short-term corporate obligations of issuers
in the personal credit institution and business credit
institution industries when, in the opinion of Putnam Management,
the yield, marketability and availability of investments meeting
the fund's quality standards in those industries justify any
additional risks associated with the concentration of the fund's
assets in those industries. The fund, however, will invest more
than 25% of its assets in the personal credit institution or
business credit institution industries only when, to Putnam
Management's knowledge, the yields then available on securities
issued by companies in such industries and otherwise suitable for
investment by the fund exceed the yields then available on
securities issued by companies in the banking industry and
otherwise suitable for investment by the fund.
The fund may invest without limit in U.S. dollar-denominated
commercial paper of foreign issuers and in bank certificates of
deposits and bankers' acceptances payable in U.S. dollars and
issued by foreign banks (including U.S. branches of foreign
banks) or by foreign branches of U.S. banks. These investments
subject the fund to investment risks different from those
associated with domestic investments. For a discussion of the
risks associated with foreign investments, See "Common
investment policies and techniques -- Foreign investments."
The fund may also lend its portfolio securities. For a
discussion of this strategy and the risks associated with it, see
"Common investment policies and techniques" below.
The fund, along with four other Putnam money market funds, has
purchased insurance, which, among other things, will insure a
fund against a decrease in the value of a security held by it due
to default or bankruptcy. Most securities and instruments in
which the funds invest, other than U.S. Government securities,
are covered by this insurance. The insurance may provide the
fund with some protection in the event of a decrease in value of
certain of its portfolio securities due to default or bankruptcy,
does not insure or guarantee that the fund will maintain a stable
net asset value of $1.
The maximum amount of total coverage under the policy is $30
million, subject to a deductible in respect of each loss equal to
the lesser of $1 million or 0.30% of the fund's net assets. As
of December 11, 1996, the fund's net assets totaled $421,072,271.
Each of the money market funds that has purchased the insurance
has access to the full amount of insurance under the policy,
subject to the deductible. Accordingly, depending upon the
circumstances, the fund may not be entitled to recover under the
policy, even though it has experienced a loss that would
otherwise be insurable. The annual cost to the fund of
purchasing the insurance is expected to equal approximately 0.02%
of the fund's average net assets. This amount is not reflected
in the expense information shown in the prospectus under the
heading "How the Trust is managed."
Putnam VT Money Market Fund will generally be managed in a style
similar to that of Putnam Money Market Fund.
PUTNAM VT NEW OPPORTUNITIES FUND
Putnam VT New Opportunities Fund seeks long-term capital
appreciation. The fund seeks its objective by investing
principally in common stocks of companies in sectors of the
economy which Putnam Management believes possess above-average
long-term growth potential. The fund will generally invest in
companies which Putnam Management identifies as offering the best
prospects for long-term growth within a particular sector.
Current dividend income is only an incidental consideration. The
fund invests primarily in common stocks, but may also purchase
convertible bonds, convertible preferred stocks, warrants,
preferred stocks and debt securities if Putnam Management
believes they would help achieve the fund's objective of capital
appreciation. The fund may invest up to 20% of its assets in
foreign securities. For a discussion of the risks associated
with foreign investing, see "Common investment policies and
techniques -- Foreign investments." The fund may also engage in
foreign currency exchange transactions and transactions in
futures and options, enter into repurchase agreements, loan its
portfolio securities and purchase securities for future delivery.
See "Common investment policies and techniques" below for a
discussion of these securities and types of transactions and the
risks associated with them. The fund may also hold a portion of
its assets in cash and money market instruments. The fund may
engage in defensive strategies when Putnam Management judges that
conditions in the securities markets make pursuing the fund's
basic investment strategy inconsistent with the best interests of
the fund's shareholders. See "Common investment policies and
techniques" below for a discussion of these strategies.
The sectors of the economy which offer above-average growth
potential will change over time. At present, Putnam Management
has identified the following sectors of the economy, and examples
of industries within these sectors , as having an above-
average growth potential over the next three to five years:
Personal Communications - long distance telephone,
competitive
local exchange carriers, cellular telephone, paging, personal
communication networks;
Media/Entertainment - cable television system operators,
cable
television network programmers, film entertainment providers,
theme park operators, radio and television stations,
billboard
advertising providers ;
Medical Technology/Cost-Containment - home and outpatient
care,
medical device companies, biotechnology, health care
information services, physician practice management, managed
care providers;
Environmental Services - solid waste disposal, hazardous
waste
disposal, remediation services, environmental testing;
Applied/Advanced Technology - database software, application
software, entertainment software, networking software,
computer
systems integrators, information services companies,
semiconductors;
Personal Financial Services - specialty insurance companies,
credit card issuers, and other consumer-oriented financial
services companies; and
Value-oriented Consuming - retailers, restaurants, hotel
chains, casino operators, travel companies and other consumer
product or service companies able to provide quality products
or services at lower prices or offering greater perceived
value
than competitors.
In addition, the fund may also invest a portion of its assets in
securities of companies that, although not in any of the sectors
described above, are expected to experience above-average growth.
The sectors described above represent Putnam Management's current
judgment of the sectors of the economy which offer the most
attractive growth opportunities. The fund will not necessarily
be invested in each of the seven market sectors at all times.
Such sectors are likely to change over time and may include a
variety of industries. Subject to the fund's investment
restrictions, the fund may invest up to one-half of its assets in
any one sector.
The fund will invest in securities which Putnam Management
believes offer above-average long-term growth opportunities. As
a result of the fund's long-term investment strategy, it is
possible that the fund's total return over certain periods may be
less than that of other equity investment vehicles.
The fund seeks to invest in companies that offer above-average
growth prospects in their particular sector of the economy,
without regard to a company's size. Companies in the fund's
portfolio will range from small, rapidly growing companies to
larger, well-established firms. It may invest in small and
relatively less well-known companies. Investing in these
companies may present greater opportunities for capital
appreciation, but also may involve greater risk. They may have
limited product lines, markets or financial resources, or may
depend on a limited management group. Their securities may trade
less frequently and in limited volume, and only in the over-the-
counter market or on a regional securities exchange. As a
result, these securities may fluctuate in value more than
securities of larger, more established companies.
The fund will normally emphasize investments in particular
economic sectors. Although the fund will not invest more than 25%
of its assets in any one industry, the fund's emphasis on
particular sectors of the economy may make the value of the
fund's shares more susceptible to any single economic, political
or regulatory development than the shares of an investment
company which is more widely diversified. As a result, the value
of the fund's shares may fluctuate more than the value of
the shares of a more diversified investment company.
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 the fund's 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, such fund will be subject to
an increased risk of loss if the market value of such issuer's
securities declines.
Putnam VT New Opportunities Fund will generally be managed in a
style similar to that of Putnam New Opportunities Fund.
PUTNAM VT NEW VALUE FUND
Putnam VT New Value Fund seeks long-term capital appreciation.
The fund will invest primarily in common stocks that Putnam
Management believes are undervalued at the time of purchase and
have the potential for long-term capital appreciation. The fund
is unlike most equity mutual funds in that its investments will
be comprised of a relatively small number of issuers (currently
expected to be approximately 40 to 50). Because Putnam
Management evaluates securities for the fund based on their long-
term potential for capital appreciation, the fund's investments
may not appreciate over the shorter term, and as a result
the fund's total return over certain periods may be less than
that of other equity mutual funds. Putnam Management's
investment decisions for the fund may be contrary to those of
most other investors.
In selecting common stocks for the fund, Putnam Management will
consider, among other things, an issuer's financial strength,
current and projected dividend rates, competitive position
and current and projected future earnings. The fund's
investments may include widely-traded common stocks of larger
companies as well as common stocks of small companies with equity
market capitalizations below $1 billion. These companies may
present greater opportunities for capital appreciation, but may
also involve greater risk. They may have limited product lines,
markets or financial resources, or may depend on a limited
management group. Their securities may trade less frequently and
in limited volume, and only in the over-the-counter market or on
a regional securities exchange. As a result, these securities
may fluctuate in value more than those of larger, more
established companies.
Common stocks and other equity securities are normally the fund's
main investments. However, the fund may purchase preferred
stocks, debt securities and convertible securities (both bonds
and preferred stocks) if Putnam Management believes they would
help achieve the fund's objective of long-term capital
appreciation. The fund may also hold a portion of its assets in
cash or high-quality money market instruments and may invest up
to 20% of its assets in foreign securities. For a discussion of
the risks associated with foreign investments, see "Common
investment policies and techniques -- Foreign investments.
<PAGE>
The fund may invest in both higher-rated and lower-rated fixed-
income securities, and is not subject to any restrictions based
on credit ratings. See "Common investment policies and
techniques -- Lower-rated and other fixed-income securities.
The fund may also engage in foreign currency exchange
transactions and transactions in futures and options, enter into
repurchase agreements, loan its portfolio securities and purchase
securities for future delivery. See "Common investment policies
and techniques" below for a discussion of these securities and
types of transactions and the risks associated with them. The
fund may engage in defensive strategies when Putnam Management
judges that conditions in the securities markets make pursuing
the fund's basic investment strategy inconsistent with the best
interests of the fund's shareholders. When pursuing such
defensive strategies, the fund may invest without limit in
securities primarily traded in U.S. markets. See "Common
investment policies and techniques" below for a discussion of
these strategies.
Putnam VT New Value Fund will generally be managed in a style
similar to that of Putnam New Value Fund.
PUTNAM VT U.S. GOVERNMENT AND HIGH QUALITY BOND FUND
Putnam VT U.S. Government and High Quality Bond Fund seeks
current income consistent with preservation of capital. The fund
invests primarily in U.S. government securities and in other debt
obligations rated at least A by Moody's or S&P at the time of
investment, or, if not rated, determined by Putnam Management to
be of comparable quality. For a more detailed description of
security ratings, see the Appendix to this prospectus. The fund
will not necessarily dispose of a security if its rating is
reduced below its rating at the time of purchase, although Putnam
Management will monitor the investment to determine whether
continued investment in the security will assist in meeting the
fund's investment objective.
Putnam Management will allocate the fund's assets between U.S.
government securities and other high quality bonds, depending on
its assessment of market conditions and the relative investment
returns available from such securities. The fund will not,
however, make any investment, if, as a result, less than 25% of
the value of its assets would be invested in U.S. government
securities. The fund may also invest up to 10% of its assets in
foreign securities. For a discussion of the risks associated
with foreign investments, see "Common investment policies and
techniques -- Foreign investments." The fund may also invest in
premium securities, engage in foreign currency exchange
transactions and transactions in futures and options, enter into
repurchase agreements, loan its portfolio securities and purchase
securities for future delivery. See "Common investment policies
and techniques" below for a discussion of these strategies and
the risks associated with them. The fund may also hold a portion
of its assets in cash and money market instruments. The fund may
engage in defensive strategies when Putnam Management judges that
conditions in the securities markets make pursuing the fund's
basic investment strategy inconsistent with the best interests of
the fund's shareholders. See "Common investment policies and
techniques" below for a discussion of these strategies.
Putnam Management may take full advantage of the entire range of
maturities of U.S. government securities and other high quality
bonds and may adjust the average maturity of the fund's portfolio
from time to time, depending on its assessment of relative yields
on securities of different maturities and expectations of future
changes in interest rates. Thus, at certain times the average
maturity of the portfolio may be relatively short (less than one
year to five years, for example) and at other times may be
relatively long (more than 10 years, for example).
The fund may also invest in high quality mortgage-backed and
asset-backed securities. For a description of these securities,
and the risks associated with them, see "Common investment
policies and techniques -- Mortgage-backed and asset-backed
securities."
U.S. government securities and other high quality bonds do not
involve the degree of credit risk associated with investments in
lower quality fixed-income securities, although, as a result, the
yields available from U.S. government securities and other high
quality bonds are generally lower than the yields available from
many other fixed-income securities. Like other fixed-income
securities, however, the values of U.S. government securities and
other high quality bonds change as interest rates fluctuate.
Fluctuations in the value of the fund's securities will not
affect interest income on securities already held by the fund,
but will be reflected in the fund's net asset value. Since the
magnitude of these fluctuations generally will be greater at
times when the fund's average maturity is longer, under certain
market conditions the fund may invest in short-term investments
yielding lower current income rather than investing in higher
yielding longer-term securities.
PUTNAM VT UTILITIES GROWTH AND INCOME FUND
The investment objective of Putnam VT Utilities Growth and Income
Fund is to seek capital growth and current income. The fund
concentrates its investments in securities issued by companies in
the public utilities industries.
The fund will seek its objective by investing under normal
circumstances at least 65% of its total assets in equity and debt
securities of companies in the public utilities industries.
Equity securities in which the fund may invest include common
stocks, preferred stocks, securities convertible into common
stocks or preferred stocks, and warrants to purchase common or
preferred stocks. Debt securities in which the fund may invest
will be rated at the time of purchase at least Baa by Moody's or
BBB by S&P or will be of comparable quality as determined by
Putnam Management. The fund may invest in debt and equity
securities of issuers in other industries if Putnam Management
believes they will help achieve the fund's objective.
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 deems 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.
The portion of the fund's assets invested in equity securities
and in debt securities will vary from time to time in light of
the fund's investment objective, changes in interest rates, and
economic and other factors. Although the fund expects that in
the near term it will invest substantial portions of its assets
in both equity securities and in debt securities, the fund may
invest all of its assets in either equity or debt securities.
The fund may hold a portion of its assets in cash and money
market instruments.
The fund may invest up to 25% of its assets in securities
principally traded in foreign markets. For a discussion of the
risks associated with foreign investments, see "Common investment
policies and techniques -- Foreign investments." The fund may
also engage in foreign currency exchange transactions and
transactions in futures and options, enter into repurchase
agreements, loan its portfolio securities and purchase securities
for future delivery. See "Common investment policies and
techniques" below for a discussion of these securities and types
of transactions and the risks associated with them. The fund may
engage in defensive strategies when Putnam Management judges that
conditions in the securities markets make pursuing the fund's
basic investment strategy inconsistent with the best interests of
the fund's shareholders. See "Common investment policies and
techniques" below for a discussion of these strategies.
Since the fund's investments are concentrated in the utilities
industries, the value of its shares can be expected to change in
response to 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
increase 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 and delays 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 in the United States 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.
Investments in securities rated BBB or Baa have speculative
characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of
the issuer to make principal and interest payments than would
likely be the case with investments in securities with higher
credit ratings. The fund will not necessarily dispose of a
security when its rating is reduced below its rating at the time
of purchase, although Putnam Management will monitor the
investment to determine whether continued investment in the
security would serve the fund's investment objective.
The fund is "non-diversified." This means that it may invest its
assets in a limited number of issuers. In order to qualify as a
"regulated investment company" under the Internal Revenue Code
(see "How the Trust makes distributions to shareholders; tax
information" below), the fund generally may not invest more than
25% of its total assets in obligations of any one issuer other
than U.S. government securities and, with respect to 50% 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). Thus the fund may invest up to 25% of
its total assets in the securities of each of any two issuers.
Because of the limited number of issuers in the public utilities
industries, the fund is more likely to invest a higher percentage
of its assets in the securities of a single issuer than an
investment company which invests in a broad range of industries.
This practice involves an increased risk of loss to the fund if
the issuer is unable to make interest or principal payments or if
the market value of such securities were to decline.
Putnam VT Utilities Growth and Income Fund will generally be
managed in a style similar to that of Putnam Utilities Growth and
Income Fund. Because that fund is "diversified," however, Putnam
VT Utilities Growth and Income Fund's portfolio may consist of
securities of a smaller number of issuers than the portfolio of
that fund.
PUTNAM VT VISTA FUND
Putnam VT Vista Fund seeks capital appreciation. It is designed
for investors seeking above-average capital growth potential,
which involves certain risks.
The fund invests in a diversified portfolio of common stocks
which Putnam Management believes have the potential for
above-average capital appreciation. These may include widely-
traded common stocks of larger companies as well as common stocks
of smaller, less well known companies. In selecting common
stocks for the fund, Putnam Management will consider, among other
things, an issuer's financial strength, competitive position,
projected future earnings and dividends, and other investment
criteria. Current income will be only an incidental
consideration in the selection of investments.
Investment opportunities may be sought among securities of large,
widely traded companies as well as securities of smaller, less
well - known companies. Smaller companies may present
greater opportunities for capital appreciation, but may also
involve greater risks. They may have limited product lines,
markets or financial resources, or may depend on a limited
management group. Their securities may trade less frequently and
in limited volume. As a result, the prices of these securities
may fluctuate more than prices of securities of larger, more
established companies.
The fund may invest principally in the common stocks of medium-
sized companies, with market capitalizations from $300 million to
$5 billion, often referred to as "midcap stocks." While midcap
stocks usually involve less risk than the stocks of smaller
capitalization companies, midcap stocks usually involve greater
risk than the stocks of larger, more mature companies. At times
markets may favor both the relative safety of larger
capitalization stocks and the greater growth potential of smaller
capitalization stocks over midcap stocks.
The fund may at times invest a portion of its assets in common
stocks Putnam Management believes are significantly undervalued.
In selecting such common stocks, Putnam Management will focus on
industries and issuers it considers to have particular
possibilities for long-term capital appreciation due to potential
growth of earnings which, in the judgment of Putnam Management,
is not fully reflected in current market prices. In selecting
undervalued securities, Putnam Management may make investment
judgments contrary to those of most investors.
Common stocks are normally the fund's main investments. However,
the fund may purchase preferred stocks, debt securities,
convertible securities (both bonds and preferred stocks) and
warrants if Putnam Management believes they would help achieve
the fund's objective of capital appreciation. The fund may
purchase debt securities rated at the time of purchase at least C
by S&P or Moody's, or unrated securities determined by Putnam
Management to be of comparable quality. Securities in the lower-
rated categories are considered to be primarily speculative and
may be in default. The risks associated with fixed-income
securities, including lower-rated fixed-income securities
(commonly known as "junk bonds"), are discussed below under
"Common investment policies and techniques -- Lower-rated and
other fixed-income securities." The fund may also hold a portion
of its assets in cash or money market instruments and may invest
up to 20% of its assets in foreign securities. For a discussion
of the risks associated with foreign investments, see "Common
investment policies and techniques -- Foreign investments."
The fund may also engage in foreign currency exchange
transactions and transactions in futures and options, enter into
repurchase agreements, loan its portfolio securities and purchase
securities for future delivery. See "Common investment policies
and techniques" below for a discussion of these securities and
types of transactions and the risks associated with them. The
fund may engage in defensive strategies when Putnam Management
judges that conditions in the securities markets make pursuing
the fund's basic investment strategy inconsistent with the best
interests of the fund's shareholders. When pursuing such
defensive strategies, the fund may invest without limit in
securities primarily traded in U.S. markets. See "Common
investment policies and techniques" below for a discussion of
these strategies.
Putnam VT Vista Fund will generally be managed in a style similar
to Putnam Vista Fund.
PUTNAM VT VOYAGER FUND
Putnam VT Voyager Fund seeks capital appreciation. It is
designed for investors willing to assume above-average risk in
return for above-average capital growth potential. The fund
invests primarily in common stocks of companies that Putnam
Management believes have potential for capital appreciation that
is significantly greater than that of market averages. The fund
may also purchase convertible bonds, convertible preferred
stocks, warrants, preferred stocks and debt securities if Putnam
Management believes they would help achieve the fund's objective.
The fund may also hold a portion of its assets in cash and money
market instruments and may invest up to 20% of its assets in
foreign securities. For a discussion of the risks associated
with foreign investments, see "Common investment policies and
techniques -- Foreign investments." The fund may also engage in
foreign currency exchange transactions and transactions in
futures and options, enter into repurchase agreements, loan its
portfolio securities and purchase securities for future delivery.
See "Common investment policies and techniques" below for a
discussion of these securities and types of transactions and the
risks associated with them. The fund may engage in defensive
strategies when Putnam Management judges that conditions in the
securities markets make pursuing the fund's basic investment
strategy inconsistent with the best interests of the fund's
shareholders. See "Common investment policies and techniques"
below for a discussion of these strategies.
The fund's investments may include widely-traded common stocks of
larger companies as well as common stocks of smaller, less well-
known issuers. The fund generally invests a portion of its
assets in the securities of small- to medium-sized companies with
equity market capitalizations of less than $3 billion. Investing
in these companies may present greater opportunities for capital
appreciation, but may also involve greater risk. They may have
limited product lines, markets or financial resources, or may
depend on a limited management group. Their securities may trade
less frequently and in limited volume and only in the over-the-
counter market or on a regional securities exchange. As a
result, these securities may fluctuate in value more than
securities of larger, more established companies.
Putnam VT Voyager Fund will generally be managed in a style
similar to Putnam Voyager Fund.
<PAGE>
GENERAL
As indicated above, certain of the funds are generally managed in
styles similar to other open-end investment companies which are
managed by Putnam Management and whose shares are generally
offered to the public. These other Putnam funds may, however,
employ different investment practices and may invest in
securities different from those in which their counterpart funds
invest, and consequently will not have identical portfolios or
experience identical investment results.
COMMON INVESTMENT POLICIES AND TECHNIQUES
Defensive strategies
At times, Putnam Management may judge that conditions in the
securities markets make pursuing a 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 fund assets.
In implementing these defensive strategies, a fund may invest
without limit in cash or cash equivalents, money-market
instruments, short-term bank obligations, high-rated fixed-income
securities or preferred stocks or invest in any other securities
Putnam Management considers consistent with such defensive
strategies.
It is impossible to predict when, or for how long, these
alternative strategies would be used.
Portfolio turnover
The length of time a fund has held a particular security is not
generally a consideration in investment decisions. A change in
the securities held by a fund is known as "portfolio turnover."
As a result of a 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 on the sale of securities and reinvestment in other
securities. These transactions may result in realization of
taxable capital gains. Portfolio turnover rates for the life of
each fund (other than Putnam VT International Growth Fund, Putnam
VT International Growth and Income Fund, Putnam VT International
New Opportunities Fund, Putnam VT New Value Fund and Putnam VT
Vista Fund, each of which commenced operations after January 1,
1997) are shown in the section "Financial highlights." While it
is impossible to predict a fund's portfolio turnover rate, Putnam
Management, based on its experience, believes that such rate will
not exceed 100% for Putnam VT International Growth Fund, 150% for
Putnam VT International Growth and Income Fund, 200% for Putnam
VT International New Opportunities Fund, 200% for Putnam VT New
Value Fund and 100% for Putnam VT Vista Fund.
Investments in premium securities
To the extent described above, certain of the funds may invest in
securities bearing coupon rates higher than prevailing market
rates. Such "premium" securities are typically purchased at
prices greater than the principal amounts payable on maturity.
A fund does not amortize the premium paid for these securities in
calculating its net investment income. As a result, the purchase
of premium securities provides a higher level of investment
income distributable to shareholders on a current basis than if
the fund purchased securities bearing current market rates of
interest. Because the value of premium securities tends to
approach the principal amount as they approach maturity (or call
price in the case of securities approaching their first call
date), the purchase of such securities may increase the fund's
risk of capital loss if such securities are held to maturity (or
first call date).
During a period of declining interest rates, many of a fund's
portfolio investments will likely bear coupon rates that are
higher than current market rates, regardless of whether such
securities were originally purchased at a premium. These
securities would generally carry premium market values that would
be reflected in the net asset value of fund shares. As a result,
an investor who purchases fund shares during such periods would
initially receive higher taxable monthly distributions (derived
from the higher coupon rates payable on a fund's investments)
than might be available from alternative investments bearing
current market interest rates, but the investor may face an
increased risk of capital loss as these higher coupon securities
approach maturity (or first call date). In evaluating the
potential performance of an investment in a fund, investors may
find it useful to compare the fund's current dividend rate with
its "yield," which is computed on a yield-to-maturity basis in
accordance with SEC regulations and which reflects amortization
of market premiums. See "How performance is shown."
Foreign investments
Each fund may invest to the extent described above in securities
principally traded in foreign markets. Each fund may also
purchase Eurodollar certificates of deposit without limitation.
Since foreign securities are normally denominated and traded in
foreign currencies, the value of fund assets may be
affected favorably or unfavorably by changes in currency
exchange rates relative to the U.S. dollar . There may be
less information publicly available about a foreign issuer
than about a U.S. issuer, and foreign issuers may
not be subject to accounting standards
comparable to those in the United States.
The securities of some foreign companies are less liquid and at
times more volatile than securities of comparable U.S. companies.
Foreign brokerage commissions and other fees are also generally
higher than those 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 fund assets held abroad) and expenses not present in the
settlement of domestic investments. Common stocks of foreign
issuers have historically offered lower yields than common stocks
of comparable U.S. issuers. In addition, foreign withholding
taxes may further reduce the amount of income available for
distribution to fund shareholders. As a result, the yield of a
fund that invests in foreign equity securities is expected to be
lower than that of funds with similar investment objectives that
invest primarily in U.S. issuers.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange
controls, confiscatory taxation, political or financial
instability and diplomatic developments that could affect the
value of investments in certain foreign countries.
Legal remedies available to investors in certain foreign
countries may be limited. The laws of some foreign countries may
limit investments in securities of certain issuers located in
those foreign countries. Special tax considerations apply to
foreign securities.
The risks described above are typically increased to the extent
that a fund invests in issuers located in less developed and
developing nations, whose securities markets are sometimes
referred to as "emerging markets." Investments in securities
located in such countries are speculative and subject to certain
special risks. Political and economic structures in many of
these countries may be in their infancy and developing rapidly,
and such countries may lack the social, political and economic
stability characteristics of more developed countries. Certain
of these countries have in the past failed to recognize private
property rights and have at times nationalized and expropriated
the assets of private companies.
The currencies of certain emerging market countries have
experienced a steady devaluation relative to the U.S. dollar, and
continued devaluations may adversely affect the value of a fund's
assets denominated in such currencies. Many emerging market
companies have experienced substantial, and in some periods
extremely high, rates of inflation for many years, and continued
inflation may adversely affect the economies and securities
markets of such countries.
In addition, unanticipated political or social developments may
affect the values of a fund's investments in these countries and
the availability to the fund of additional investments in these
countries. The small size, limited trading volume and relative
inexperience of the securities markets in these countries may
make a fund's investments in such countries illiquid, and the
fund may be required to establish special custodial or other
arrangements before making investments in these countries. There
may be little financial or accounting information available with
respect to issuers located in these countries, and it may be more
difficult as a result to assess the value or prospects of an
investment in such issuers.
A more detailed explanation of foreign investments, and the risks
and special tax considerations associated with them, is included
in the SAI.
Foreign currency exchange transactions
To the extent described above, certain of the funds may engage in
foreign currency exchange transactions to protect against
uncertainty in the level of future exchange rates. Putnam
Management expects to engage in foreign currency exchange
transactions in connection with the purchase and sale of
portfolio securities ("transaction hedging") and to
protect against changes in the value of specific portfolio
positions ("position hedging").
A fund may engage in transaction hedging to protect against a
change in foreign currency exchange rates between the date on
which the fund contracts to purchase or sell a security and the
settlement date, or to "lock in" the U.S. dollar equivalent of a
dividend or interest payment in a foreign currency. A fund may
also purchase or sell a foreign currency on a spot (or cash)
basis at the prevailing spot rate in connection with the
settlement of transactions in portfolio securities denominated in
that foreign currency.
If conditions warrant, for transaction hedging purposes, a fund
may also enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") and may
purchase and sell foreign currency futures contracts. A foreign
currency forward contract is a negotiated agreement to exchange
currency at a future time at a rate or rates that may be higher
or lower than the spot rate. Foreign currency futures contracts
are standardized exchange-traded contracts and have margin
requirements. In addition, for transaction hedging purposes, a
fund may also purchase or sell exchange-listed and over-the-
counter call and put options on foreign currency futures
contracts and on foreign currencies.
A fund may engage in position hedging to protect against a
decline in the value relative to the U.S. dollar of the
currencies in which its portfolio securities are denominated or
quoted (or an increase in the value of the currency in which
securities the fund intends to buy are denominated, when the fund
holds cash or short-term investments). For position hedging
purposes, a fund may purchase or sell foreign currency futures
contracts, foreign currency forward contracts and options on
foreign currency futures contracts and on foreign currencies on
exchanges or in over-the-counter markets. In connection with
position hedging, a fund may also purchase or sell foreign
currency on a spot basis.
A fund's currency hedging transactions may call for the delivery
of one foreign currency in exchange for another foreign currency
and may at times not involve currencies in which its portfolio
securities are then denominated. Putnam Management will engage
in such "cross hedging" activities when it believes that such
transactions provide significant hedging opportunities for a
fund. Cross hedging transactions by a fund involve the risk of
imperfect correlation between changes in the values of the
currencies to which such transactions relate and changes in the
value of the currency or other asset or liability which is the
subject of the hedge.
The decision as to whether and to what extent a fund will engage
in foreign currency exchange transactions will depend on a number
of factors, including prevailing market conditions, the
composition of a fund's portfolio and the availability of
suitable transactions. Accordingly, there can be no assurance
that a fund will engage in foreign currency exchange transactions
at any given time or from time to time. See the SAI.
For a discussion of the risks associated with options and futures
strategies in connection with a fund's foreign currency exchange
transactions, see "Risks related to options and futures
strategies."
Futures and options
Futures and options on futures. To the extent described above,
each fund may, buy and sell index futures contracts ("index
futures"). An "index future" is a contract to buy or sell units
of a particular stock index at an agreed price on a specified
future date. Depending on the change in value of the index
between the time a fund enters into and terminates an index
futures transaction, the fund realizes a gain or loss. Each of
these funds , may also, to the extent consistent with its
investment objectives and policies, buy and sell call
and put options on index futures or stock indexes. Each of these
funds may engage in index futures and options transactions for
hedging purposes and for nonhedging purposes, such as to adjust
its exposure to relevant markets or as a substitute for direct
investment. In addition, if a fund's investment policies permit
it to invest in foreign securities, such fund may invest in
futures and options on foreign securities, for hedging purposes
and for nonhedging purposes.
To the extent described above, each fund may also buy and sell
futures contracts and related options with respect to U.S.
government securities and options directly on U.S. government
securities. Putnam Management believes that, under certain market
conditions, price movements in U.S. government securities futures
and related options may correlate closely with securities in
which such funds may invest and may, as a result, provide hedging
opportunities for the funds. U.S. government securities futures
and related options would be used in a way similar to a fund's
use of index futures and options.
Options. As described above, certain of the funds may, to the
extent consistent with their investment objectives and policies,
seek to increase current return by writing covered call and put
options on securities such funds own or in which they may invest.
A 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 a fund writes a call option, it gives up the opportunity to
profit from any increase in the price of a security above the
exercise price of the option; when it writes a put option, the
fund 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. Each 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.
Each fund may also, to the extent consistent with its investment
objectives and policies, buy and sell put and call options for
hedging purposes. From time to time, a fund may also buy and
sell combinations of put and call options on the same underlying
security to earn additional income. The aggregate value of the
securities underlying the options may not exceed 25% of the
relevant fund's assets. The use of these strategies may be
limited by applicable law.
Risks related to options and futures strategies
Options and futures transactions involve costs and may result in
losses. The effective use of options and futures strategies
depends on a fund's ability to terminate its options and futures
positions at times when Putnam Management deems it desirable to
do so. Although a fund will enter into an option or futures
contract position only if Putnam Management believes that a
liquid secondary market exists for such option or futures
contract, there is no assurance that the fund will be able to
effect closing transactions at any particular time or at an
acceptable price. Options on certain U.S. government securities
are traded in significant volume on securities exchanges.
However, other options which a fund may purchase or sell are
traded in the "over-the-counter" market rather than on an
exchange. This means that a fund will enter into such option
contracts with particular securities dealers who make markets in
these options. A fund's ability to terminate options positions
established in the over-the-counter market may be more
limited than for exchange-traded options and may also involve the
risk that securities dealers participating in such transactions
would fail to meet their obligations to the fund.
Certain provisions of the Internal Revenue Code and certain
regulatory requirements may limit the use of index futures and
options transactions.
The use of options and futures strategies also involves the risk
of imperfect correlation among movements in the values of the
securities, currencies or indexes underlying the futures and
options purchased and sold by a fund, of the option or futures
contract itself, and of the securities or currencies which are
the subject of a hedge. 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 futures and options transactions,
including the risks associated with them, is included in the SAI.
Lower-rated and other fixed-income securities
As described above, certain of the funds may invest in lower-
rated fixed-income securities (commonly known as "junk bonds").
Differing yields on fixed-income securities of the same maturity
are a function of several factors, including the relative
financial strength of the issuers. Higher yields are generally
available from securities in the lower rating categories of
recognized rating agencies (Baa or MIG-4 or lower by Moody's and
BBB or SP-3 or lower by S&P) or from unrated securities of
comparable quality. Securities rated below Baa as determined by
Moody's and BBB as determined by S&P are considered to be of poor
standing and predominantly speculative. The rating services'
descriptions of securities in the lower rating categories,
including their speculative characteristics, are set forth in the
Appendix to this prospectus.
Securities ratings are based largely on the issuer's historical
financial condition and the rating agencies' investment analysis
at the time of rating. Consequently, the rating assigned to any
particular security is not necessarily a reflection of the
issuer's current financial condition, which may be better or
worse than the rating would indicate. Although Putnam Management
considers security ratings when making investment decisions, it
performs its own investment analysis and does not rely
principally on the ratings assigned by the rating services.
Putnam Management's analysis may include consideration of the
issuer's experience and managerial strength, changing financial
condition, borrowing requirements or debt maturity schedules, and
its responsiveness to changes in business conditions and interest
rates. It also considers relative values based on anticipated
cash flow, interest or dividend coverage, asset coverage and
earning prospects.
At times, a substantial portion of fund assets may be invested in
securities as to which the fund, by itself or together with other
funds and accounts managed by Putnam Management and its
affiliates, holds all or a major portion. Under adverse market
or economic conditions or in the event of adverse changes in the
financial condition of the issuer, it may be more
difficult to sell these securities when Putnam Management
believes it advisable to do so , or a fund may be
able to sell the securities only at prices lower than if they
were more widely held. Under these circumstances, it may also be
more difficult to determine the fair value of such securities for
purposes of computing a fund's net asset value.
In order to enforce its rights in the event of a default of these
securities, a fund may be required to participate in various
legal proceedings or take possession of and manage assets
securing the issuer's obligations on the securities. This could
increase fund operating expenses and adversely affect
a fund's net asset value.
Like those of other fixed-income securities, the values of
lower-rated securities fluctuate in response to changes in
interest rates. Thus, a decrease in interest rates will
generally result in an increase in the value of a fund's assets.
Conversely, during periods of rising interest rates, the value of
a fund's assets will generally decline.
The magnitude of these fluctuations will generally be greater
when a fund's average maturity is longer. However, the yields on
such securities are also generally higher. In addition, the
values of such securities are also affected by changes in general
economic conditions and business conditions affecting the
specific industries of their issuers. Changes by recognized
rating services in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments.
Changes in the value of portfolio securities generally will not
affect income derived from such securities, but will affect a
fund's net asset value.
Investors should carefully consider their ability to assume the
risks of investing in a mutual fund which invests in lower-rated
securities before allocating a portion of their insurance
investment to a fund that invests in such securities. The lower
ratings of certain securities held by a fund reflect a greater
possibility that adverse changes in the financial condition of
the issuer, or in general economic conditions, or both, or an
unanticipated rise in interest rates, may impair the ability of
the issuer to make payments of interest and principal. The
inability (or perceived inability) of issuers to make timely
payments of interest and principal would likely make the values
of securities held by a fund more volatile and could limit the
fund's ability to sell its securities at prices approximating the
values the fund had placed on such securities. In the absence of
a liquid trading market for securities held by it, a fund may be
unable at times to establish the fair value of such securities.
The rating assigned to a security by Moody's or S&P does not
reflect an assessment of the volatility of the security's market
value or of the liquidity of an investment in the security.
Putnam Management seeks to minimize the risks of investing in
lower-rated securities through careful investment analysis. When
a fund invests in securities in the lower rating categories, the
achievement of the fund's goals is more dependent on Putnam
Management's ability than would be the case if the fund were
investing in securities in the higher rating categories.
Certain securities held by a fund may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were
to redeem securities held by a fund during a time of declining
interest rates, the fund may not be able to reinvest the proceeds
in securities providing the same investment return as the
securities redeemed.
A fund may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a
significant discount from their principal amount and pay interest
only at maturity rather than at intervals during the life of the
security. Payment-in-kind bonds allow the issuer, at its option,
to make current interest payments on the bonds either in cash or
in additional bonds. The values of zero-coupon bonds and
payment-in-kind bonds are subject to greater fluctuation in
response to changes in market interest rates than bonds which pay
interest in cash currently.
Both zero-coupon bonds and payment-in-kind bonds allow an issuer
to avoid the need to generate cash to meet current interest
payments. Accordingly, such bonds may involve greater credit
risks than bonds paying interest currently. Even though such
bonds do not pay current interest in cash, a fund is nonetheless
required to accrue interest income on such investments and to
distribute such amounts on a current basis to shareholders.
Thus, a fund could be required at times to sell other investments
in order to satisfy its income distribution requirements.
Certain investment grade securities in which a fund may invest
share some of the risk factors discussed above with respect to
lower-rated securities.
Each fund (other than Putnam VT Money Market Fund) may invest up
to 15% of its assets in illiquid securities. Putnam Management
believes that opportunities to earn high yields may exist from
time to time in securities which are illiquid and which may be
considered speculative. The sale of these securities is usually
restricted under federal securities laws. As a result of
illiquidity, the fund may not be able to sell these securities
when Putnam Management considers it desirable to do so or may
have to sell them at less than fair market value.
Mortgage-backed and asset-backed securities
As described above, certain of the funds may invest in asset-
backed and mortgage-backed securities, such as CMOs and certain
stripped mortgage-backed securities. CMOs and other mortgage-
backed securities represent participations in, or are secured by,
mortgage loans and include:
- - Certain securities issued or guaranteed by the U.S.
government
or one of its agencies or instrumentalities;
- - Securities issued by private issuers that represent an
interest
in or are secured by mortgage-backed securities issued or
guaranteed by the U.S. government or one of its agencies or
instrumentalities; and
- - Securities issued by private issuers that represent an
interest
in or are secured by mortgage loans or mortgage-backed
securities without a government guarantee but usually having
some form of private credit enhancement.
Stripped mortgage-backed securities are usually structured with
two classes that receive different portions of the interest and
principal distributions on a pool of mortgage loans. A fund may
invest in both the interest-only or "IO" class and the
principal-only or "PO" class.
Each fund may also invest in asset-backed securities. Asset-
backed securities are structured like mortgage-backed securities,
but instead of mortgage loans or interests in mortgage loans, the
underlying assets may include such items as motor vehicle
installment sales or installment loan contracts, leases of
various types of real and personal property, and receivables from
credit card agreements. The ability of an issuer of asset-backed
securities to enforce its security interest in the underlying
assets may be limited.
Mortgage-backed and asset-backed securities have yield and
maturity characteristics corresponding to the underlying assets.
Unlike traditional debt securities, which may pay a fixed rate of
interest until maturity when the entire principal amount comes
due, payments on certain mortgage-backed and asset-backed
securities include both interest and a partial payment of
principal. Besides the scheduled repayment of principal,
payments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying mortgage loans or
other assets.
<PAGE>
Mortgage-backed and asset-backed securities are less effective
than other types of securities as a means of "locking in"
attractive long-term interest rates. One reason is the need to
reinvest prepayments of principal; another is the possibility of
significant unscheduled prepayments resulting from declines in
interest rates. These prepayments would have to be reinvested at
lower rates. As a result, these securities may have less
potential for capital appreciation during periods of declining
interest rates than other securities of comparable maturities,
although they may have a similar risk of decline in market value
during periods of rising interest rates. Prepayments may also
significantly shorten the effective maturities of these
securities, especially during periods of declining interest
rates. Conversely, during periods of rising interest rates, a
reduction in prepayments may increase the effective maturities of
these securities, subjecting them to a greater risk of decline in
market value in response to rising interest rates than
traditional debt securities, and, therefore, potentially
increasing a fund's volatility .
Prepayments may cause losses on securities purchased at a
premium. At times, some of the mortgage-backed and asset-backed
securities in which a fund may invest will have higher than
market interest rates and therefore will be purchased at a
premium above their par value. Unscheduled prepayments, which
are made at par, will cause a fund to experience a loss equal to
any unamortized premium.
CMOs are issued with a number of classes or series that have
different maturities and that may represent interests in some or
all of the interest or principal on the underlying collateral.
Payment of interest or principal on some classes or series of
CMOs may be subject to contingencies or some classes or series
may bear some or all of the risk of default on the underlying
mortgages. CMOs of different classes or series are generally
retired in sequence as the underlying mortgage loans in the
mortgage pool are repaid. If enough mortgages are repaid ahead
of schedule, the classes or series of a CMO with the earliest
maturities generally will be retired prior to their maturities.
Thus, the early retirement of particular classes or series of a
CMO would have the same effect as the prepayment of mortgages
underlying other mortgage-backed securities. Conversely, slower
than anticipated prepayments can extend the effective maturities
of CMOs, subjecting them to a greater risk of decline in market
value in response to rising interest rates than traditional debt
securities, and, therefore, potentially increasing a
fund's volatility .
The yield to maturity on an IO or PO class of stripped mortgage-
backed securities is extremely sensitive not only to changes in
prevailing interest rates but also to the rate of principal
payments (including prepayments) on the underlying assets. A
rapid rate of principal prepayments may have a measurably adverse
effect on a fund's yield to maturity to the extent it invests in
IOs. If the assets underlying the IO experience greater than
anticipated prepayments of principal, a fund may fail to recoup
fully its initial investment in these securities. Conversely,
POs tend to increase in value if prepayments are greater than
anticipated and decline if prepayments are slower than
anticipated.
In either event, the secondary market for stripped mortgage-
backed securities may be more volatile and less liquid than that
for other mortgage-backed securities, potentially limiting a
fund's ability to buy or sell those securities at any particular
time.
Securities loans, repurchase agreements and forward commitments.
A fund may lend portfolio securities to broker-dealers and may
enter into repurchase agreements. These transactions must be
fully collateralized at all times. Each fund (other than Putnam
VT Money Market 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 a
fund is delayed or prevented from recovering the collateral or
completing the transaction.
Derivatives
Certain of the instruments in which each fund (except Putnam VT
Money Market Fund) may invest, such as futures contracts,
options, forward contracts, and CMOs, 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.
HOW PERFORMANCE IS SHOWN
Fund advertisements may, from time to time, include performance
information. For funds other than Putnam VT Money Market Fund,
"yield" is calculated by dividing a fund's annualized net
investment income per share during a recent 30-day period by the
maximum public offering price per share on the last day of that
period.
For purposes of calculating yield, net investment income is
calculated in accordance with SEC regulations and may differ from
net investment income as determined for financial reporting
purposes. SEC regulations require that net investment income be
calculated on a "yield-to-maturity" basis, which has the effect
of amortizing any premiums or discounts in the current market
value of fixed-income securities. The current dividend rate is
based on net investment income as determined for tax purposes,
which may not reflect amortization in the same manner. See
"Common investment policies and techniques -- Investments in
premium securities." For Putnam VT Money Market Fund, "yield"
represents an annualization of the change in value of an
investment (excluding any capital changes) in the fund for a
specific seven-day period; "effective yield" compounds that yield
for a year and is, for that reason, greater than the fund's
yield.
"Total return" for the one-, five- and ten-year periods (or for
the life of a fund, if shorter) through the most recent calendar
quarter represents the average annual compounded rate of return
on an investment of $1,000 in such fund. Total return may also
be presented for other periods.
All data are based on past investment results and do not predict
future performance. Investment performance, which will vary, is
based on many factors, including market conditions, portfolio
composition and fund operating expenses. Investment performance
also often reflects the risks associated with a fund's investment
objective or objectives and policies. These factors should be
considered when comparing a 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.
Performance information presented for the funds should not be
compared directly with performance information of other insurance
products without taking into account insurance-related charges
and expenses payable with respect to these insurance products.
Insurance related charges and expenses are not reflected in the
funds' performance information. As a result of such insurance-
related charges and expenses, an investor's return under the
insurance product would be lower.
For performance information through the funds' most recent fiscal
year, see "Investment Performance of the Trust" in the SAI.
HOW THE TRUST IS MANAGED
The Trustees are responsible for generally overseeing the conduct
of the Trust's business. Subject to such policies as the
Trustees may determine, Putnam Management furnishes a continuing
investment program for the Trust and makes investment decisions
on its behalf. Subject to the control of the Trustees, Putnam
Management also manages the Trust's other affairs and business.
The Trust pays Putnam Management a quarterly fee for these
services based on each fund's average net assets. See the SAI.
The following officers of Putnam Management have had primary
responsibility for the day-to-day management of each fund's
portfolio since the year stated below:
<PAGE>
Business experience
Fund name Year (at least 5 years)
- --------------------- ------- -------------------------
Putnam VT Asia Pacific
Growth Fund
David K. Thomas 1995 Employed as an investment
Senior Vice President professional by Putnam
Management since 1987.
Putnam VT Diversified
Income Fund
William Kohli 1994 Employed as an investment
Managing Director professional by Putnam
Management since September,
1994. Prior to September,
1994, Mr. Kohli was Executive
Vice President, and Co-
Director of Global Bond
Management and, prior to
October, 1993, Mr. Kohli was
Senior Portfolio Manager at
Franklin Advisors/Templeton
Investment Counsel.
Michael Martino 1994 Employed as an investment
Managing Director professional by Putnam
Management since January,
1994. Prior to January, 1994,
Mr. Martino was employed by
Back Bay Advisors in the
positions of Executive Vice
President and Chief Investment
Officer from 1992 to 1994, and
Senior Vice President and
Senior Portfolio Manager
prior to 1992.
Jennifer E. Leichter 1993 Employed as an investment
Senior Vice President professional by Putnam
Management since 1987.
Mark J. Siegel 1994 Employed as an investment
Senior Vice President professional by Putnam
Management since June, 1993.
Prior to June, 1993, Mr.
Siegel was Vice President of
Salomon Brothers International
Ltd.
Neil J. Powers 1994 Employed as an investment
Vice President professional by Putnam
Management since 1986
<PAGE>
Putnam VT Global Asset
Allocation Fund
William Kohli 1994 Employed as an investment
Managing Director professional by Putnam
Management since September,
1994. Prior to September,
1994, Mr. Kohli was Executive
Vice President, and Co-
Director of Global Bond
Management and, prior to
October, 1993, Mr. Kohli was
Senior Portfolio Manager at
Franklin Advisors/Templeton
Investment Counsel.
Anthony I. Kreisel 1996 Employed as an investment
Managing Director professional by Putnam
Management since 1986.
William J. Landes 1993 Employed as an investment
Managing Director professional by Putnam
Management since 1985.
Richard M. Frucci 1995 Employed as an investment
Senior Vice President professional by Putnam
Management since 1984.
David L. King 1993 Employed as an investment
Senior Vice President professional by Putnam
Management since 1983.
John K. Storkerson 1993 Employed as an investment
Senior Vice President professional by Putnam
Management since 1979.
Christopher A. Ray 1993 Employed as an investment
Vice President professional by Putnam
Management since December,
1992. Prior to December,
1992, Mr. Ray was Vice
President and Portfolio
Manager at Scudder, Stevens &
Clark, Inc.
David J. Santos 1995 Employed as an investment
Vice President professional by Putnam
Management since 1986.
Putnam VT Global
Growth Fund
Anthony W. Regan 1996 Employed as an investment
Senior Managing Director professional by Putnam
Management since 1987.
Carol C. McMullen 1995 Employed as an investment
Managing Director professional by Putnam
Management since June, 1995.
Prior to June, 1995, Ms.
McMullen was Senior Vice
President of Baring Asset
Management.
C. Kim Goodwin 1996 Employed as an investment
Senior Vice President professional by Putnam
Management since May, 1996.
Prior to May, 1996 Ms. Goodwin
was Vice President at
Prudential Mutual Fund
Investment Management, and
prior to February, 1993, Ms.
Goodwin was Assistant Vice
President at Mellon Bank
Corporation.
John K. Storkerson 1992 Employed as an investment
Senior Vice President professional by Putnam
Management since 1979.
Ami T. Kuan 1996 Employed as an investment
Vice President professional by Putnam
Management since April, 1993.
Prior to April, 1993, Ms. Kuan
attended the MIT Sloan School
of Management.
Robert Swift 1996 Employed as an investment
Senior Vice President professional by Putnam
Management since August, 1995.
Prior to August, 1995, Mr.
Swift was Director and Senior
Portfolio Manager at IAI
International/Hill Samuel
Investment Advisors.
Putnam VT Growth and
Income Fund
Anthony I. Kreisel 1993 Employed as an investment
Managing Director professional by Putnam
Management since 1986.
David L. King 1993 Employed as an investment
Senior Vice President professional by Putnam
Management since 1983.
<PAGE>
Putnam VT High
Yield Fund
Jin W. Ho 1996 Employed as an investment
Managing Director professional by Putnam
Management since 1983.
Putnam VT International
Growth Fund
Justin M. Scott 1996 Employed as an investment
Managing Director professional by Putnam
Management since 1988.
Omid Kamshad 1996 Employed as an investment
Senior Vice President professional by Putnam
Management since January,
1996. Prior to January, 1996
Mr. Kamshad was Director of
Investments at Lombard Odier
International, prior to April,
1995 he was Director at Baring
Asset Management Company, and
prior to December, 1991 Mr.
Kamshad was Senior Portfolio
Manager at Enskilda Asset
Management.
Putnam VT International
Growth and Income Fund
Justin M. Scott 1996 Employed as an investment
Managing Director professional by Putnam
Management since 1988.
Putnam VT International
New Opportunities Fund
Justin M. Scott 1996 Employed as an investment
Managing Director professional by Putnam
Management since 1988.
Robert Swift 1996 Employed as an investment
Senior Vice President professional by Putnam
Management since August, 1995.
Prior to August, 1995, Mr.
Swift was Director and
Senior Portfolio Manager
at IAI International/Hill
Samuel Investment Advisors.
J. Peter Grant 1996 Employed as an investment
Senior Vice President professional by Putnam
Management since 1973.
<PAGE>
Ami T. Kuan
1996 Employed as an investment
Vice President professional by Putnam
Management since April, 1993.
Prior to April, 1993, Ms.
Kuan attended the MIT
Sloan School of Management.
Putnam VT Money
Market Fund
Lindsey C. Strong 1992 Employed as an investment
Vice President professional by Putnam
Management since 1984.
Putnam VT New
Opportunities Fund
Carol C. McMullen 1996 Employed as an investment
Managing Director professional by Putnam
Management since June, 1995.
Prior to June, 1995, Ms.
McMullen was Senior Vice
President of Baring Asset
Management.
Daniel L. Miller 1994 Employed as an investment
Managing Director professional by Putnam
Management since 1983.
Putnam VT New
Value Fund
David L. King 1996 Employed as an investment
Senior Vice President professional by Putnam
Management since 1983.
Putnam VT U.S.
Government and High
Quality Bond Fund
Kenneth J. Taubes 1993 Employed as an investment
Senior Vice President professional by Putnam
Management since 1991.
Putnam VT Utilities
Growth and Income Fund
Sheldon N. Simon 1992 Employed as an investment
Senior Vice President professional by Putnam
Management since 1984.
<PAGE>
Christopher A. Ray 1995 Employed as an investment
Vice President professional by Putnam
Management since December,
1992. Prior to December,
1992, Mr. Ray was Vice
President and Portfolio
Manager at Scudder, Stevens &
Clark, Inc.
Putnam VT Vista Fund
Jennifer K. Silver 1996 Employed as an investment
Senior Vice President professional by Putnam
Management since 1981.
C. Kim Goodwin 1996 Employed as an investment
Senior Vice President professional by Putnam
Management since May, 1996.
Prior to May, 1996, Ms.
Goodwin was Vice President at
Prudential Mutual Fund
Investment Management. Prior
to February, 1993, Ms. Goodwin
was Assistant Vice President
at Mellon Bank Corporation.
David J. Santos 1996 Employed as an investment
Vice President professional by Putnam
Management since 1986.
Anthony C. Santosus 1996 Employed as an investment
Vice President professional by Putnam
Management since 1985.
Putnam VT Voyager Fund
Roland W. Gillis 1995 Employed as an investment
Senior Vice President professional by Putnam
Management since March, 1995.
Prior to March, 1995, Mr.
Gillis was Vice President at
Keystone Custodian Funds, Inc.
Robert R. Beck 1995 Employed as an investment
Senior Vice President professional by Putnam
Management since 1989.
Charles H. Swanberg 1994 Employed as an investment
Senior Vice President professional by Putnam
Management since 1984.
The Trust, on behalf of the funds, pays all expenses not assumed
by Putnam Management, including Trustees' fees and auditing,
legal, custodial, investor servicing and shareholder reporting
expenses. The Trust also reimburses Putnam Management for the
compensation and related expenses of certain officers of the
Trust and their staff who provide administrative services to the
Trust. The total reimbursement is determined annually by the
Trustees.
General expenses of the Trust will be allocated among and charged
to the assets of each fund on a basis that the Trustees deem fair
and equitable, which may be based on the relative assets of each
fund or the nature of the services performed and relative
applicability to each fund. Expenses directly charged or
attributable to a fund will be paid from the assets of that fund.
Expense Limitations. In order to limit the expenses of Putnam VT
International Growth Fund, Putnam VT International Growth and
Income Fund, Putnam VT International New Opportunities Fund,
Putnam VT New Value Fund and Putnam VT Vista Fund during their
start-up periods, Putnam Management has agreed to limit its
compensation (and, to the extent necessary, bear other expenses
of the funds) through December 31, 1997, to the extent that
expenses of the funds (exclusive of brokerage, interest, taxes,
and deferred organizational and extraordinary expenses) would
exceed the annual rate of 1.20%, 1.20%, 1.60%, 1.10% and 1.05%,
respectively, of the fund's average net assets.
For the purpose of determining any such limitation on Putnam
Management's compensation, expenses of the funds will not reflect
the application of commissions or cash management credits that
may reduce designated fund expenses.
With Trustee approval, any expense limitation may be terminated
earlier, in which event shareholders would be notified and this
prospectus would be revised.
The following table summarizes total expenses, including
management fees but excluding any insurance-related charges and
expenses, based on the most recent fiscal year (or, for funds
that have been in operation for less than a full year, based on
estimated expenses for the first full fiscal year) as a
percentage of each fund's average net assets :
<PAGE>
Total Management
Expenses Fees
Putnam VT Asia Pacific Growth Fund* 1.70% 0.80%
Putnam VT Diversified Income Fund 0.85% 0.70%
Putnam VT Global Asset Allocation Fund 0.84% 0.70%
Putnam VT Global Growth Fund 0.75% 0.60%
Putnam VT Growth and Income Fund 0.57% 0.52%
Putnam VT High Yield Fund 0.79% 0.70%
Putnam VT International Growth Fund 0.98% 0.80%
Putnam VT International Growth and
Income Fund 0.97% 0.80%
Putnam VT International New
Opportunities Fund 1.39% 1.20%
Putnam VT Money Market Fund 0.57% 0.45%
Putnam VT New Opportunities Fund 0.84% 0.70%
Putnam VT New Value Fund 0.83% 0.70%
Putnam VT U.S. Government and High
Quality Bond Fund 0.70% 0.61%
Putnam VT Utilities Growth and
Income Fund** 0.78% 0.70%
Putnam VT Vista Fund 0.81% 0.65%
Putnam VT Voyager Fund 0.68% 0.62%
* The annualized total expenses and management fees shown
above for Putnam VT Asia Pacific Growth Fund reflect the
termination of an expense limitation in effect for the
period. Actual annualized management fees and total
expenses would have been 0.33% and 1.22%, respectively.
** On July 11, 1996, shareholders approved an increase
in the fees payable to Putnam Management under the
Management Contract for Putnam VT Utilities Growth and
Income Fund. The management fees and total expenses shown
in the table have been restated to reflect the increase.
Actual management fees and total expenses were 0.60% and
0.68%, respectively.
The expenses shown in the table do not reflect the application of
credits related to brokerage service and expense offset
arrangements that reduce certain fund expenses.
Putnam Management places all orders for purchases and sales of
the securities of each fund. 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, if
permitted by law, sales of shares of the other Putnam funds as a
factor in the selection of broker-dealers.
ORGANIZATION AND HISTORY
Putnam Variable Trust is a Massachusetts business trust organized
on September 24, 1987. 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 January 1, 1997, the Trust was known as Putnam Capital
Manager Trust.
The Trust is an open-end management investment company with an
unlimited number of authorized shares of beneficial interest.
Shares of the Trust may, without shareholder approval, be divided
into two or more series of shares representing separate
investment portfolios, and are currently divided into sixteen
series of shares, each representing a separate investment
portfolio which is being offered through separate accounts of
various insurance companies. Each portfolio is a diversified
investment company, except for Putnam VT Utilities Growth and
Income Fund, which is a non-diversified investment company.
Prior to January 1, 1997, Putnam VT Asia Pacific Growth Fund was
known as PCM Asia Pacific Growth Fund, Putnam VT Diversified
Income Fund was known as PCM Diversified Income Fund, Putnam VT
Global Asset Allocation Fund was known as PCM Global Asset
Allocation Fund, Putnam VT Global Growth Fund was known as PCM
Global Growth Fund, Putnam VT Growth and Income Fund was known as
PCM Growth and Income Fund, Putnam VT High Yield Fund was known
as PCM High Yield Fund, Putnam VT Money Market Fund was known as
PCM Money Market Fund, Putnam VT New Opportunities Fund was known
as PCM New Opportunities Fund, Putnam VT U.S. Government and High
Quality Growth Fund was known as PCM U.S. Government and High
Quality Growth Fund, Putnam VT Utilities Growth and Income Fund
was known as PCM Utilities Growth and Income Fund, and Putnam VT
Voyager Fund was known as PCM Voyager Fund. Until September 1,
1993, PCM Global Asset Allocation Fund was known as PCM Multi-
Strategy Fund. Shares vote by individual portfolio on all
matters except (i) when required by the Investment Company Act of
1940, shares of all portfolios shall be voted in the aggregate,
and (ii) when the Trustees have determined that the matter
affects only the interests of one or more portfolios, only the
shareholders of such portfolio or portfolios shall be entitled to
vote.
Each share has one vote, with fractional shares voting
proportionately. Shares of each of the portfolios are freely
transferable, are entitled to dividends as declared by the
Trustees, and, if the portfolio were liquidated, would receive
the net assets of the portfolio. The Trust may suspend the sale
of shares of any portfolio at any time and may refuse any order
to purchase shares. Although the Trust 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.
Shares of the funds may only be purchased by an insurance company
separate account. For matters requiring shareholder approval,
you may be able to instruct the insurance company separate
account how to vote the fund shares attributable to your contract
or policy. See the Voting Rights section of your insurance
product prospectus.
The funds' Trustees: George Putnam,* Chairman. President of the
Putnam funds. Chairman and Director of Putnam Management and
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.,
Director of Safety 1st, Inc., Trustee of Salem Hospital and
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, Inc., 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.; 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 funds' 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 Trust, Putnam Management
or Putnam Mutual Funds.
About Your Investment
SALES AND REDEMPTIONS
The Trust has an underwriting agreement relating to the funds
with Putnam Mutual Funds, One Post Office Square, Boston,
Massachusetts 02109. Putnam Mutual Funds presently offers shares
of each fund of the Trust continuously to separate accounts of
various insurers. The underwriting agreement presently provides
that Putnam Mutual Funds accepts orders for shares at net asset
value and no sales commission or load is charged. Putnam Mutual
Funds may, at its expense, provide promotional incentives to
dealers that sell variable insurance products.
Shares are sold or redeemed at the net asset value per share next
determined after receipt of an order, except that, in the case of
Putnam VT Money Market Fund, purchases will not be effected until
the next determination of net asset value after federal funds
have been made available to the Trust. Orders for purchases or
sales of shares of a fund must be received by Putnam Mutual Funds
before the close of regular trading on the New York Stock
Exchange in order to receive that day's net asset value. No fee
is charged to a separate account when it redeems fund shares.
Please check with your insurance company to determine the funds
available under your variable annuity contract or variable life
insurance policy. Certain funds may not be available in your
state due to various insurance regulations. Inclusion in this
prospectus of a fund that is not available in your state is not
to be considered a solicitation. This prospectus should be read
in conjunction with the prospectus of the separate account of the
specific insurance product which accompanies this prospectus.
Each fund currently does not foresee any disadvantages to
policyowners arising out of the fact that each fund offers its
shares to separate accounts of various insurance companies to
serve as the investment medium for their variable products.
Nevertheless, the Trustees intend to monitor events in order to
identify any material irreconcilable conflicts which may possibly
arise, and to determine what action, if any, should be taken in
response to such conflicts. If such a conflict were to occur,
one or more insurance companies' separate accounts might be
required to withdraw their investments in one or more funds and
shares of another fund may be substituted. This might force a
fund to sell portfolio securities at disadvantageous prices. In
addition, the Trustees may refuse to sell shares of any fund to
any separate account or may suspend or terminate the offering of
shares of any fund if such action is required by law or
regulatory authority or is in the best interests of the
shareholders of the fund.
Under unusual circumstances, the Trust may suspend repurchases or
postpone payment for up to seven days or longer, as permitted by
federal securities law.
EXCHANGE PRIVILEGE
A shareholder may exchange shares of any fund in the Trust for
shares of any other fund in the Trust on the basis of their
respective net asset values. Exchanges may not be made into
portfolios of the Trust not offered by your variable annuity
contract or variable life policy.
HOW A FUND VALUES ITS SHARES
The Trust calculates the net asset value of a share of each fund
by dividing the total value of the assets of the fund, less
liabilities, by the number of shares of the fund outstanding.
Shares are valued as of the close of regular trading on the New
York Stock Exchange each day the Exchange is open.
Except for securities held by Putnam VT Money Market Fund,
securities for which market quotations are readily available are
valued at market value. 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. The Trust values the portfolio investments of Putnam
VT Money Market Fund at amortized cost pursuant to Rule 2a-7
under the Investment Company Act of 1940.
HOW THE FUNDS MAKE DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION
Putnam VT Money Market Fund will declare a dividend of its net
investment income daily and distribute such dividend monthly.
Each month's distributions will be paid on the first business day
of the next month. Since the net income of Putnam VT Money
Market Fund is declared as a dividend each time it is determined,
the net asset value per share of the fund remains at $1.00
immediately after each determination and dividend declaration.
Each of the other funds will distribute any net investment income
and net realized capital gains at least annually. Both types of
distributions will be made in shares of such funds unless an
election is made on behalf of a separate account to receive some
or all of the distributions in cash.
Distributions are reinvested without a sales charge, using the
net asset value determined on the ex-dividend date, except that
with respect to Putnam VT Money Market Fund, distributions are
reinvested using the net asset value determined on the day
following the distribution payment date.
Each fund intends to qualify each year as a "regulated investment
company" for federal income tax purposes and to meet all other
requirements necessary for it to be relieved of federal income
taxes on income and gains it distributes to the separate
accounts. For information concerning federal income tax
consequences for the holders of variable annuity contracts and
variable life insurance policies, contract holders should consult
the prospectus of the applicable separate account.
Internal Revenue Service regulations applicable to variable
annuity and variable life insurance separate accounts generally
require that portfolios that serve as the funding vehicles solely
for such separate accounts invest no more than 55% of the value
of their assets in one investment, 70% in two investments, 80% in
three investments and 90% in four investments. Alternatively, a
portfolio will be treated as meeting these requirements for any
quarter of its taxable year if, as of the close of such quarter,
the portfolio meets the diversification requirements applicable
to regulated investment companies (see "Taxes" in the SAI) and no
more than 55% of the value of its total assets consists of cash
and cash items (including receivables), U.S. government
securities and securities of other regulated investment
companies. Each of the funds intends to comply with these
requirements.
Fund investments in foreign securities may be subject to
withholding taxes at the source on dividend or interest payments.
In that case, a fund's yield on those securities would be
decreased.
Fund transactions in foreign currencies and hedging activities
will likely produce a difference between book income and taxable
income. This difference may cause a portion of a fund's income
distributions to constitute a return of capital for tax purposes
or require a fund to make distributions exceeding book income to
qualify as a regulated investment company for tax purposes.
Investment in an entity that qualifies as a "passive foreign
investment company" under the Code could subject a fund to a U.S.
federal income tax or other charge on certain "excess
distributions" with respect to the investment, and on the
proceeds from disposition of the investment.
FINANCIAL INFORMATION
It is expected that owners of the variable annuity contracts and
variable life insurance policies who have contract or policy
values allocated to the funds will receive an unaudited semi-
annual financial statement and an audited annual financial
statement for such funds. These reports show the investments
owned by each fund and provide other relevant information about
the fund.
About Putnam Investments, Inc.
Putnam Management has been managing mutual funds since 1937.
Putnam Mutual Funds is the principal underwriter of the Trust and
of other Putnam funds. Putnam Fiduciary Trust Company is the
custodian of the Trust. Putnam Investor Services, a division of
Putnam Fiduciary Trust Company, is the investor servicing and
transfer agent for the Trust.
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>
APPENDIX
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.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever earning any real investment standing.
Notes
MIG 1/VMIG 1 -- This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2 -- This designation denotes high quality. Margins
of protection are ample although not so large as in the preceding
group.
Commercial paper
Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced
by the following characteristics:
- -- Leading market positions in well established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
- -- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- -- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
This will normally be evidenced by many of the characteristics
cited above to a lesser degree. Earnings trends and coverage
ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity
is maintained.
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, on balance as predominantly speculative with respect to
capacity to pay interest and repay principal, in accordance with
the terms of the obligation. `BB' indicates the lowest 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.
CC -- The rating `CC' typically is applied to debt subordinated
to senior debt that is assigned an actual or implied `CCC'
rating.
<PAGE>
C -- The rating `C' typically is applied to debt subordinated to
senior debt which is assigned an actual or implied `CCC-' debt
rating. The ` C-' rating may be used to cover a situation
where bankruptcy petition has been filed, but debt service
payments are continued.
D -- Bonds rated `D' are in payment default. The
`D' rating category is used when interest payments or
principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The
`D' rating also will be used on the filing of a bankruptcy
petition if debt service payments are jeopardized.
Notes
SP-1 -- Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given a
plus sign (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
SP-3 -- Speculative capacity to pay principal and interest.
Commercial paper
A-1 -- This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with
a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated `A-1'.
A-3 -- Issues carrying this designation have adequate capacity
for timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
<PAGE>
Putnam Variable Trust
One Post Office Square
Boston, MA 02109
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 02109
Toll-free 1-800-225-1581
<PAGE>
PUTNAM VARIABLE TRUST
FORM N-1A
PART B
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
May 1, 1996, as revised January 1, 1997
This SAI is not a prospectus and is only authorized for
distribution when accompanied or preceded by the prospectus of
the Trust dated May 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 Trust has more
than one form of current prospectus, each reference to the
prospectus in this SAI shall include all the Trust'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.
The Report of the Trust's independent accountants and the audited
financial statements of the Trust are incorporated by reference
into this SAI.
Table of Contents
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .B-2
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . .
. . . .B-2
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.B- 30
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . .
.B- 33
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . .
.B- 35
INVESTMENT PERFORMANCE OF THE TRUST. . . . . . . . . . . . . .
.B- 68
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . .
.B- 70
SUSPENSION OF REDEMPTIONS. . . . . . . . . . . . . . . . . . .
.B- 73
SHAREHOLDER LIABILITY. . . . . . . . . . . . . . . . . . . . .
.B- 73
CUSTODIAN. . . . . . . . . . . . . . . . . . . . . . . . . . .
.B- 74
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS . . . . . . .
.B- 75
<PAGE>
PUTNAM VARIABLE TRUST
SAI
DEFINITIONS
The "Trust" -- Putnam Variable Trust.
"Putnam Management" -- Putnam Investment Management,
Inc., the Trust's investment
manager.
"Putnam Mutual Funds" -- Putnam Mutual Funds Corp., the
Trust's principal underwriter.
"Putnam Fiduciary Trust -- Putnam Fiduciary Trust Company,
Company" the Trust's custodian.
"Putnam Investor Services" -- Putnam Investor Services, a
division of Putnam Fiduciary
Trust Company, the Trust's
investor servicing agent.
INVESTMENT OBJECTIVES AND POLICIES
The Trust consists of sixteen separate investment portfolios (the
"funds") with differing investment objectives and policies:
Putnam VT Asia Pacific Growth Fund, Putnam VT Diversified Income
Fund, Putnam VT Global Asset Allocation Fund, Putnam VT Global
Growth Fund, Putnam VT Growth and Income Fund, Putnam VT High
Yield Fund, Putnam VT International Growth Fund, Putnam VT
International Growth and Income Fund, Putnam VT International New
Opportunities Fund, Putnam VT Money Market Fund, Putnam VT New
Opportunities Fund, Putnam VT New Value Fund, Putnam VT U.S.
Government and High Quality Bond Fund, Putnam VT Utilities Growth
and Income Fund, Putnam VT Vista Fund and Putnam VT Voyager Fund.
The investment objectives and policies of the funds are described
in the prospectus offering such funds. This SAI contains, among
other things, the investment restrictions of the funds. It also
contains information concerning certain investment practices in
which some or all of the funds may engage. The prospectus
indicates which practices are applicable to each fund which it
offers.
Except as described below under "Investment Restrictions of the
Trust," the investment policies described in the prospectus and
in this SAI are not fundamental, and the Trustees may change such
policies without shareholder approval. As a matter of policy,
the Trustees would not materially change the funds' investment
objectives without shareholder approval.
<PAGE>
Short-term Trading
In seeking a fund's objective(s), Putnam Management will buy or
sell portfolio securities whenever Putnam Management believes it
appropriate to do so. In deciding whether to sell a portfolio
security, Putnam Management does not consider how long the fund
has owned the security. From time to time the fund will buy
securities intending to seek short-term trading profits. A
change in the securities held by the fund is known as "portfolio
turnover" and generally involves some expense to the fund. This
expense may include brokerage commissions or dealer markups and
other transaction costs on both the sale of securities and the
reinvestment of the proceeds in other securities. If sales of
portfolio securities cause the fund to realize net short-term
capital gains, such gains will be taxable as ordinary income. As
a result of the fund's investment policies, under certain market
conditions the fund's portfolio turnover rate may be higher than
that of other mutual funds. Portfolio turnover rate for a fiscal
year is the ratio of the lesser of purchases or sales of
portfolio securities to the monthly average of the value of
portfolio securities -- excluding securities whose maturities at
acquisition were one year or less. A fund's portfolio turnover
rate is not a limiting factor when Putnam Management considers a
change in the fund's portfolio.
Lower-rated Securities
Each fund may invest in lower-rated fixed-income securities
(commonly known as "junk bonds") to the extent described in the
prospectus. The lower ratings of certain securities held by a
fund reflect a greater possibility that adverse changes in the
financial condition of the issuer or in general economic
conditions, or both, or an unanticipated rise in interest rates,
may impair the ability of the issuer to make payments of interest
and principal. The inability (or perceived inability) of issuers
to make timely payment of interest and principal would likely
make the values of securities held by a fund more volatile and
could limit a fund's ability to sell its securities at prices
approximating the values the fund had placed on such securities.
In the absence of a liquid trading market for securities held by
it, a fund at times may be unable to establish the fair value of
such securities.
Securities ratings are based largely on the issuer's historical
financial condition and the rating agencies' analysis at the time
of rating. Consequently, the rating assigned to any particular
security is not necessarily a reflection of the issuer's current
financial condition, which may be better or worse than the rating
would indicate. In addition, the rating assigned to a security
by Moody's Investors Service, Inc. or Standard & Poor's (or by
any other nationally recognized securities rating organization)
does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the
security. See the prospectus for a description of security
ratings.
Like those of other fixed-income securities, the values of lower-
rated securities fluctuate in response to changes in interest
rates. A decrease in interest rates will generally result in an
increase in the value of a fund's assets. Conversely, during
periods of rising interest rates, the value of a fund's assets
will generally decline. The values of lower-rated securities may
often be affected to a greater extent by changes in general
economic conditions and business conditions affecting the issuers
of such securities and their industries. Negative publicity or
investor perceptions may also adversely affect the values of
lower-rated securities. Changes by recognized rating services in
their ratings of any fixed-income security and changes in the
ability of an issuer to make payments of interest and principal
may also affect the value of these investments. Changes in the
value of portfolio securities generally will not affect income
derived from these securities, but will affect a fund's net asset
value. A fund will not necessarily dispose of a security when
its rating is reduced below its rating at the time of purchase.
However, Putnam Management will monitor the investment to
determine whether its retention will assist in meeting a fund's
investment objective(s).
Issuers of lower-rated securities are often highly leveraged, so
that their ability to service their debt obligations during an
economic downturn or during sustained periods of rising interest
rates may be impaired. Such issuers may not have more
traditional methods of financing available to them and may be
unable to repay outstanding obligations at maturity by
refinancing. The risk of loss due to default in payment of
interest or repayment of principal by such issuers is
significantly greater because such securities frequently are
unsecured and subordinated to the prior payment of senior
indebtedness.
At times, a substantial portion of a fund's assets may be
invested in securities as to which the fund, by itself or
together with other funds and accounts managed by Putnam
Management and its affiliates, holds all or a major portion.
Although Putnam Management generally considers such securities to
be liquid because of the availability of an institutional market
for such securities, it is possible that, under adverse market or
economic conditions or in the event of adverse changes in the
financial condition of the issuer, a fund could find it more
difficult to sell these securities when Putnam Management
believes it advisable to do so or may be able to sell the
securities only at prices lower than if they were more widely
held. Under these circumstances, it may also be more difficult
to determine the fair value of such securities for purposes of
computing a fund's net asset value. In order to enforce its
rights in the event of a default under such securities, a fund
may be required to participate in various legal proceedings or
take possession of and manage assets securing the issuer's
obligations on such securities. This could increase the fund's
operating expenses and adversely affect the fund's net asset
value. In addition, each fund's intention to qualify as a
"regulated investment company" under the Internal Revenue Code
may limit the extent to which a fund may exercise its rights by
taking possession of such assets.
Certain securities held by a fund may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were
to redeem securities held by a fund during a time of declining
interest rates, the fund may not be able to reinvest the proceeds
in securities providing the same investment return as the
securities redeemed.
A fund may at times invest without limit in so-called "zero-
coupon" bonds and "payment-in-kind" bonds identified in the
prospectus, unless otherwise specified in the prospectus. Zero-
coupon bonds are issued at a significant discount from their
principal amount in lieu of paying interest periodically.
Payment-in-kind bonds allow the issuer, at its option, to make
current interest payments on the bonds either in cash or in
additional bonds. Because zero-coupon bonds and payment-in-kind
bonds do not pay current interest in cash, their
values are subject to greater fluctuation in response to changes
in market interest rates than bonds that pay interest
currently in cash. Both zero-coupon and payment-in-kind bonds
allow an issuer to avoid the need to generate cash to meet
current interest payments. Accordingly, such bonds may involve
greater credit risks than bonds paying interest currently in
cash. Even though such bonds do not pay current interest in
cash, a fund is nonetheless required to accrue interest income on
such investments and to distribute such amounts at least annually
to shareholders. Thus, it may be necessary at times for a
fund to liquidate other investments in order to satisfy its
dividend requirements.
Investments in Premium Securities
Unless otherwise specified in the prospectus or elsewhere in this
SAI, if a fund may invest in premium securities, it may do so
without limit.
Investments in Miscellaneous Fixed-Income Securities
Unless otherwise specified in the prospectus or elsewhere in this
SAI, if a fund may invest in inverse floating obligations,
premium securities, or interest-only or principal-only classes of
mortgage-backed securities (IOs and POs), it may do so without
limit. None of the funds, however, currently intends to invest
more than 15% of its assets in inverse floating obligations or
more than 35% of its assets in IOs and POs under normal market
conditions.
Private Placements
Each fund may invest in securities that are purchased in private
placements and, accordingly, are subject to restrictions on
resale as a matter of contract or under federal securities laws.
Because there may be relatively few potential purchasers for such
investments, especially under adverse market or economic
conditions or in the event of adverse changes in the financial
condition of the issuer, a fund could find it more difficult to
sell such securities when Putnam Management believes it advisable
to do so or may be able to sell such securities only at prices
lower than if such securities were more widely held. At times,
it may also be more difficult to determine the fair value of such
securities for purposes of computing the fund's net asset value.
Loan Participations
A fund may invest in "loan participations." By purchasing a loan
participation, a fund acquires some or all of the interest of a
bank or other lending institution in a loan to a particular
borrower. Many such loans are secured, and most impose
restrictive covenants which must be met by the borrower.
The loans in which a fund may invest are typically made by a
syndicate of banks, represented by an agent bank which has
negotiated and structured the loan and which is responsible
generally for collecting interest, principal, and other amounts
from the borrower on its own behalf and on behalf of the other
lending institutions in the syndicate and for enforcing its and
their other rights against the borrower. Each of the lending
institutions, including the agent bank, lends to the borrower a
portion of the total amount of the loan, and retains the
corresponding interest in the loan.
A fund's ability to receive payments of principal and interest
and other amounts in connection with loan participations held by
it will depend primarily on the financial condition of the
borrower. The failure by a fund to receive scheduled interest of
principal payments on a loan participation would adversely affect
the income of the fund and would likely reduce the value of its
assets, which would be reflected in a reduction in a fund's net
asset value. Banks and other lending institutions generally
perform a credit analysis of the borrower before originating a
loan or participating in a lending syndicate. In selecting the
loan participations in which a fund will invest, however, Putnam
Management will not rely solely on that credit analysis, but will
perform its own investment analysis of the borrowers. Putnam
Management's analysis may include consideration of the borrower's
financial strength and experience, and managerial experience,
debt coverage, additional borrowing requirements or debt maturity
schedules, changing financial conditions, and responsiveness to
changes in business conditions and interest rates. Because loan
participations in which a fund may invest are not generally rated
by independent credit rating agencies, a decision by a fund to
invest in a particular loan participation will depend almost
exclusively on Putnam Management's credit analysis, and that of
the original lending institutions, of the borrower.
Loan participations may be structured in different forms,
including novations, assignments, and participating interests.
In a novation, a fund assumes all of the rights of a lending
institution in a loan, including the right to receive payments of
principal and interest and other amounts directly from the
borrower and to enforce its rights as a lender directly against
the borrower. A fund assumes the position of a co-lender with
other syndicate members. As an alternative, a fund may purchase
an assignment of a portion of a lender's interest in a loan. In
this case, a fund may be required generally to rely upon the
assigning bank to demand payment and enforce its rights against
the borrower, but would otherwise be entitled to all of such
bank's rights in the loan. A fund may also purchase a
participating interest in a portion of the rights of a lending
institution in a loan. In such case, it will be entitled to
receive payments of principal, interest, and premium, if any, but
will not generally be entitled to enforce its rights directly
against the agent bank or the borrower, but must rely for that
purpose on the lending institution. A fund may also acquire a
loan participation directly by acting as a member of the original
lending syndicate.
A fund will in many cases be required to rely upon the lending
institution from which it purchases the loan participation to
collect and pass on to a fund such payments and to enforce a
fund's rights under the loan. As a result, an insolvency,
bankruptcy, or reorganization of the lending institution may
delay or prevent a fund from receiving principal, interest, and
other amounts with respect to the underlying loan. When a fund
is required to rely upon a lending institution to pay to the fund
principal, interest, and other amounts received by it, Putnam
Management will also evaluate the creditworthiness of the lending
institution.
The borrower of a loan in which a fund holds a participation
interest may, either at its own election or pursuant to terms of
the loan documentation, prepay amounts of the loan from time to
time. There is no assurance that a fund will be able to reinvest
the proceeds of any loan prepayment at the same interest rate or
on the same terms as those of the original loan participation.
Corporate loans in which a fund may purchase a loan participation
are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs, and other
corporate activities. Under current market conditions, most of
the corporate loan participations purchased by a fund will
represent interests in loans made to finance highly leveraged
corporate acquisitions, known as "leveraged buy-out"
transactions. The highly leveraged capital structure of the
borrowers in such transactions may make such loans especially
vulnerable to adverse changes in economic or market conditions.
In addition, loan participations generally are subject to
restrictions on transfer, and only limited opportunities may
exist to sell such participations in secondary markets. As a
result, a fund may be unable to sell loan participations at a
time when it may otherwise be desirable to do so or may be able
to sell them only at a price that is less than their fair market
value.
Certain of the loan participations acquired by a fund may involve
revolving credit facilities under which a borrower may from time
to time borrow and repay amounts up to the maximum amount of the
facility. In such cases, a fund would have an obligation to
advance its portion of such additional borrowings upon the terms
specified in the loan participation. To the extent that a fund
is committed to make additional loans under such a participation,
it will at all times hold and maintain in a segregated account
liquid assets in an amount sufficient to meet such commitments.
Certain of the loan participations acquired by a fund may also
involve loans made in foreign currencies. A fund's investment in
such participations would involve the risks of currency
fluctuations described above with respect to investments in the
foreign securities.
Mortgage Related Securities
To the extent described in the prospectus, each fund may invest
in mortgage-backed securities, including collateralized mortgage
obligations ("CMOs") and certain stripped mortgage-backed
securities. CMOs and other mortgage-backed securities represent
a participation in, or are secured by, mortgage loans.
Mortgage-backed securities have yield and maturity
characteristics corresponding to the underlying assets. Unlike
traditional debt securities, which may pay a fixed rate of
interest until maturity, when the entire principal amount comes
due, payments on certain mortgage-backed securities include both
interest and a partial repayment of principal. Besides the
scheduled repayment of principal, repayments of principal may
result from the voluntary prepayment, refinancing, or foreclosure
of the underlying mortgage loans. If property owners make
unscheduled prepayments of their mortgage loans, these
prepayments will result in early payment of the applicable
mortgage-related securities. In that event a fund may be
unable to invest the proceeds from the early payment of the
mortgage-related securities in an investment that provides as
high a yield as the mortgage-related securities. Consequently,
early payment associated with mortgage-related securities may
cause these securities to experience significantly greater price
and yield volatility than that experienced by traditional fixed-
income securities. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates,
general economic conditions, the location and age of the mortgage
and other social and demographic conditions. During periods of
falling interest rates, the rate of mortgage prepayments tends to
increase, thereby tending to decrease the life of mortgage-
related securities. During periods of rising interest rates, the
rate of mortgage prepayments usually decreases, thereby tending
to increase the life of mortgage-related securities. If the life
of a mortgage-related security is inaccurately predicted,
a fund may not be able to realize the rate of return it
expected.
Mortgage-backed securities are less effective than other types of
securities as a means of "locking in" attractive long-term
interest rates. One reason is the need to reinvest prepayments
of principal; another is the possibility of significant
unscheduled prepayments resulting from declines in interest
rates. These prepayments would have to be reinvested at lower
rates. As a result, these securities may have less potential for
capital appreciation during periods of declining interest rates
than other securities of comparable maturities, although they may
have a similar risk of decline in market value during periods of
rising interest rates. Prepayments may also significantly
shorten the effective maturities of these securities, especially
during periods of declining interest rates. Conversely, during
periods of rising interest rates, a reduction in prepayments may
increase the effective maturities of these securities, subjecting
them to a greater risk of decline in market value in response to
rising interest rates than traditional debt securities, and,
therefore, potentially increasing a fund's volatility
.
Prepayments may cause losses on securities purchased at a
premium. At times, some of the mortgage-backed securities in
which a fund may invest will have higher than market interest
rates and therefore will be purchased at a premium above their
par value. Unscheduled prepayments, which are made at par, will
cause the fund to experience a loss equal to any unamortized
premium.
CMOs may be issued by a U.S. government agency or instrumentality
or by a private issuer. Although payment of the principal of,
and interest on, the underlying collateral securing privately
issued CMOs may be guaranteed by the U.S. government or its
agencies or instrumentalities, these CMOs represent obligations
solely of the private issuer and are not insured or guaranteed by
the U.S. government, its agencies or instrumentalities or any
other person or entity.
Prepayments could cause early retirement of CMOs. CMOs are
designed to allocate the risk of prepayment among investors by
issuing multiple classes of securities, each having different
maturities, interest rates and payment schedules, and with the
principal and interest on the underlying mortgages allocated
among the several classes in various ways. Payment of interest
or principal on some classes or series of CMOs may be subject to
contingencies or some classes or series may bear some or all of
the risk of default on the underlying mortgages. CMOS of
different classes or series are generally retired in sequence as
the underlying mortgage loans in the mortgage pool are repaid.
If enough mortgages are repaid ahead of schedule, the classes or
series of a CMO with the earliest maturities generally will be
retired prior to their maturities. Thus, the early retirement of
particular classes or series of a CMO held by a fund would have
the same effect as the prepayment of mortgages underlying other
mortgage-backed securities. Conversely, slower than anticipated
prepayments can extend the effective maturities of CMOs,
subjecting them to a greater risk of decline in market value in
response to rising interest rates than traditional debt
securities, and, therefore, potentially increasing the volatility
of the fund.
Prepayments could result in losses on stripped mortgage-backed
securities. Stripped mortgage-backed securities are usually
structured with two classes that receive different portions of
the interest and principal distributions on a pool of mortgage
loans. A fund may invest in both the interest-only or "IO" class
and the principal-only or "PO" class. The yield to maturity on
an IO class of stripped mortgage-backed securities is extremely
sensitive not only to changes in prevailing interest rates but
also to the rate of principal payments (including prepayments) on
the underlying assets. A rapid rate of principal prepayments may
have a measurable adverse effect on the fund's yield to maturity
to the extent it invests in IOs. If the assets underlying the IO
experience greater than anticipated prepayments of principal, the
fund may fail to recoup fully its initial investment in these
securities. Conversely, POs tend to increase in value if
prepayments are greater than anticipated and decline if
prepayments are slower than anticipated.
The secondary market for stripped mortgage-backed securities may
be more volatile and less liquid than that for other mortgage-
backed securities, potentially limiting a fund's ability to buy
or sell those securities at any particular time.
<PAGE>
Securities Loans
Each fund may make secured loans of its portfolio securities, on
either a short-term or long-term basis, amounting to not more
than 25% of its total assets, thereby realizing additional
income. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delay in recovery of
the securities or possible loss of rights in the collateral
should the borrower fail financially. As a matter of policy,
securities loans are made to broker-dealers pursuant to
agreements requiring that the loans be continuously secured by
collateral consisting of cash or short-term debt obligations at
least equal at all times to the value of the securities on loan,
"marked-to-market" daily. The borrower pays to the fund an
amount equal to any dividends or interest received on securities
lent. The fund retains all or a portion of the interest received
on investment of the cash collateral or receives a fee from the
borrower. Although voting rights, or rights to consent, with
respect to the loaned securities may pass to the borrower, the
fund retains the right to call the loans at any time on
reasonable notice, and it will do so to enable the fund to
exercise voting rights on any matters materially affecting the
investment. The fund may also call such loans in order to sell
the securities.
Forward Commitments
Each fund may enter into contracts to purchase securities for a
fixed price at a future date beyond customary settlement time
("forward commitments") if the fund holds, and maintains until
the settlement date in a segregated account, cash or high-grade
debt obligations in an amount sufficient to meet the purchase
price, or if the fund enters into offsetting contracts for the
forward sale of other securities it owns. In the case of to-be-
announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when the fund enters
into a contract, with the actual principal amount being within a
specified range of the estimate. Forward commitments may be
considered securities in themselves, and involve a risk of loss
if the value of the security to be purchased declines prior to
the settlement date, which risk is in addition to the risk of
decline in the value of the fund's other assets. Where such
purchases are made through dealers, the fund relies on the dealer
to consummate the sale. The dealer's failure to do so may result
in the loss to the fund of an advantageous yield or price.
Although a fund will generally enter into forward commitments
with the intention of acquiring securities for its portfolio or
for delivery pursuant to options contracts it has entered into, a
fund may dispose of a commitment prior to settlement if Putnam
Management deems it appropriate to do so. A fund may realize
short-term profits or losses upon the sale of forward
commitments.
A fund may enter into TBA sale commitments to hedge its portfolio
positions or to sell securities it owns under delayed delivery
arrangements. Proceeds of TBA sale commitments are not received
until the contractual settlement date. During the time a TBA
sale commitment is outstanding, equivalent deliverable
securities, or an offsetting TBA purchase commitment deliverable
on or before the sale commitment date, are held as "cover" for
the transaction. Unsettled TBA sale commitments are valued at
the current market value of the underlying securities. If the
TBA sale commitment is closed through the acquisition of an
offsetting purchase commitment, that fund realizes a gain or loss
on the commitment without regard to any unrealized gain or loss
on the underlying security. If a fund delivers securities under
the commitment, the fund realizes a gain or loss from the sale of
the securities based upon the unit price established at the date
the commitment was entered into.
Repurchase Agreements
Each fund may enter into repurchase agreements up to the limit
specified in the prospectus. A repurchase agreement is a
contract under which a fund acquires a security for a relatively
short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the fund to resell
such security at a fixed time and price (representing the fund's
cost plus interest). It is the Trust's present intention to
enter into repurchase agreements only with commercial banks and
registered broker-dealers approved by the Trustees and only with
respect to obligations of the U.S. government or its agencies or
instrumentalities. Repurchase agreements may also be viewed as
loans made by a fund which are collateralized by the securities
subject to repurchase. Putnam Management will monitor such
transactions to ensure that the value of the underlying
securities will be at least equal at all times to the total
amount of the repurchase obligation, including the interest
factor. If the seller defaults, a fund could realize a loss on
the sale of the underlying security to the extent that the
proceeds of sale including accrued interest are less than the
resale price provided in the agreement including interest. In
addition, if the seller should be involved in bankruptcy or
insolvency proceedings, a fund may incur delay and costs in
selling the underlying security or may suffer a loss of principal
and interest if the fund is treated as an unsecured creditor and
required to return the underlying collateral to the seller's
estate.
Pursuant to an exemptive order issued by the Securities and
Exchange Commission, the fund may transfer uninvested cash
balances into a joint account, along with cash of other Putnam
funds and certain other accounts. These balances may be invested
in one or more repurchase agreements and/or short-term money
market instruments.
Options on Securities
Writing covered options. Each fund may write covered call
options and covered put options on optionable securities held in
its portfolio, when in the opinion of Putnam Management such
transactions are consistent with a fund's investment objective(s)
and policies. Call options written by a fund give the purchaser
the right to buy the underlying securities from the fund at a
stated exercise price; put options give the purchaser the right
to sell the underlying securities to the fund at a stated price.
Each fund may write only covered options, which means that, so
long as a fund is obligated as the writer of a call option, it
will own the underlying securities subject to the option (or
comparable securities satisfying the cover requirements of
securities exchanges). In the case of put options, the fund will
hold cash and/or high-grade short-term debt obligations equal to
the price to be paid if the option is exercised. In addition,
the fund will be considered to have covered a put or call option
if and to the extent that it holds an option that offsets some or
all of the risk of the option it has written. Each fund may
write combinations of covered puts and calls on the same
underlying security.
A fund will receive a premium from writing a put or call option,
which increases the fund's return on the underlying security in
the event the option expires unexercised or is closed out at a
profit. The amount of the premium reflects, among other things,
the relationship between the exercise price and the current
market value of the underlying security, the volatility of the
underlying security, the amount of time remaining until
expiration, current interest rates, and the effect of supply and
demand in the options market and in the market for the underlying
security. By writing a call option, the fund limits its
opportunity to profit from any increase in the market value of
the underlying security above the exercise price of the option
but continues to bear the risk of a decline in the value of the
underlying security. By writing a put option, the fund assumes
the risk that it may be required to purchase the underlying
security for an exercise price higher than its then-current
market value, resulting in a potential capital loss.
A 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 offsetting option. The fund realizes a
profit or loss from a closing transaction if the cost of the
transaction (option premium plus transaction costs) is less or
more than the premium received from writing the option. If a
fund writes a call option but does not own the underlying
security, and when it writes a put option, the fund may be
required to deposit cash or securities with its broker as
"margin," or collateral, for its obligation to buy or sell the
underlying security. As the value of the underlying security
varies, the fund may have to deposit additional margin with the
broker. Margin requirements are complex and are fixed by
individual brokers, subject to minimum requirements currently
imposed by the Federal Reserve Board and by stock exchanges and
other self-regulatory organizations.
Purchasing put options. A fund may purchase put options to
protect its portfolio holdings in an underlying security against
a decline in market value. Such protection is provided during
the life of the put option since the fund, as holder of the
option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying
security's market price. In order for a put option to be
profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the
premium and transaction costs. By using put options in this
manner, the fund will reduce any profit it might otherwise have
realized from appreciation of the underlying security by the
premium paid for the put option and by transaction costs.
Purchasing call options. A fund may purchase call options to
hedge against an increase in the price of securities that the
fund wants ultimately to buy. Such hedge protection is provided
during the life of the call option since the fund, as holder of
the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying
security's market price. In order for a call option to be
profitable, the market price of the underlying security must rise
sufficiently above the exercise price to cover the premium and
transaction costs.
Risk Factors in Options Transactions
The successful use of a fund's options strategies depends on the
ability of Putnam Management to forecast correctly interest rate
and market movements. For example, if the fund were to write a
call option based on Putnam Management's expectation that the
price of the underlying security would fall, but the price were
to rise instead, the fund could be required to sell the security
upon exercise at a price below the current market price.
Similarly, if the fund were to write a put option based on Putnam
Management's expectation that the price of the underlying
security would rise, but the price were to fall instead, the fund
could be required to purchase the security upon exercise at a
price higher than the current market price.
When a fund purchases an option, it runs the risk that it will
lose its entire investment in the option in a relatively short
period of time, unless the fund exercises the option or enters
into a closing sale transaction before the option's expiration.
If the price of the underlying security does not rise (in the
case of a call) or fall (in the case of a put) to an extent
sufficient to cover the option premium and transaction costs, the
fund will lose part or all of its investment in the option. This
contrasts with an investment by the fund in the underlying
security, since the fund will not realize a loss if the
security's price does not change.
The effective use of options also depends on a fund's ability to
terminate option positions at times when Putnam Management deems
it desirable to do so. There is no assurance that the fund will
be able to effect closing transactions at any particular time or
at an acceptable price.
If a secondary market in options were to become unavailable, a
fund could no longer engage in closing transactions. Lack of
investor interest might adversely affect the liquidity of the
market for particular options or series of options. A market may
discontinue trading of a particular option or options generally.
In addition, a market could become temporarily unavailable if
unusual events -- such as volume in excess of trading or clearing
capability -- were to interrupt normal market operations.
A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening
transactions. For example, if an underlying security ceases to
meet qualifications imposed by the market or the Options Clearing
Corporation, new series of options on that security will no
longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options
market were to become unavailable, a fund as a holder of an
option would be able to realize profits or limit losses only by
exercising the option, and the fund, as option writer, would
remain obligated under the option until expiration or exercise.
Disruptions in the markets for the securities underlying options
purchased or sold by a fund could result in losses on the
options. If trading is interrupted in an underlying security,
the trading of options on that security is normally halted as
well. As a result, the fund as purchaser or writer of an option
will be unable to close out its positions until options trading
resumes, and it may be faced with considerable losses if trading
in the security reopens at a substantially different price. In
addition, the Options Clearing Corporation or other options
markets may impose exercise restrictions. If a prohibition on
exercise is imposed at the time when trading in the option has
also been halted, the fund as purchaser or writer of an option
will be locked into its position until one of the two
restrictions has been lifted. If the Options Clearing
Corporation were to determine that the available supply of an
underlying security appears insufficient to permit delivery by
the writers of all outstanding calls in the event of exercise,
the Options Clearing Corporation may prohibit indefinitely the
exercise of put options. The fund, as holder of such a put
option, could lose its entire investment if the prohibition
remained in effect until the put option's expiration.
Foreign-traded options are subject to many of the same risks
presented by internationally-traded securities. In addition,
because of time differences between the United States and
various foreign countries, and because different holidays are
observed in different countries, foreign options markets may be
open for trading during hours or on days when U.S. markets are
closed. As a result, option premiums may not reflect the current
prices of the underlying interest in the United States.
Over-the-counter ("OTC") options purchased by a fund and assets
held to cover OTC options written by the fund may, under certain
circumstances, be considered illiquid securities for purposes of
any limitation on the fund's ability to invest in illiquid
securities.
Futures Contracts and Related Options
Subject to applicable law, and unless otherwise specified in the
prospectus, a fund may invest without limit in the types of
futures contracts and related options identified in the
prospectus for hedging and non-hedging purposes, such as to
manage the effective duration of the fund's portfolio or as a
substitute for direct investment. A financial futures contract
sale creates an obligation by the seller to deliver the type of
financial instrument called for in the contract in a specified
delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to take delivery
of the type of financial instrument called for in the contract in
a specified delivery month at a stated price. The specific
instruments delivered or taken, respectively, at settlement date
are not determined until on or near that date. The determination
is made in accordance with the rules of the exchange on which the
futures contract sale or purchase was made. Futures contracts
are traded in the United States only on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for
such trading by the Commodities Futures Trading Commission (the
"CFTC"), and must be executed through a futures commission
merchant or brokerage firm which is a member of the relevant
contract market.
Although futures contracts (other than index futures) by their
terms call for actual delivery or acceptance of commodities or
securities, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery.
Closing out a futures contract sale is effected by purchasing a
futures contract for the same aggregate amount of the specific
type of financial instrument or commodity with the same delivery
date. If the price of the initial sale of the futures contract
exceeds the price of the offsetting purchase, the seller is paid
the difference and realizes a gain. Conversely, if the price of
the offsetting purchase exceeds the price of the initial sale,
the seller realizes a loss. If the fund is unable to enter into
a closing transaction, the amount of the fund's potential loss is
unlimited. The closing out of a futures contract purchase is
effected by the purchaser's entering into a futures contract
sale. If the offsetting sale price exceeds the purchase price,
the purchaser realizes a gain, and if the purchase price exceeds
the offsetting sale price, the purchaser realizes a loss. In
general, 40% of the gain or loss arising from the closing out of
a futures contract traded on an exchange approved by the CFTC is
treated as short-term gain or loss, and 60% is treated as long-
term gain or loss.
Unlike when a fund purchases or sells a security, no price is
paid or received by the fund upon the purchase or sale of a
futures contract. Upon entering into a contract, the fund is
required to deposit with its custodian in a segregated account in
the name of the futures broker an amount of liquid assets. This
amount is known as "initial margin." The nature of initial
margin in futures transactions is different from that of margin
in security transactions in that futures contract margin does not
involve the borrowing of funds to finance the transactions.
Rather, the initial margin is similar to a performance bond or
good faith deposit which is returned to the fund upon termination
of the futures contract, assuming all contractual obligations
have been satisfied. Futures contracts also involve brokerage
costs.
Subsequent payments, called "variation margin" or "maintenance
margin," to and from the broker (or the custodian) are made on a
daily basis as the price of the underlying security or commodity
fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "marking to
the market." For example, when a fund has purchased a futures
contract on a security and the price of the underlying security
has risen, that position will have increased in value and the
fund will receive from the broker a variation margin payment
based on that increase in value. Conversely, when the fund has
purchased a security futures contract and the price of the
underlying security has declined, the position would be less
valuable and the fund would be required to make a variation
margin payment to the broker.
A fund may elect to close some or all of its futures positions at
any time prior to their delivery date in order to reduce or
eliminate the hedge position then currently held by the fund.
The fund may close its positions by taking opposite positions
which will operate to terminate the fund's position in the
futures contracts. Final determinations of variation margin are
then made, additional cash is required to be paid by or released
to the fund, and the fund realizes a loss or a gain. Such
closing transactions involve additional commission costs.
None of the funds intends to purchase or sell 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
futures and related options positions and premiums paid for
outstanding options on futures contracts would exceed 5% of the
fund's net assets.
Options on futures contracts. A fund may purchase and write call
and put options on futures contracts it may buy or sell and enter
into closing transactions with respect to such options to
terminate existing positions. Options on futures contracts give
the purchaser the right in return for the premium paid to assume
a position in a futures contract at the specified option exercise
price at any time during the period of the option. The fund may
use options on futures contracts in lieu of writing options
directly on the underlying securities or purchasing and selling
the underlying futures contracts. For example, to hedge against
a possible decrease in the value of its portfolio securities, a
fund may purchase put options or write call options on futures
contracts rather than sell futures contracts. Similarly, a fund
may purchase call options or write put options on futures
contracts as a substitute for the purchase of futures contracts
to hedge against a possible increase in the price of securities
which the fund expects to purchase. Such options generally
operate in the same manner as options purchased or written
directly on the underlying investments.
As with options on securities, the holder or writer of an option
may terminate his position by selling or purchasing an offsetting
option. There is no guarantee that such closing transactions can
be effected.
A fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those
described above in connection with the discussion of futures
contracts.
Risks of transactions in futures contracts and related options.
Successful use of futures contracts by a fund is subject to
Putnam Management's ability to predict movements in various
factors affecting securities markets, including interest rates.
Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves
less potential risk to a fund because the maximum amount at risk
is the premium paid for the options (plus transaction costs).
However, there may be circumstances when the purchase of a call
or put option on a futures contract would result in a loss to a
fund when the purchase or sale of a futures contract would not,
such as when there is no movement in the prices of the hedged
investments. The writing of an option on a futures contract
involves risks similar to those risks relating to the sale of
futures contracts.
The use of options and futures strategies also involves the risk
of imperfect correlation among movements in the prices of the
securities underlying the futures and options purchased and sold
by the fund, of the options and futures contracts themselves,
and, in the case of hedging transactions, of the securities which
are the subject of a hedge.
There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render
certain market clearing facilities inadequate, and thereby result
in the institution by exchanges of special procedures which may
interfere with the timely execution of customer orders.
To reduce or eliminate a position held by a fund, the
fund may seek to close out a position. The ability to establish
and close out positions will be subject to the development and
maintenance of a liquid secondary market. It is not certain that
this market will develop or continue to exist for a particular
futures contract or option. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there
may be insufficient trading interest in certain contracts or
options; (ii) restrictions may be imposed by an exchange on
opening transactions or closing transactions or both; (iii)
trading halts, suspensions or other restrictions may be imposed
with respect to particular classes or series of contracts or
options, or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or a clearing corporation may not
at all times be adequate to handle current trading volume; or
(vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the
trading of contracts or options (or a particular class or series
of contracts or options), in which event the secondary market on
that exchange for such contracts or options (or in the class or
series of contracts or options) would cease to exist, although
outstanding contracts or options on the exchange that had been
issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with
their terms.
U.S. Treasury security futures contracts and options. U.S.
Treasury security futures contracts require the seller to
deliver, or the purchaser to take delivery of, the type of U.S.
Treasury security called for in the contract at a specified date
and price. Options on U.S. Treasury security futures contracts
give the purchaser the right in return for the premium paid to
assume a position in a U.S. Treasury security futures contract at
the specified option exercise price at any time during the period
of the option.
Successful use of U.S. Treasury security futures contracts by a
fund is subject to Putnam Management's ability to predict
movements in the direction of interest rates and other factors
affecting markets for debt securities. For example, if a fund
has sold U.S. Treasury security futures contracts in order to
hedge against the possibility of an increase in interest rates
which would adversely affect securities held in its portfolio,
and the prices of the fund's securities increase instead as a
result of a decline in interest rates, the fund will lose part or
all of the benefit of the increased value of its securities which
it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the fund
has insufficient cash, it may have to sell securities to meet
daily maintenance margin requirements at a time when it may be
disadvantageous to do so.
There is also a risk that price movements in U.S. Treasury
security futures contracts and related options will not correlate
closely with price movements in markets for particular
securities. For example, if a fund has hedged against a decline
in the values of fixed-income securities held by it by selling
Treasury security futures and the values of Treasury securities
subsequently increase while the values of its fixed-income
securities decrease, the fund would incur losses on both the
Treasury security futures contracts written by it and the
fixed-income securities held in its portfolio.
Index futures contracts. An index futures contract is a contract
to buy or sell units of an index at a specified future date at a
price agreed upon when the contract is made. Entering into a
contract to buy units of an index is commonly referred to as
buying or purchasing a contract or holding a long position in the
index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short
position. A unit is the current value of the index. A fund may
enter into stock index futures contracts, debt index futures
contracts, or other index futures contracts appropriate to its
objective(s). A fund may also purchase and sell options on index
futures contracts.
For example, the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500") is composed of 500 selected common stocks, most
of which are listed on the New York Stock Exchange. The S&P 500
assigns relative weightings to the common stocks included in the
Index, and the value fluctuates with changes in the market values
of those common stocks. In the case of the S&P 500, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500
were $150, one contract would be worth $75,000 (500 units x
$150). The stock index futures contract specifies that no
delivery of the actual stocks making up the index will take
place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the
difference between the contract price and the actual level of the
stock index at the expiration of the contract. For example, if a
fund enters into a futures contract to buy 500 units of the S&P
500 at a specified future date at a contract price of $150 and
the S&P 500 is at $154 on that future date, the fund will gain
$2,000 (500 units x gain of $4). If the fund enters into a
futures contract to sell 500 units of the stock index at a
specified future date at a contract price of $150 and the S&P 500
is at $152 on that future date, the fund will lose $1,000 (500
units x loss of $2).
There are several risks in connection with the use by a fund of
index futures. One risk arises because of the imperfect
correlation between movements in the prices of the index futures
and movements in the prices of securities which are the subject
of the hedge. Putnam Management will, however, attempt to reduce
this risk by buying or selling, to the extent possible, futures
on indices the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the
securities sought to be hedged.
Successful use of index futures by a fund is also subject to
Putnam Management's ability to predict movements in the market.
For example, it is possible that, where a fund has sold futures
to hedge its portfolio against a decline in the market, the index
on which the futures are written may advance and the value of
securities held in the fund's portfolio may decline. If this
occurred, the fund would lose money on the futures and also
experience a decline in value in its portfolio securities. It is
also possible that, if a fund has hedged against the possibility
of a decline in the market adversely affecting securities held in
its portfolio and securities prices increase instead, the fund
will lose part or all of the benefit of the increased value of
those securities it has hedged because it will have offsetting
losses in its futures positions. In addition, in such
situations, if the fund has insufficient cash, it may have to
sell securities to meet daily variation margin requirements at a
time when it is disadvantageous to do so.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the
index futures and the portion of the portfolio being hedged, the
prices of index futures may not correlate perfectly with
movements in the underlying index due to certain market
distortions. First, all participants in the futures market are
subject to margin deposit and maintenance requirements. Rather
than meeting additional margin deposit requirements, investors
may close futures contracts through offsetting transactions which
could distort the normal relationship between the index and
futures markets. Second, margin requirements in the futures
market are less onerous than margin requirements in the
securities market, and as a result the futures market may attract
more speculators than the securities market does. Increased
participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price
distortions in the futures market and also because of the
imperfect correlation between movements in the index and
movements in the prices of index futures, even a correct forecast
of general market trends by Putnam Management may still not
result in a profitable position over a short time period.
Options on stock index futures. Options on index futures are
similar to options on securities except that options on index
futures give the purchaser the right, in return for the premium
paid, to assume a position in an index futures contract (a long
position if the option is a call and a short position if the
option is a put), at a specified exercise price at any time
during the period of the option. Upon exercise of the option,
the delivery of the futures position by the writer of the option
to the holder of the option will be accompanied by delivery of
the accumulated balance in the writer's futures margin account
which represents the amount by which the market price of the
index futures contract, at exercise, exceeds (in the case of a
call) or is less than (in the case of a put) the exercise price
of the option on the index future. If an option is exercised on
the last trading day prior to its expiration date, the settlement
will be made entirely in cash equal to the difference between the
exercise price of the option and the closing level of the index
on which the future is based on the expiration date. Purchasers
of options who fail to exercise their options prior to the
exercise date suffer a loss of the premium paid.
Options on Indices
As an alternative to purchasing call and put options on index
futures, a fund may purchase call and put options on the
underlying indices themselves. Such options would be used in a
manner identical to the use of options on index futures.
Index Warrants
A fund may purchase put warrants and call warrants whose values
vary depending on the change in the value of one or more
specified securities indices ("index warrants"). Index warrants
are generally issued by banks or other financial institutions and
give the holder the right, at any time during the term of the
warrant, to receive upon exercise of the warrant a cash payment
from the issuer based on the value of the underlying index at the
time of exercise. In general, if the value of the underlying
index rises above the exercise price of the index warrant, the
holder of a call warrant will be entitled to receive a cash
payment from the issuer upon exercise based on the difference
between the value of the index and the exercise price of the
warrant; if the value of the underlying index falls, the holder
of a put warrant will be entitled to receive a cash payment from
the issuer upon exercise based on the difference between the
exercise price of the warrant and the value of the index. The
holder of a warrant would not be entitled to any payments from
the issuer at any time when, in the case of a call warrant, the
exercise price is greater than the value of the underlying index,
or, in the case of a put warrant, the exercise price is less than
the value of the underlying index. If the fund were not to
exercise an index warrant prior to its expiration, then the fund
would lose the purchase price paid for the warrant.
A fund will normally use index warrants in a manner similar to
its use of options on securities indices. The risks of a fund's
use of index warrants are generally similar to those relating to
its use of index options. Unlike most index options, however,
index warrants are issued in limited amounts and are not
obligations of a regulated clearing agency, but are backed only
by the credit of the bank or other institution which issues the
warrant. Also, index warrants generally have longer terms than
index options. Although the fund will normally invest only in
exchange-listed warrants, index warrants are not likely to be as
liquid as certain index options backed by a recognized clearing
agency. In addition, the terms of index warrants may limit the
fund's ability to exercise the warrants at such times, or in such
quantities, as the fund would otherwise wish to do.
Foreign Securities
Under its current policy, which may be changed without
shareholder approval, each fund may invest up to the limit of its
total assets specified in the prospectus in securities
principally traded in markets outside the United States.
Eurodollar certificates of deposit are excluded for purposes of
this limitation. Since foreign securities are normally
denominated and traded in foreign currencies, the value of a
fund's assets may be affected favorably or unfavorably by changes
in currency exchange rates, exchange control regulations
and restrictions or prohibitions on the repatriation of foreign
currencies. There may be less information publicly available
about a foreign company than about a U.S. company, and foreign
companies 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 companies
are less liquid and at times more volatile than securities of
comparable U.S. companies. 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 a fund's assets held abroad) and expenses
not present in the settlement of domestic investments.
In addition, there may be a possibility of nationalization or
expropriation of assets, imposition of currency exchange controls
or withholding taxes at the sources , confiscatory
taxation, political or financial instability and diplomatic
developments which could affect the value of a fund's investments
in certain foreign countries. 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 a fund's ability to invest in securities of
certain issuers located in those foreign countries. Special tax
considerations apply to foreign securities.
The risks described above, including the risks of nationalization
or expropriation of assets, are typically increased to the extent
that a fund invests in issuers located in less developed and
developing nations, whose securities markets are sometimes
referred to as "emerging securities markets." Investments in
securities located in such countries are speculative and subject
to certain special risks. Political and economic structures in
many of these countries may be in their infancy and developing
rapidly, and such countries may lack the social, political and
economic stability characteristic of more developed countries.
Certain of these countries have in the past failed to recognize
private property rights and have at times nationalized and
expropriated the assets of private companies.
The currencies of certain emerging market countries have
experienced a steady devaluation relative to the U.S. dollar, and
continued devaluations may adversely affect the value of a fund's
assets denominated in such currencies. Many emerging market
companies have experienced substantial, and in some periods
extremely high, rates of inflation for many years, and continued
inflation may adversely affect the economies and securities
markets of such countries.
In addition, unanticipated political or social developments may
affect the value of a fund's investments in these countries and
the availability to such fund of additional investments in these
countries. The small size, limited trading volume and relative
inexperience of the securities markets in these countries may
make a fund's investments in such countries illiquid and more
volatile than investments in more developed countries, and such
fund may be required to establish special custodial or other
arrangements before making investments in these countries. There
may be little financial or accounting information available with
respect to issuers located in these countries, and it may be
difficult as a result to assess the value or prospects of an
investment in such issuers.
Foreign Currency Transactions
Unless otherwise specified in the prospectus or this SAI, a fund
may engage without limit in currency exchange transactions,
including purchasing and selling foreign currency, foreign
currency options, foreign currency forward contracts and foreign
currency futures contracts and related options, to protect
against uncertainty in the level of future currency exchange
rates. In addition, a fund may write covered call and put
options on foreign currencies for the purpose of increasing its
current return.
Generally, a fund may engage in both "transaction hedging" and
"position hedging." When it engages in transaction hedging, the
fund enters into foreign currency transactions with respect to
specific receivables or payables, generally arising in connection
with the purchase or sale of portfolio securities. The fund will
engage in transaction hedging when it desires to "lock in" the
U.S. dollar price of a security it has agreed to purchase or
sell, or the U.S. dollar equivalent of a dividend or interest
payment in a foreign currency. By transaction hedging, the fund
will attempt to protect itself against a possible loss resulting
from an adverse change in the relationship between the U.S.
dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, or
on which the dividend or interest payment is earned, and the date
on which such payments are made or received.
A fund may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with the
settlement of transactions in portfolio securities denominated in
that foreign currency. If conditions warrant, for transaction
hedging purposes a fund may also enter into contracts to
purchase or sell foreign currencies at a future date ("forward
contracts") and purchase and sell foreign currency futures
contracts. A foreign currency forward contract is a
negotiated agreement to exchange currency at a future time at a
rate or rates that may be higher or lower than the spot rate.
Foreign currency futures contracts are standardized exchange-
traded contracts and have margin requirements. In addition, for
transaction hedging purposes a fund may also purchase or sell
exchange-listed and over-the-counter call and put options on
foreign currency futures contracts and on foreign currencies.
A fund's currency hedging transactions may call for the delivery
of one foreign currency in exchange for another foreign currency
and may at times not involve currencies in which its portfolio
securities are then denominated. Putnam Management will engage
in such "cross hedging" activities when it believes that such
transactions provide significant hedging opportunities for a
fund.
Cross hedging transactions by a fund involve the risk of
imperfect correlation between changes in the values of the
currencies to which such transactions relate and changes in the
value of the currency or other asset or liability which is the
subject of the hedge.
For transaction hedging purposes, a fund may also purchase
exchange-listed and over-the-counter call and put options on
foreign currency futures contracts and on foreign currencies. A
put option on a futures contract gives the fund the right to
assume a short position in the futures contract until expiration
of the option. A put option on a currency gives the fund the
right to sell the currency at an exercise price until the
expiration of the option. A call option on a futures contract
gives the fund the right to assume a long position in the futures
contract until the expiration of the option. A call option on a
currency gives the fund the right to purchase the currency at the
exercise price until the expiration of the option.
A fund may engage in position hedging to protect against a
decline in the value relative to the U.S. dollar of the
currencies in which its portfolio securities are denominated or
quoted (or an increase in the value of the currency in which the
securities the fund intends to buy are denominated, when the fund
holds cash or short-term investments). For position hedging
purposes, the fund may purchase or sell foreign currency futures
contracts, foreign currency forward contracts and options on
foreign currency futures contracts and on foreign currencies on
exchanges or in over-the-counter markets. In connection with
position hedging, a fund may also purchase or sell foreign
currency on a spot basis.
It is impossible to forecast with precision the market value of
portfolio securities at the expiration or maturity of a forward
or futures contract. Accordingly, it may be necessary for a fund
to purchase additional foreign currency on the spot market (and
bear the expense of such purchase) if the market value of the
security or securities being hedged is less than the amount of
foreign currency the fund is obligated to deliver and a decision
is made to sell the security or securities and make delivery of
the foreign currency. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the
sale of the portfolio security or securities if the market value
of such security or securities exceeds the amount of foreign
currency the fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in
the underlying prices of the securities which the fund owns or
intends to purchase or sell. They simply establish a rate of
exchange which one can achieve at some future point in time.
Additionally, although these techniques tend to minimize the risk
of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the
increase in value of such currency. See "Risk factors in options
transactions" above.
A fund may seek to increase its current return or to offset some
of the costs of hedging against fluctuations in current exchange
rates by writing covered call options and covered put options on
foreign currencies. The fund receives a premium from writing a
call or put option, which increases the fund's current return if
the option expires unexercised or is closed out at a net profit.
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 value of any currency, including U.S. dollars and foreign
currencies, may be affected by complex political and economic
factors applicable to the issuing country. In addition, the
exchange rates of foreign currencies (and therefore the values of
foreign currency options, forward contracts and futures
contracts) may be affected significantly, fixed, or supported
directly or indirectly by U.S. and foreign government actions.
Government intervention may increase risks involved in purchasing
or selling foreign currency options, forward contracts and
futures contracts, since exchange rates may not be free to
fluctuate in response to other market forces.
The value of a foreign currency option, forward contract or
futures contract reflects the value of an exchange rate, which in
turn reflects relative values of two currencies, the U.S. dollar
and the foreign currency in question. Because foreign currency
transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in
the exercise of foreign currency options, forward contracts and
futures contracts, investors may be disadvantaged by having to
deal in an odd-lot market for the underlying foreign currencies
in connection with options at prices that are less favorable than
for round lots. Foreign governmental restrictions or taxes could
result in adverse changes in the cost of acquiring or disposing
of foreign currencies.
There is no systematic reporting of last sale information for
foreign currencies and there is no regulatory requirement that
quotations available through dealers or other market sources be
firm or revised on a timely basis. Available quotation
information is generally representative of very large round-lot
transactions in the interbank market and thus may not reflect
exchange rates for smaller odd-lot transactions (less than $1
million) where rates may be less favorable. The interbank market
in foreign currencies is a global, around-the-clock market. To
the extent that options markets are closed while the markets for
the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be
reflected in the options markets.
The decision as to whether and to what extent a fund will engage
in foreign currency exchange transactions will depend on a number
of factors, including prevailing market conditions, the
composition of the fund's portfolio and the availability
of suitable transactions. Accordingly, there can be no assurance
that a fund will engage in foreign currency exchange transactions
at any given time or from time to time.
Currency forward and futures contracts. A forward foreign
currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number
of days from the date of the contract as agreed by the parties,
at a price set at the time of the contract. In the case of a
cancelable forward contract, the holder has the unilateral right
to cancel the contract at maturity by paying a specified fee.
The contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial
banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage
for trades. A foreign currency futures contract is a
standardized contract for the future delivery of a specified
amount of a foreign currency at a price set at the time of the
contract. Foreign currency futures contracts traded in the
United States are designed by and traded on exchanges regulated
by the CFTC, such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the
maturity date of a forward contract may be any fixed number of
days from the date of the contract agreed upon by the parties,
rather than a predetermined date in a given month. Forward
contracts may be in any amounts agreed upon by the parties rather
than predetermined amounts. Also, forward foreign exchange
contracts are traded directly between currency traders so that no
intermediary is required. A forward contract generally requires
no margin or other deposit.
At the maturity of a forward or futures contract, the fund may
either accept or make delivery of the currency specified in the
contract, or at or prior to maturity enter into a closing
transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts
are usually effected with the currency trader who is a party to
the original forward contract. Closing transactions with respect
to futures contracts are effected on a commodities exchange; a
clearing corporation associated with the exchange assumes
responsibility for closing out such contracts.
<PAGE>
Positions in the foreign currency futures contracts may be closed
out only on an exchange or board of trade which provides a
secondary market in such contracts. Although a fund intends to
purchase or sell foreign currency futures contracts only on
exchanges or boards of trade where there appears to be an active
secondary market, there is no assurance that a secondary market
on an exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be
possible to close a futures position and, in the event of adverse
price movements, the fund would continue to be required to make
daily cash payments of variation margin.
Foreign currency options. In general, options on foreign
currencies operate similarly to options on securities and are
subject to many of the risks described above. Foreign currency
options are traded primarily in the over-the-counter market,
although options on foreign currencies are also listed on several
exchanges. Options are traded not only on the currencies of
individual nations, but also on the European Currency Unit
("ECU"). The ECU is composed of amounts of a number of
currencies, and is the official medium of exchange of the
European Community's European Monetary System.
A fund will only purchase or write foreign currency options when
Putnam Management believes that a liquid secondary market exists
for such options. There can be no assurance that a liquid
secondary market will exist for a particular option at any
specific time. Options on foreign currencies are affected by all
of those factors which influence foreign exchange rates and
investments generally.
Settlement procedures. Settlement procedures relating to a
fund's investments in foreign securities and to the fund's
foreign currency exchange transactions may be more complex than
settlements with respect to investments in debt or equity
securities of U.S. issuers, and may involve certain risks not
present in the fund's domestic investments. For example,
settlement of transactions involving foreign securities or
foreign currencies may occur within a foreign country, and the
fund may be required to accept or make delivery of the underlying
securities or currency in conformity with any applicable U.S. or
foreign restrictions or regulations, and may be required to pay
any fees, taxes or charges associated with such delivery. Such
investments may also involve the risk that an entity involved in
the settlement may not meet its obligations.
Foreign currency conversion. Although foreign exchange dealers
do not charge a fee for currency conversion, they do realize a
profit based on the difference (the "spread") between prices at
which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to a fund at one
rate, while offering a lesser rate of exchange should the fund
desire to resell that currency to the dealer.
Restricted Securities
The SEC Staff currently takes the view that any delegation by the
Trustees of the authority to determine that a restricted security
is readily marketable (as described in the investment
restrictions of the funds) must be pursuant to written procedures
established by the Trustees. It is the present intention of the
Trustees that, if the Trustees decide to delegate such
determinations to Putnam Management or another person, they would
do so pursuant to written procedures, consistent with the Staff's
position. Should the Staff modify its position in the future,
the Trustees would consider what action would be appropriate in
light of the Staff's position at that time.
TAXES
Taxation of the Trust. Each fund intends to qualify each year as
a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). In order to so
qualify and to qualify for the special tax treatment accorded
regulated investment companies and their shareholders, each fund
must, among other things:
(a) derive at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, and
gains from the sale of stock, securities and foreign currencies,
or other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to its
business of investing in such stock, securities, or currencies;
(b) derive less than 30% of its gross income from the sale or
other disposition of certain assets (including stocks or
securities and certain options, futures contracts, forward
contracts and foreign currencies) held for less than three
months;
(c) distribute with respect to each taxable year at least 90%
of its taxable net investment income (exclusive of net capital
gains) and 90% of its net tax-exempt income; and
(d) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the market value of the fund's
assets is represented by cash and cash items, U.S. government
securities, securities of other regulated investment companies,
and other securities limited in respect of any one issuer to a
value not greater than 5% of the value of the fund's total assets
and to not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities (other than those of the
U.S. government or other regulated investment companies) of any
one issuer or of two or more issuers which the fund controls and
which are engaged in the same, similar, or related trades or
businesses.
If a fund qualifies as a regulated investment company that is
accorded special tax treatment, the fund will not be subject to
federal income tax on income paid to its shareholders in the form
of dividends (including capital gain dividends).
If a fund failed to qualify as a regulated investment company
accorded special tax treatment in any taxable year, the fund
would be subject to tax on its taxable income at corporate rates.
In addition, the fund could be required to recognize unrealized
gains, pay substantial taxes and interest and make substantial
distributions before requalifying as a regulated investment
company that is accorded special tax treatment.
If a fund fails to distribute in a calendar year substantially
all of its ordinary income for such year and substantially all of
its capital gain net income for the one-year period ending
October 31 (or later if the fund is permitted so to elect and so
elects), plus any retained amount from the prior year, the fund
will be subject to a 4% excise tax on the undistributed amounts.
A fund is exempt from this distribution requirement and excise
tax if at all times during the calendar year each shareholder in
the fund was "a segregated asset account of a life
insurance company held in connection with variable contracts."
Hedging transactions. If a fund engages in hedging transactions,
including hedging transactions in options, futures contracts, and
straddles, or other similar transactions, it will be subject to
special tax rules (including mark-to-market, straddle, wash sale,
and short sale rules), the effect of which may be to accelerate
income to the fund, defer losses to the fund, cause adjustments
in the holding periods of the fund's securities, or convert
short-term capital losses into long-term capital losses. These
rules could therefore affect the amount, timing and character of
the fund's distributions. The fund will endeavor to make any
available elections pertaining to such transactions in a manner
believed to be in the best interests of the fund.
Under the 30% of gross income test described above (see "Taxation
of the Trust"), a fund will be restricted in selling assets held
or considered under Code rules to have been held for less than
three months, and in engaging in certain hedging transactions
(including hedging transactions in options and futures) that in
some circumstances could cause certain fund assets to be treated
as held for less than three months.
<PAGE>
Securities issued or purchased at a discount. The fund's
investment in securities that are treated for tax purposes as
issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require
the fund to accrue and distribute income not yet received. In
order to generate sufficient cash to make the requisite
distributions, the fund may be required to sell securities in its
portfolio that it otherwise would have continued to hold.
Capital loss carryover. Distributions from capital gains are
made after applying any available capital loss carryovers. The
amount and expiration date of any capital loss carryovers
available to a fund are shown in Note 1 (Federal income taxes) to
the financial statements incorporated by reference into this SAI.
With respect to investment income and gains received by a fund
from sources outside the United States, such income and gains may
be subject to foreign taxes which are withheld at the source.
The effective rate of foreign taxes to which a fund will be
subject depends on the specific countries in which its assets
will be invested and the extent of the assets invested in each
such country and therefore cannot be determined in advance.
Investment by a fund in "passive foreign investment companies"
could subject the fund to a U.S. federal income tax or other
charge on the proceeds from the sale of its investment in such a
company; however, this tax can be avoided by making an election
to mark such investments to market annually or to treat the
passive foreign investment company as a "qualified electing
fund."
A "passive foreign investment company" is any foreign
corporation: (i) 75 percent of more of the income of which for
the taxable year is passive income, or (ii) the average
percentage of the assets of which (generally by value, but by
adjusted tax basis in certain cases) that produce or are held for
the production of passive income is at least 50 percent.
Generally, passive income for this purpose means dividends,
interest (including income equivalent to interest), royalties,
rents, annuities, the excess of gains over losses from certain
property transactions and commodities transactions, and foreign
currency gains. Passive income for this purpose does not include
rents and royalties received by the foreign corporation from
active business and certain income received from related persons.
This discussion of federal income tax treatment of the Trust and
its shareholders is based on the law as of the date of this SAI.
<PAGE>
INVESTMENT RESTRICTIONS
As fundamental investment restrictions, which may not be changed
as to any fund without a vote of a majority of the outstanding
voting securities of that fund, the Trust may not and will not
take any of the following actions with respect to that fund:
(1) (All funds except Putnam VT Voyager Fund) Borrow money in
excess of 10% of the value (taken at the lower of cost or current
value) of the fund's 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.
(Putnam VT Voyager Fund) Borrow more than 50% of the value of
its total assets (excluding borrowings and stock index futures
contracts and call options on stock index futures contracts and
stock indices) less liabilities other than borrowings and stock
index futures contracts and call options on stock index futures
contracts and stock indices.
(2) Underwrite securities issued by other persons except to the
extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under certain
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 purchase and sell financial futures contracts
and options and may enter into foreign exchange contracts and
other financial transactions not involving physical commodities.
(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.
<PAGE>
(6) (All funds except Putnam VT Asia Pacific Growth Fund,
Putnam VT New Opportunities Fund, and Putnam VT Utilities Growth
and Income Fund) 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.
(7a) (All funds except Putnam VT Utilities Growth and Income
Fund) With respect to 75% of its total assets, acquire more than
10% of the outstanding voting securities of any issuer.
(7b) (Putnam VT Utilities Growth and Income Fund) With respect
to 50% of its total assets, acquire more than 10% of the
outstanding voting securities of any issuer.
(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 the fund's total assets would be
invested in any one industry; except that Putnam VT Utilities
Growth and Income Fund may invest more than 25% of its assets in
any of the public utilities industries; and except that Putnam VT
Money Market Fund may invest up to 100% of its assets (i) in the
banking industry, (ii) in the personal credit institution or
business credit institution industries when in the opinion of
management yield differentials make such investments desirable,
or (iii) any combination of these.
(9) Issue any class of securities which is senior to the fund's
shares of beneficial interest, except for permitted borrowings.
---------------------
In addition, each fund has agreed that, so long as shares of
beneficial interest in the fund are registered for offer and sale
in the State of California and such undertaking is required as a
condition to such registration, except as noted below, any fund
investing in foreign securities will at all times invest in
securities of issuers located in a minimum of five different
foreign countries. However, this minimum is reduced to four
different foreign countries when the fund's foreign investments
comprise less than 80% of its net assets, to three different
foreign countries when the fund's foreign investments comprise
less than 60% of its net assets, to two different foreign
countries when the fund's foreign investments comprise less than
40% of its net assets, and is eliminated when the fund's foreign
investments comprise less than 20% of its net assets. In
addition, no fund may invest more than 20% of its net assets in
securities of issuers located in any one foreign country, except
that, to the extent consistent with its investment policies, a
fund may invest up to 35% of its net assets in securities of
issuers located in any one of the following countries:
Australia, Canada, France, Germany, Japan or the United Kingdom.
Also, subject to such more restrictive investment restrictions
and policies as a fund may adopt from time to time, the borrowing
limits for any fund are (1) 10% of net asset value when borrowing
for any general purpose, and (2) 25% of net asset value when
borrowing as a temporary measure to facilitate redemptions. For
this purpose, a fund's net asset value shall be the market value
of all investments owned less outstanding liabilities of the
portfolio at the time that any new or additional borrowing is
undertaken.
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 a fund or the
Trust means the affirmative vote of the lesser of (1) more than
50% of the outstanding shares of a fund or the Trust, as the case
may be, or (2) 67% or more of the shares present at a meeting if
more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
MANAGEMENT
Trustees
Name (Age)
*+George Putnam (70) , Chairman and President. Chairman
and Director of Putnam Investment Management, Inc. and Putnam
Mutual Funds Corp. Director, The Boston Company, Inc., Boston
Safe Deposit and Trust Company, Freeport-McMoRan, Inc., Freeport
Copper and Gold, Inc., McMoRan Oil and Gas, Inc., General Mills,
Inc., Houghton Mifflin Company, Marsh & McLennan Companies, Inc.
and Rockefeller Group, Inc.
+William F. Pounds (68), Vice Chairman. Professor of Management,
Alfred P. Sloan School of Management, Massachusetts Institute of
Technology. Director of EG&G, Inc., IDEXX Laboratories, Inc.,
Perseptive Biosystems, Inc., Management Sciences for Health,
Inc., and Sun Company, Inc.
Jameson A. Baxter (53) , Trustee. President, Baxter
Associates, Inc. (a management and financial consultant).
Director of Avondale Federal Savings Bank, ASHTA Chemicals, Inc.
and Banta Corporation. Chairman Emeritus of the Board of
Trustees, Mount Holyoke College.
+Hans H. Estin (68) , Trustee. Vice Chairman, North
American Management Corp. (a registered investment adviser).
Director of The Boston Company, Inc. and Boston Safe Deposit and
Trust Company.
John A. Hill (54), Trustee. Chairman and Managing Director,
First Reserve Corporation (a registered investment adviser).
Director, Maverick Tube Corporation, PetroCorp Incorporated,
Snyder Oil Corporation, Weatherford Enterra, Inc. (an oil field
service company) and various First Reserve Funds.
Ronald J. Jackson (52), Trustee. Former Chairman, President and
Chief Executive Officer of Fisher-Price, Inc., Director of Safety
1st, Inc., Trustee of Salem Hospital and Trustee of the
Peabody Essex Museum.
Elizabeth T. Kennan (58), Trustee. President Emeritus and
Professor, Mount Holyoke College. Director, the Kentucky Home
Life Insurance Companies, NYNEX Corporation, Northeast Utilities
and Talbots and Trustee of the University of Notre Dame.
*Lawrence J. Lasser (53), Trustee and Vice President. President,
Chief Executive Officer and Director of Putnam Investments, Inc.
and Putnam Investment Management, Inc. Director of Marsh &
McLennan Companies, Inc. Vice President of the Putnam funds.
+Robert E. Patterson (51), Trustee. Executive Vice President and
Director of Acquisitions, Cabot Partners Limited Partnership (a
registered investment adviser).
*Donald S. Perkins (69), Trustee. Director of various
corporations, including AON Corp., Cummins Engine Company, Inc.,
Current Assets L.L.C., Illinova and Illinois Power Company,
Inland Steel Industries, Inc., LaSalle Street Fund, Inc., Lucent
Technologies Inc., Springs Industries, Inc. (a textile
manufacturer), and Time Warner Inc.
*#George Putnam, III (45), Trustee. President, New
Generation Research, Inc. (publisher of bankruptcy information)
and New Generation Advisers, Inc. (a registered investment
adviser).
*A.J.C. Smith (62), Trustee. Chairman and Chief Executive
Officer, Marsh & McLennan Companies, Inc. Director, Trident
Corp.
W. Nicholas Thorndike (63), Trustee. Director of various
corporations and charitable organizations, including Courier
Corporation, Data General Corporation, Bradley Real Estate, Inc.,
and Providence Journal Co.
*Trustees who are or may be deemed to be "interested persons" (as
defined in the Investment Company Act of 1940) of the Trust,
Putnam Management or Putnam Mutual Funds.
+Members of the Executive Committee of the Trustees. The
Executive Committee meets between regular meetings of the
Trustees as may be required to review investment matters and
other affairs of the Trust and may exercise all of the powers of
the Trustees.
#George Putnam, III is the son of George Putnam.
Officers
Name (Age)
Charles E. Porter (58) , Executive Vice President.
Managing Director of Putnam Investments, Inc. and Putnam
Management .
Patricia C. Flaherty (49), Senior Vice President. Senior Vice
President of Putnam Investments, Inc. and Putnam
Management .
Gordon H. Silver (49) , Vice President. Director and
Senior Managing Director of Putnam Investments, Inc. and Putnam
Management .
William N. Shiebler (54), Vice President. Director and Senior
Managing Director of Putnam Investments, Inc and Putnam
Management . President and Director of Putnam Mutual Funds
Corp. Vice President of the Putnam funds.
John R. Verani (57) , Vice President. Senior Vice
President of Putnam Investments, Inc. and Putnam
Management . Vice President of the Putnam funds.
Paul M. O'Neil (43) , Vice President. Vice President of
Putnam Investments, Inc. and Putnam Management .
Vice President of the Putnam funds.
John D. Hughes (61), Senior Vice President and Treasurer. Vice
President and Treasurer of the Putnam funds.
Beverly Marcus (52) , Clerk and Assistant Treasurer. Clerk
and Assistant Treasurer of the Putnam funds.
Gary N. Coburn (50) , Vice President. Senior Managing
Director of Putnam Management . Director of
Putnam Investments, Inc. Vice President of certain of the Putnam
funds.
Peter Carman (55) , Vice President. Senior Managing
Director of Putnam Management . Director of
Putnam Investments, Inc. Vice President of certain of the Putnam
funds.
Ian C. Ferguson (39), Vice President. Senior Managing Director
of Putnam Management . Vice President of certain of
the Putnam funds .
Brett C. Browchuk (33), Vice President. Managing Director of
Putnam Management . Vice President of certain of the
Putnam funds .
Jin W. Ho (39), Vice President. Managing Director of Putnam
Management . Vice President of certain of the
Putnam funds.
D. William Kohli (35), Vice President. Managing Director of
Putnam Management . Vice President of certain of
the Putnam funds.
Anthony I. Kreisel (51), Vice President. Managing Director of
Putnam Management . Vice President of Putnam
Fiduciary Trust Company. Vice President of certain of the Putnam
funds.
William J. Landes (43), Vice President. Managing Director of
Putnam Management . Vice President of certain of
the Putnam funds.
Michael Martino (43), Vice President. Managing Director of
Putnam Management . Vice President of certain of
the Putnam funds.
Carol C. McMullen (41) , Vice President. Managing Director
of Putnam Management . Vice President of certain
of the Putnam funds.
Daniel L. Miller (39) , Vice President. Managing Director
of Putnam Management . Vice President of certain
of the Putnam funds.
Justin M. Scott (39), Vice President. Managing Director
of Putnam Management . Vice President of certain
of the Putnam funds.
Robert R. Beck (56) , Vice President. Senior Vice
President of Putnam Management . Vice President of
certain of the Putnam funds.
Richard M. Frucci (51), Vice President. Senior Vice President of
Putnam Management .
Roland W. Gillis (47), Vice President. Senior Vice President of
Putnam Management . Vice President of certain of
the Putnam funds.
<PAGE>
C. Kim Goodwin (37), Vice President. Senior Vice President of
Putnam Management . Vice President of certain of
the Putnam funds.
J. Peter Grant (54), Vice President. Senior Vice President of
Putnam Management . Vice President of certain of
the Putnam funds.
Omid Kamshad (34), Vice President. Senior Vice President of
Putnam Management. Vice President of certain of the Putnam
funds.
David L. King (39), Vice President. Senior Vice President of
Putnam Management . Vice President of certain of
the Putnam funds.
Jennifer E. Leichter (35), Vice President. Senior Vice President
of Putnam Management . Vice President of certain
of the Putnam funds.
Neil J. Powers (34), Vice President. Senior Vice President of
Putnam Management . Vice President of certain of
the Putnam funds.
Christopher A. Ray (33) , Vice President. Senior Vice
President of Putnam Management . Vice President of
certain of the Putnam funds.
Mark J. Siegel (36), Vice President. Senior Vice President of
Putnam Management . Vice President of certain of
the Putnam funds.
Jennifer K. Silver (39), Vice President. Senior Vice President
of Putnam Management . Vice President of certain
of the Putnam funds.
Sheldon N. Simon (39) , Vice President. Senior Vice
President of Putnam Management . Vice President of
certain of the Putnam funds.
John K. Storkerson (57), Vice President. Senior Vice President
of Putnam Management and The Putnam Advisory Company, Inc.
Vice President of certain of the Putnam funds.
Charles H. Swanberg (48), Vice President. Senior Vice President
of Putnam Management . Vice President of certain
of the Putnam funds.
Robert Swift (36), Vice President. Senior Vice President of
Putnam Management. Vice President of certain of the Putnam
funds.
Kenneth J. Taubes (38), Vice President. Senior Vice President of
Putnam Management . Vice President of certain of
the Putnam funds.
David K. Thomas (54), Vice President. Senior Vice President of
Putnam Management . Vice President of certain of
the Putnam funds.
Ami T. Kuan (34), Vice President. Vice President of
Putnam Management . Vice President of certain of
the Putnam funds.
David J. Santos (38), Vice President. Vice President of Putnam
Management . Vice President of certain of the
Putnam funds.
Lindsey C. Strong (35), Vice President. Vice President of Putnam
Management . Vice President of certain of the
Putnam funds.
Except as stated below, the principal occupations of the officers
and Trustees for the last five years have been with the employers
as shown above, although in some cases they have held different
positions with such employers. Prior to 1993, Mr. Jackson was
Chairman of the Board, President and Chief Executive Officer of
Fisher-Price, Inc. Prior to January, 1992, Ms. Baxter was Vice
President and Principal, Regency Group, Inc. and Consultant, The
First Boston Corporation. During the past five years Dr. Shapiro
has provided economic and financial consulting services to
various clients. 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. Prior to April, 1993, Ms. Kuan attended the
MIT Sloan School of Management. Prior to April, 1996, Mr.
Ferguson was CEO at Hong Kong Shanghai Banking Corporation.
Prior to January, 1994, Mr. Martino was employed by Back Bay
Advisors in the positions of Executive Vice President and Chief
Investment Officer from 1992 to 1994, and Senior Vice President
and Senior Portfolio Manager prior to 1992. Prior to
June, 1995, Ms. McMullen was Senior Vice President of Baring
Asset Management. Prior to March, 1995, Mr. Gillis was Vice
President at Keystone Custodian Funds, Inc. Prior to May, 1996,
Ms. Goodwin was Vice President at Prudential Mutual Fund
Investment Management, and prior to February, 1993, Ms.
Goodwin was Assistant Vice President at Mellon Bank
Corporation. Prior to January, 1996 Mr. Kamshad was Director
of Investments at Lombard Odier International, prior to April,
1995 he was Director at Baring Asset Management Company and prior
to December, 1991 Mr. Kamshad was Senior Portfolio Manager at
Enskilda Asset Management. Prior to September, 1994, Mr.
Kohli was Executive Vice President and Co-Director of Global Bond
Management and, prior to October, 1993, Senior Portfolio Manager,
at Franklin Advisors/Templeton Investment Counsel. Prior to
December, 1992, Mr. Ray was Vice President and Portfolio
Manager at Scudder, Stevens & Clark, Inc. Prior to
June, 1993, Mr. Siegel was Vice President at Salomon
Brothers International LTD. Prior to August, 1995, Mr. Swift was
Director and Senior Portfolio Manager at IAI International/Hill
Samuel Investment Advisors.
The Trust pays each Trustee 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 each Putnam VT fund for fiscal 1995 (except for Putnam VT
International Growth Fund, Putnam VT International Growth and
Income Fund, Putnam VT International New Opportunities Fund,
Putnam VT New Value Fund, and Putnam VT Vista Fund, for which
fees expected to be paid for the first full fiscal year are
shown), and the fees paid to each Trustee by all of the
Putnam funds for the year ended December 31, 1995:
<TABLE>
<CAPTION>
COMPENSATION TABLE
Aggregate compensation
(1) from :
<S> <C> <C>
<C> <C> <C> <C>
Putnam VT Putnam VT
Putnam VT Putnam VT Putnam VT Putnam
VT
Asia Pacific Diversified
Global Asset Global Growth and High
Trustee/Year Growth Income
Allocation Growth Income Yield
Jameson A. Baxter/1994 $148 $1,059
$1,178 $1,961 $3,662 $1,183
Hans H. Estin/1972 145 1,066
1,187 1,976 3,685 1,192
John A. Hill/1985 (3) 148 1,059
1,178 1,962 3,659 1,183
Ronald J. Jackson/1996 (4) 0 0
0 0 0 0
Elizabeth T. Kennan/1992 145 1,066
1,187 1,976 3,685 1,192
Lawrence J. Lasser/1992 140 1,060
1,179 1,963 3,656 1,184
Robert E. Patterson/1984 150 1,073
1,195 1,989 3,714 1,200
Donald S. Perkins/1982 140 1,060
1,179 1,963 3,656 1,184
William F. Pounds/1971 148 1,059
1,179 1,962 3,658 1,183
George Putnam/1957 145 1,066
1,187 1,976 3,685 1,192
George Putnam, III/1984 145 1,066
1,187 1,976 3,685 1,192
Eli Shapiro/1995 (6) 104 709
780 1,311 2,481 799
A.J.C. Smith/1986 139 1,053
1,171 1,949 3,629 1,175
W. Nicholas Thorndike/1992 150 1,073
1,195 1,989 3,714 1,200
/TABLE
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE (continued)
Aggregate
compensation (1) from:
<S> <C> <C>
<C> <C> <C> <C>
Putnam VT Putnam VT
Putnam VT Putnam VT Putnam VT Putnam VT
International International
International New Money New New
Trustee/Year Growth Growth and
Income Opportunities
Market Value
Opportunities
Jameson A. Baxter/1994 $1,101 $1,101
$1,101 $756 $858 $895
Hans H. Estin/1972 1,101 1,101
1,101 759 858 898
John A. Hill/1985 (3) 1,101 1,101
1,101 756 858 893
Ronald J. Jackson/1996 (4) 1,101
1,101 1,101 0
858 0
Elizabeth T. Kennan/1992 1,101 1,101
1,101 759 858 898
Lawrence J. Lasser/1992 1,101 1,101
1,101 756 858 889
Robert E. Patterson/1984 1,101 1,101
1,101 762 858 907
Donald S. Perkins/1982 1,101 1,101
1,101 756 858 889
William F. Pounds/1971 1,150 (5)
1,150 (5) 1,150 (5)
756 901 (5)
892
George Putnam/1957 1,101 1,101
1,101 759 858 898
George Putnam, III/1984 1,101 1,101
1,101 759 858 898
Eli Shapiro/1995 (6) 1,101 1,101
1,101 502 858 651
A.J.C. Smith/1986 1,101 1,101
1,101 753 858 883
W. Nicholas Thorndike/1992 1,101 1,101
1,101 762 858 907
/TABLE
<PAGE>
<TABLE><CAPTION>
COMPENSATION TABLE (continued)
Aggregate
compensation (1) from:
<S> <C> <C> <C>
<C> <C> <C> <C>
Estimated
Pension on annual
retirement benefits
Putnam VT
benefits from all
Putnam VT U.S.
Government
accrued as Putnam funds
Utilities Growth and
High Putnam VT Putnam
VT All Putnam part of fund
upon
Trustee/Year and Income Quality Bond
Vista Voyager funds
(2) expenses (3) retirement (4)
Jameson A. Baxter/1994 $1,265 $1,537 $758
$3,016 $150,854 $0 $71,676
Hans H. Estin/1972 1,275 1,547 758
3,031 150,854 0 70,043
John A. Hill/1985 (3) 1,265
1,538 758 3,013 149,854 0
70,043
Ronald J. Jackson/1996 (4) 0 0
758 0 0
0 70,043
Elizabeth T. Kennan/1992 1,275 1,547 758
3,031 148,854 0 69,709
Lawrence J. Lasser/1992 1,266 1,539 758
3,010 150,854 0 70,043
Robert E. Patterson/1984 1,283 1,555 758
3,052 152,854 0 71,043
Donald S. Perkins/1982 1,266 1,539 758
3,010 150,854 0 69,376
William F. Pounds/1971 1,265 1,538 792
(5) 3,012 149,854
0 70,543
George Putnam/1957 1,275 1,547 758
3,031 150,854 0 70,043
George Putnam, III/1984 1,275 1,547 758
3,031 150,854 0 70,043
Eli Shapiro/1995 (6) 848
1,023 758 2,038 95,372
0 70,043
A.J.C. Smith/1986 1,257 1,530 758
2,992 149,854 0 68,252
W. Nicholas Thorndike/1992 1,283 1,555 758
3,052 152,854 0 71,043
(1) Includes an annual retainer and an attendance fee for each
meeting attended.
(2) As of December 31, 1995, there were 99 funds in the
Putnam family.
(3) Includes compensation deferred pursuant to a Trustee
Compensation Deferral Plan. The total amounts
of deferred compensation payable to Mr. Hill as of
December 31, 1995 by Putnam VT Global Asset
Allocation Fund, Putnam VT Global Growth Fund,
Putnam VT Growth and Income Fund, Putnam VT
High Yield Fund, Putnam VT U.S. Government and High
Quality Bond Fund, Putnam VT Utilities Growth
and Income Fund, Putnam VT Voyager Fund, and by
all Putnam funds were $566, $939, $1,775, $591, $739,
$621, $1,511 and $51,141, respectively, including income
earned on such amounts.
(4) Elected as a Trustee in May 1996.
(5) Includes additional compensation
for service as Vice Chairman of the Putnam funds.
(6) Elected as a Trustee in April 1995.
/TABLE
<PAGE>
Under a Retirement Plan for Trustees of the Putnam
funds (the "Plan"), each Trustee who retires with at
least five years of service as a
Trustee of the funds is entitled to receive an annual
retirement benefit equal to one - half of the
average annual compensation paid to such Trustee for
the last three years of service prior to retirement. This
retirement benefit is payable during a Trustee's lifetime,
beginning the year following retirement , for a number of
years equal to such Trustee's years of service. A death
benefit is also available under the Plan which assures that
the Trustee and his or her beneficiaries will receive benefit
payments for the lesser of an aggregate period of (i) ten years
or (ii) such Trustee's total years of service.
The Plan Administrator (a committee comprised of Trustees that
are not "interested persons" of the fund, as defined in the
Investment Company Act of 1940) may terminate or amend the
Plan at any time, but no termination or amendment will
result in a reduction in the amount of benefits (i) currently
being paid to a Trustee at the time of such termination or
amendment, or (ii) to which a current Trustee would have been
entitled to receive had he or she retired immediately prior to
such termination or amendment.
For additional information concerning the Trustees, see
"Management" in this SAI.
The Agreement and Declaration of Trust of the Trust provides that
the Trust will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the
Trust, except if it is determined in the manner specified in such
Agreement and Declaration of Trust that such Trustees and
officers have not acted in good faith in the reasonable belief
that their actions were in the best interests of the Trust or
that such indemnification would relieve any officer or Trustee of
any liability to the Trust or its shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties. The Trust, at its expense,
provides liability insurance for the benefit of its Trustees and
officers.
<PAGE>
Trustees and officers of the Trust who are also officers of
Putnam Management or its affiliates or stockholders of Marsh &
McLennan Companies, Inc. will benefit from the advisory fees,
transfer agency fees and custodian fees and fees paid or allowed
by the Trust. At August 31, 1996 the officers and Trustees as a
group owned no shares of the Trust or any fund. As of this date,
less than 1% of the value of the accumulation units with respect
to any fund was attributable to the officers and Trustees of the
Trust, as a group, owning variable annuity contracts or variable
life insurance policies issued by the insurers listed in the
following tables. All of the shares of each of the funds are
owned by the insurance company separate accounts listed below and
by Putnam Management pursuant to its initial capital contribution
to each fund during the organization of the Trust and the
subsequent organization of Putnam VT Global Growth Fund, Putnam
VT Utilities Growth and Income Fund, Putnam VT Diversified Income
Fund, Putnam VT New Opportunities Fund, Putnam VT Asia Pacific
Growth Fund, Putnam VT International Growth Fund, Putnam VT
International Growth and Income Fund, Putnam VT International New
Opportunities Fund, Putnam VT New Value Fund and Putnam VT Vista
Fund. Except to the extent set forth below, to the knowledge of
the Trust no person owned of record or beneficially 5% or more of
the shares of any fund as of September 6, 1996 .
<PAGE>
Issuer and name of
Separate Account
(1) Hartford Life Percentage of
Insurance Company Fund shares owned of record
(a) Putnam Capital Manager
Trust
Separate Account
Putnam VT Asia
Pacific Growth Fund 37.72%
Putnam VT Diversified
Income Fund 38.98%
Putnam VT Global
Asset Allocation Fund 55.53%
Putnam VT Global
Growth Fund 48.79%
Putnam VT Growth and
Income Fund 57.41%
Putnam VT High Yield Fund 49.62%
Putnam VT International
Growth Fund --
Putnam VT International
Growth and Income Fund --
Putnam VT International
New Opportunities Fund --
Putnam VT Money Market Fund 53.02%
Putnam VT New
Opportunities Fund 42.18%
Putnam VT New Value Fund --
Putnam VT U.S. Government
and High Quality Bond Fund 71.71%
Putnam VT Utilities
Growth and Income Fund 57.53%
Putnam VT Vista Fund --
Putnam VT Voyager Fund 52.50%
(1) Hartford Life Percentage of
Insurance Company Fund shares owned of record
(b) Putnam Capital Manager
Trust
Separate Account VLI
Putnam VT Diversified
Income Fund 25.65%
Putnam VT Global Asset
Allocation Fund 0.78%
Putnam VT Global
Growth Fund 0.75%
Putnam VT Growth and
Income Fund 0.26%
Putnam VT High Yield Fund 0.29%
Putnam VT Money
Market Fund 0.35%
Putnam VT New
Opportunities Fund 0.54%
Putnam VT U.S. Government
and High Quality
Bond Fund 0.47%
Putnam VT Utilities Growth
and Income Fund 0.28%
Putnam VT Voyager Fund 0.72%
<PAGE>
(1) Hartford Life Percentage of
Insurance Company Fund shares owned of record
(c) Putnam Capital Manager
Trust
Separate Account VLII
Putnam VT Diversified
Income Fund *
Putnam VT Global Asset
Allocation Fund 0.02%
Putnam VT Global
Growth Fund 0.04%
Putnam VT Growth and
Income Fund 0.01%
Putnam VT High Yield Fund 0.02%
Putnam VT Money
Market Fund 0.01%
Putnam VT New
Opportunities Fund 0.04%
Putnam VT U.S. Government
and High Quality
Bond Fund 0.04%
Putnam VT Utilities Growth
and Income Fund *
Putnam VT Voyager Fund 0.03%
<PAGE>
(1) Hartford Life Percentage of
Insurance Company Fund shares owned of record
(d) Putnam Capital Manager
Trust
Variable Life
Separate Account Five
Putnam VT Asia Pacific
Growth Fund 0.66%
Putnam VT Diversified
Income Fund 0.16%
Putnam VT Global Asset
Allocation Fund 0.15%
Putnam VT Global
Growth Fund 0.45%
Putnam VT Growth and
Income Fund 0.24%
Putnam VT High Yield Fund 0.44%
Putnam VT International
Growth Fund --
Putnam VT International
Growth and Income Fund --
Putnam VT International
New Opportunities Fund --
Putnam VT Money
Market Fund 0.85%
Putnam VT New
Opportunities Fund 0.53%
Putnam VT New Value Fund --
Putnam VT U.S. Government
and High Quality Bond Fund 0.16%
Putnam VT Utilities Growth
and Income Fund 0.21%
Putnam VT Vista Fund --
Putnam VT Voyager Fund 0.28%
<PAGE>
Issuer and name
of Separate Account
(2) ITT Hartford Life
and Annuity Percentage of
Insurance Company Fund shares owned of record
(a) Putnam Capital Manager
Trust
Separate Account Two
Putnam VT Asia Pacific
Growth Fund 57.77%
Putnam VT Diversified
Income Fund 32.59%
Putnam VT Global Asset
Allocation Fund 42.48%
Putnam VT Global Growth
Fund 49.70%
Putnam VT Growth and
Income Fund 40.45%
Putnam VT High Yield Fund 49.13%
Putnam VT International
Growth Fund --
Putnam VT International
Growth and Income Fund --
Putnam VT International
New Opportunities Fund --
Putnam VT Money Market Fund 41.66%
Putnam VT New
Opportunities Fund 54.33%
Putnam VT New Value Fund --
Putnam VT U.S. Government
and High Quality Bond Fund 25.39%
Putnam VT Utilities Growth
and Income Fund 40.73%
Putnam VT Vista Fund --
Putnam VT Voyager Fund 44.11%
(2) ITT Hartford Life
and Annuity Percentage of
Insurance Company Fund shares owned of record
(b) Putnam Capital Manager
Trust
Separate Account VLII
Putnam VT Diversified
Income Fund *
Putnam VT Global Asset
Allocation Fund 0.02%
Putnam VT Global
Growth Fund 0.04%
Putnam VT Growth and
Income Fund 0.01%
Putnam VT High Yield Fund 0.02%
Putnam VT Money
Market Fund 0.01%
Putnam VT New
Opportunities Fund 0.04%
Putnam VT U.S. Government
and High Quality
Bond Fund 0.04%
Putnam VT Utilities Growth
and Income Fund *
Putnam VT Voyager Fund 0.03%
<PAGE>
(2) ITT Hartford Life
and Annuity Percentage of
Insurance Company Fund shares owned of record
(c) Putnam Capital Manager
Trust
Variable Life
Separate Account Five
Putnam VT Asia Pacific
Growth Fund 0.21%
Putnam VT Diversified
Income Fund 0.32%
Putnam VT Global Asset
Allocation Fund 0.18%
Putnam VT Global
Growth Fund 0.19%
Putnam VT Growth and
Income Fund 0.17%
Putnam VT High Yield Fund 0.28%
Putnam VT International
Growth Fund --
Putnam VT International
Growth and Income Fund --
Putnam VT International
New Opportunities Fund --
Putnam VT Money
Market Fund 1.05%
Putnam VT New
Opportunities Fund 0.39%
Putnam VT New Value Fund --
Putnam VT U.S. Government
and High Quality
Bond Fund 0.06%
Putnam VT Utilities Growth
and Income Fund 0.13%
Putnam VT Vista Fund --
Putnam VT Voyager Fund 0.17%
(2) ITT Hartford Life
and Annuity Percentage of
Insurance Company Fund shares owned of record
(c) Putnam Capital Manager
Trust
Separate Account Six
Putnam VT Diversified
Income Fund 0.34%
Putnam VT Global Asset
Allocation Fund 0.84%
Putnam VT Global
Growth Fund 0.04%
Putnam VT U.S. Government
and High Quality
Bond Fund 0.24%
Issuer and name of
Separate Account
(3) ReliaStar Life Percentage of
Insurance Company Fund shares owned of record
(a) Putnam Capital Manager
Trust
Select Life
Putnam VT Diversified
Income Fund 0.02%
Putnam VT Growth and
Income Fund 0.02%
Putnam VT Utilities Growth
and Income Fund 0.04%
Putnam VT Voyager Fund 0.10%
<PAGE>
(b) Putnam Capital Manager
Trust
Select Life II
Variable Account
Putnam VT Asia Pacific
Growth Fund 0.56%
Putnam VT Diversified
Income Fund 0.09%
Putnam VT Growth and
Income Fund 0.08%
Putnam VT New
Opportunities Fund 0.25%
Putnam VT Utilities Growth
and Income Fund 0.09%
Putnam VT Voyager Fund 0.34%
(3) ReliaStar Life Percentage of
Insurance Company Fund shares owned of record
(c) Putnam Capital Manager
Trust
Select Life III
Variable Account
Putnam VT Asia Pacific
Growth Fund 0.56%
Putnam VT Diversified
Income Fund 0.09%
Putnam VT Growth and
Income Fund 0.08%
Putnam VT New
Opportunities Fund 0.25%
Putnam VT Utilities
Growth and Income Fund 0.09%
Putnam VT Voyager Fund 0.34%
<PAGE>
(d) Putnam Capital Manager
Trust
NWNL Select
Annuity II
Putnam VT Diversified
Income Fund 0.10%
Putnam VT Growth and
Income Fund 0.07%
Putnam VT Utilities Growth
and Income Fund 0.15%
Putnam VT Voyager Fund 0.26%
(3) ReliaStar Life Percentage of
Insurance Company Fund shares owned of record
(e) Putnam Capital Manager
Trust
NWNL Select
Annuity III
Putnam VT Asia Pacific
Growth Fund 2.53%
Putnam VT Diversified
Income Fund 1.34%
Putnam VT Growth and
Income Fund 0.42%
Putnam VT New
Opportunities Fund 1.17%
Putnam VT Utilities Growth
and Income Fund 0.74%
Putnam VT Voyager Fund 1.01%
<PAGE>
Issuer and name of
Separate Account
(4) American Enterprise Percentage of
Life Insurance Company Fund shares owned of record
(a) Putnam Capital Manager
Trust
American Enterprise
Variable Annuity Account
Putnam VT Diversified
Income Fund 0.32%
Putnam VT Growth and
Income Fund 0.09%
Putnam VT High Yield Fund 0.20%
Putnam VT New
Opportunities Fund 0.28%
(5) Investors Life
Insurance Company of Percentage of
North America Fund shares owned of record
Putnam Capital
Manager Trust
CIGNA Separate
Account I
Putnam VT Growth and
Income Fund 0.69%
Putnam VT Money
Market Fund 3.05%
Putnam VT U.S. Government
and High Quality
Bond Fund 1.88%
Putnam VT Voyager Fund 0.12%
<PAGE>
Issuer and name of
Separate Account
(6) Paragon Life Percentage of shares
Insurance Company Fund owned of record
as
Putnam Capital
Manager Trust
Paragon Variable Life
Putnam VT Asia Pacific
Growth Fund 0.02%
Putnam VT Diversified
Income Fund *
Putnam VT Global Asset
Allocation Fund *
Putnam VT Global
Growth Fund *
Putnam VT Growth and
Income Fund *
Putnam VT High Yield Fund *
Putnam VT Money Market Fund *
Putnam VT New
Opportunities Fund *
Putnam VT U.S. Government
and High Quality
Bond Fund *
Putnam VT Utilities
Growth and Income Fund *
Putnam VT Voyager Fund *
(7) IDS Life Percentage of shares
Insurance Company Fund owned of record as
Putnam Capital
Manager Trust
IDS Variable
Account 10
Putnam VT New
Opportunities Fund 4.90%
*Less than 1/10th of 1%.
The address for the separate accounts listed in (1) and
(2) above is: P.O. Box 2099, Hartford, CT 06140-2999. The
address for the separate account listed in (3) above is: 20
Washington Avenue South, Minneapolis, MN 55401. The address for
the separate account listed in (4) above is: 80 S. Eighth
Street, Minneapolis, MN 55440. The address for the separate
account listed in (5) above is: Austin Centre, 701 Brazos
Street, Austin, TX 78701. The address for the separate account
listed in (6) above is: 100 South Brentwood, St. Louis, MO
63105. The address for the separate account listed in (7) above
is: IDS Tower 10, Minneapolis, MN 55440.
Each of the insurance companies issuing the separate accounts
listed above have agreed to vote their shares in proportion to
and in the manner instructed by contract and policy owners. By
virtue of the foregoing, each of these insurance companies, or
any of them together, may be deemed to be a controlling person of
each of the funds.
Putnam Management and its affiliates
Putnam Management is one of America's oldest and largest money
management firms. Putnam Management's staff of experienced
portfolio managers and research analysts selects securities and
constantly supervises the fund's portfolio. By pooling an
investor's money with that of other investors, a greater variety
of securities can be purchased than could be purchased by the
investor individually; the resulting diversification helps reduce
investment risk. Putnam Management has been managing mutual funds
since 1937. Today, the firm serves as the investment manager for
the funds in the Putnam Family, with over $113 billion in assets
in over 6.2 million shareholder accounts at June 30, 1996. An
affiliate, The Putnam Advisory Company, Inc., manages domestic
and foreign institutional accounts and mutual funds, including
the accounts of many Fortune 500 companies. Another affiliate,
Putnam Fiduciary Trust Company, provides investment advice to
institutional clients under its banking and fiduciary powers.
At June 30, 1996, Putnam Management and its affiliates managed
nearly $149 billion in assets, including over $17 billion in tax-
exempt securities and over $66 billion in retirement plan assets.
Putnam Management, Putnam Mutual Funds and Putnam Fiduciary Trust
Company are subsidiaries of Putnam Investments, Inc., a holding
company which is in turn wholly owned by Marsh & McLennan
Companies, Inc., a publicly-owned holding company whose principal
operating subsidiaries are international insurance and
reinsurance brokers, investment managers and management
consultants.
<PAGE>
Trustees and officers of a fund who are also officers of Putnam
Management or its affiliates or who are stockholders of Marsh &
McLennan Companies, Inc. will benefit from the advisory fees,
sales commissions, distribution fees, custodian fees and transfer
agency fees paid or allowed by the fund.
The Management Contract
Under a Management Contract between the Trust and Putnam
Management dated October 2, 1987, as supplemented March 2, 1990,
and as further supplemented February 27, 1992, July 9, 1993,
April 5, 1994, June 2, 1994, April 7, 1995, July 13, 1995, July
11, 1996 and as further supplemented, December 20, 1996
subject to such policies as the Trustees may determine, Putnam
Management, at its expense, furnishes continuously an investment
program for the Funds and makes investment decisions on their
behalf. Subject to the control of the Trustees, Putnam
Management also manages, supervises and conducts the other
affairs and business of the Trust, furnishes office space and
equipment, provides bookkeeping and clerical services (including
determination of the net asset values of the funds, but excluding
shareholder accounting services) and places all orders for the
purchase and sale of the Trust's portfolio securities. Putnam
Management may place the Trust's portfolio transactions with
broker-dealers which furnish Putnam Management, without cost to
it, certain research, statistical and quotation services of value
to Putnam Management and its affiliates in advising the Trust and
other clients. In so doing, Putnam Management may cause a fund
to pay greater brokerage commissions than it might otherwise pay.
The compensation payable to Putnam Management under the
Management Contract for its investment management services to the
funds is paid quarterly at the following annual rates of each
fund's average net assets, as determined at the close of each
business day during the quarter:
Fund Rate
Putnam VT International New 1.20% of the first
$500
Opportunities Fund million of
average net assets,
1.10% of the next $500
million, 1.05% of the
next $500 million,
1.00% of the next $5
billion, 0.975% of the
next $5 billion, 0.955%
of the next $5 billion
and 0.94% of any excess
thereafter
<PAGE>
Putnam VT Asia Pacific Growth Fund and 0.80% of the first
$500
Putnam VT International Growth Fund million of
average net assets,
0.70% of the next $500
million, 0.65% of the
next $500 million,
0.60% of the next $5
billion, 0.575% of the
next $5 billion, 0.555%
of the next $5 billion,
0.54% of the next $5
billion, and 0.53% of
any excess thereafter
Putnam VT Diversified Income Fund, 0.70% of the first
$500
Putnam VT Global Asset Allocation Fund, million of
average net
Putnam VT High Yield Fund, Putnam VT net assets,
0.60% of
New Opportunities Fund, Putnam VT the next
$500 million,
Utilities Growth and Income Fund, and 0.55% of the
next $500
Putnam VT Voyager Fund million, 0.50%
of the next $5 billion,
0.475% of the next $5
billion, 0.455% of the
next $5 billion, 0.44%
of the next $5 billion
and 0.43% of any excess
thereafter
Putnam VT Growth and Income Fund, and 0.65% of the first
$500
Putnam VT U.S. Government and High million of
average net
Quality Bond Fund assets, 0.55%
of the next $500
million, 0.50% of the
next $500 million,
0.45% of the next $5
billion, 0.425% of the
next $5 billion, 0.405%
of the next $5 billion,
0.39% of the next $5
billion and 0.38% of
any excess thereafter
Putnam VT Global Growth Fund 0.60% of average net
assets
<PAGE>
Putnam VT Money Market Fund 0.45% of the first $500
million of average net
assets, 0.35% of the
next $500 million,
0.30% of the next $500
million, 0.25% of the
next $5 billion, 0.225%
of the next $5 billion,
0.205% of the next $5
billion, 0.190% of the
next $5 billion and
0.180% of any excess
thereafter
The Trust pays affiliates of Putnam Management additional amounts
for investor servicing and custody services.
In addition to the fee paid to Putnam Management, the Trust
reimburses Putnam Management for the compensation and related
expenses of certain officers of the funds and certain persons who
assist them in carrying out the responsibilities of their
offices. During fiscal 1995, the Trust reimbursed Putnam
Management $157,952 in this regard, including $137,513 in
contributions to the Putnam Investments, Inc. Profit Sharing
Retirement Plan for the benefit of such officers and their
assistants. The Trust may also pay or reimburse Putnam
Management for all or a part of the compensation and related
expenses of one or more other officers of the Trust and their
assistants. Currently the Trust is reimbursing Putnam Management
for the compensation and related expenses of the Senior Vice
President and the Clerk of the Trust. The aggregate amount of
all such payments and reimbursements is determined annually by
the Trustees. Putnam Management pays all other salaries of
officers of the Trust. The Trust pays all expenses not assumed
by Putnam Management including, without limitation, auditing,
legal, custodial, investor servicing and shareholder reporting
expenses. The Trust pays any cost of typesetting for its
prospectuses and any cost of printing and mailing prospectuses
sent to its shareholders. Putnam Mutual Funds pays the cost of
printing and distributing all other prospectuses.
The Management Contract provides that Putnam Management shall not
be subject to any liability to the Trust or to any shareholder of
the Trust for any act or omission in the course of or connected
with rendering services to the Trust in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of
its duties on the part of Putnam Management. The Management
Contract may be terminated as to the Trust or as to any fund
without penalty by vote of the Trustees or the shareholders of
one or more Funds affected, or by Putnam Management, on 30 days'
written notice. It may be amended with respect to a fund only by
a vote of the shareholders of that fund. The Management Contract
also terminates without payment of any penalty in the event of
its assignment. The Management Contract provides that it will
continue in effect as to any fund only so long as such
continuance is approved at least annually by vote of either the
Trustees or the shareholders of that fund, and, in either case,
by a majority of the Trustees who are not "interested persons" of
Putnam Management or any fund. In each of the foregoing cases,
the vote of the shareholders of any fund is the affirmative vote
of a "majority of the outstanding voting securities" of such fund
as defined in the Investment Company Act of 1940. The
continuation of the Contract as to all funds was unanimously
approved by the Trustees, including those Trustees who are not
"interested persons," on January 5, 1996.
Management fees
Reflecting a
reduction in the
following amounts
pursuant to an
Fund Fiscal Management expense
name year fee paid limitation
- ---- ------ ---------- -----------------
Putnam VT Asia
Pacific Growth
Fund 1995+ $67,583 $40,348
Putnam VT Diversified
Income Fund 1995 $1,741,950
1994 $1,219,268
1993++ $56,026
Putnam VT Global
Asset Allocation
Fund 1995 $3,253,739
1994 $2,501,952
1993 $1,167,001
Putnam VT Global
Growth Fund 1995 $4,329,841
1994 $3,316,215
1993 $1,000,268
Putnam VT Growth
and Income Fund 1995 $13,096,405
1994 $9,644,524
1993 $5,982,583
Putnam VT High
Yield Fund 1995 $2,909,080
1994 $2,098,314
1993 $1,208,791
Putnam VT Money
Market Fund 1995 $1,061,046
1994 $960,766
1993 $370,812
Putnam VT New
Opportunities Fund 1995 $1,618,748
1994+++ $119,511 $49,240
Putnam VT U.S.
Government and High
Quality Bond Fund 1995 $4,133,901
1994 $4,062,088
1993 $3,574,490
Putnam VT Utilities
Growth and Income
Fund 1995 $2,666,363
1994 $2,450,006
1993 $1,496,570
Putnam VT Voyager
Fund 1995 $8,864,927
1994 $5,347,055
1993 $2,770,454
+ Commencement of operations May 1, 1995
++ Commencement of operations September 15, 1993
+++ Commencement of operations May 1, 1994
Portfolio Transactions
Investment decisions. Investment decisions for each of the funds
and for the other investment advisory clients of Putnam
Management and its affiliates are made with a view to achieving
their respective investment objectives. Investment decisions are
the product of many factors in addition to basic suitability for
the particular client involved. Thus, a particular security may
be bought or sold for certain clients even though it could have
been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling the security.
In some instances, one client may sell a particular security to
another client. It also sometimes happens that two or more
clients simultaneously purchase or sell the same security, in
which event each day's transactions in such security are, insofar
as possible, averaged as to price and allocated between such
clients in a manner which in Putnam Management's opinion is
equitable to each and in accordance with the amount being
purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.
Brokerage and research services. Transactions on U.S. stock
exchanges, commodities markets and futures markets and other
agency transactions involve the payment by the Trust of
negotiated brokerage commissions. Such commissions vary among
different brokers. Also, a particular broker may charge
different commissions according to such factors as the difficulty
and size of the transaction. Transactions in foreign investments
often involve the payment of fixed brokerage commissions, which
may be higher than those in the United States. There is
generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid by the Trust
usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid includes a disclosed,
fixed commission or discount retained by the underwriter or
dealer.
It has for many years been a common practice in the investment
advisory business for advisers of investment companies and other
institutional investors to receive "brokerage and research
services" (as defined in the Securities Exchange Act of 1934, as
amended (the "1934 Act")) from broker-dealers and from third
parties with which these broker-dealers have arrangements which
execute portfolio transactions for the clients of such advisers.
Consistent with this practice, Putnam Management receives
brokerage and research services and other similar services from
many broker-dealers with which Putnam Management places the
funds' portfolio transactions and from third parties with which
those broker-dealers have arrangements. These services include
such matters as general economic and market reviews, industry and
company reviews, evaluations of investments, recommendations as
to the purchase and sale of investments, newspapers, magazines,
pricing services, quotation services, news services and personal
computers utilized by Putnam Management's managers and analysts.
Where the services referred to above are not used exclusively by
Putnam Management for research services, Putnam Management, based
upon its own allocations of expected use, bears that portion of
the cost of these services which directly relates to their non-
research use. Some of these services are of value to Putnam
Management and its affiliates in advising various of their
clients (including the Trust), although not all of these services
are necessarily useful and of value in managing the Trust. The
management fee paid by the Trust is not reduced because Putnam
Management and its affiliates receive these services even though
Putnam Management might otherwise be required to purchase some of
these services for cash.
Putnam Management places all orders for the purchase and sale of
portfolio investments for each fund and buys and sells
investments for each fund through a substantial number of brokers
and dealers. In so doing, Putnam Management uses its best
efforts to obtain for each fund the most favorable price and
execution available, except to the extent it may be permitted to
pay higher brokerage commissions as described below. In seeking
the most favorable price and execution, Putnam Management, having
in mind each fund's best interests, considers all factors it
deems relevant, including, by way of illustration, price, the
size of the transaction, the nature of the market for the
security or other investment, the amount of the commission, the
timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the
broker-dealer involved and the quality of service rendered by the
broker-dealer in other transactions.
As permitted by Section 28(e) of the 1934 Act, and by the
Management Contract, Putnam Management may cause a fund to pay a
broker-dealer which provides "brokerage and research services"
(as defined in the 1934 Act) to Putnam Management an amount of
disclosed commission for effecting a securities transaction on
stock exchanges and other agency transactions for the fund on an
agency basis in excess of the commission which another broker-
dealer would have charged for effecting that transaction. Putnam
Management's authority to cause a fund to pay any such greater
commissions is subject to such policies as the Trustees may adopt
from time to time. Putnam Management does not currently intend
to cause the Trust to make such payments. It is the position of
the staff of the Securities and Exchange Commission that Section
28(e) does not apply to the payment of such greater commissions
in "principal" transactions, and accordingly Putnam Management
will use its best efforts to obtain the most favorable price and
execution available with respect to such transactions, as
described above.
The Management Contract provides that commissions, fees,
brokerage or similar payments received by Putnam Management or an
affiliate in connection with the purchase and sale of portfolio
investments of a fund, less any direct expenses approved by the
Trustees, shall be recaptured by the fund through a reduction of
the fee payable under the Management Contract. Putnam Management
seeks to recapture for each fund soliciting dealer fees on the
tender of the fund's portfolio securities in tender or exchange
offers. Any such fees which may be recaptured are likely to be
minor in amount.
Consistent with the Conduct Rules of the National Association of
Securities Dealers, Inc. and subject to seeking the most
favorable price and execution available and such other policies
as the Trustees may determine, Putnam Management may consider
sales of shares of the Trust (and, if permitted by law, of the
other Putnam funds) as a factor in the selection of broker-
dealers to execute portfolio transactions for the Funds.
<PAGE>
Fund Fiscal Brokerage
name year commissions
- ---- ------ -----------
Putnam VT Asia
Pacific Growth
Fund (Commencement 1995 $205,198
of operations
May 1, 1995)
Putnam VT Diversified
Income Fund 1995 $14,676
1994 $3,004
1993 $252
Putnam VT Global Asset
Allocation Fund 1995 $797,004
1994 $818,846
1993 $611,157
Putnam VT Global
Growth Fund 1995 $2,275,831
1994 $1,992,940
1993 $1,163,591
Putnam VT Growth and
Income Fund 1995 $3,637,703
1994 $2,736,406
1993 $2,560,288
Putnam VT High
Yield Fund 1995 $11,800
1994 $4,461
1993 $19,196
Putnam VT Money
Market Fund 1995 $0
1994 $0
1993 $0
Putnam VT New
Opportunities Fund 1995 $312,487
(Commencement of 1994 $68,123
operations
May 2, 1994
Putnam VT U.S. Government
and High Quality
Bond Fund 1995 $2,880
1994 $17,014
1993 $7,844
Putnam VT Utilities
Growth and Income Fund 1995 $938,350
1994 $1,069,430
1993 $760,057
Putnam VT Voyager Fund 1995 $2,171,392
1994 $1,295,494
1993 $799,917
Principal Underwriter
Putnam Mutual Funds is the principal underwriter of shares of the
Trust, which are continuously offered, and shares of the other
continuously offered Putnam funds. Putnam Mutual Funds is not
obligated to sell any specific amount of shares of the Trust and
will purchase shares for resale only against orders for shares.
Investor servicing agent and Custodian
Putnam Investor Services, a division of Putnam Fiduciary Trust
Company ("PFTC"), is the Trust's investor servicing agent
(transfer, plan and dividend disbursing agent), for which it
receives fees which are paid monthly by the Trust as an expense
of all its shareholders. The fee paid to PFTC is determined by
the Trustees taking into account the number of shareholder
accounts and transactions. Putnam Investor Services has won the
DALBAR Quality Tested Service Seal every year since the award's
1990 inception. Over 10,000 tests of 38 separate shareholder
service components demonstrated that Putnam Investor Services
exceeded the industry standard in all categories.
The Trust paid $5,038,496 in gross fees to PFTC for its investor
servicing and custody services during fiscal 1995. The Trust
made no payments to PFTC for out-of-pocket expenses related to
the investor servicing agent's function for the year. For a
description of the custodial services provided by PFTC, see
"Custodian" below.
Putnam Fiduciary Trust Company is also investor servicing agent
for the other Putnam funds and receives fees from each of those
funds for its services.
INVESTMENT PERFORMANCE OF THE TRUST
Standard Performance Measures
Yield and total return data for the funds may from time to time
be presented in the prospectus, this SAI and advertisements. The
data is calculated as follows.
Total return for the life of the funds is determined by
calculating the actual dollar amount of investment return on a
$1,000 investment in a fund at the beginning of the period, and
then calculating the annual compounded rate of return which would
produce that amount. Total return for a period of one year is
equal to the actual return of a fund during that period.
A fund's yield is presented for a specified thirty-day period
(the "base period"). Yield is based on the amount determined by
(i) calculating the aggregate amount of dividends and interest
earned by the fund during the base period less expenses accrued
for that period, and (ii) dividing that amount by the product of
(A) the average daily number of shares of the fund outstanding
during the base period and entitled to receive dividends and (B)
the per share net asset value of the fund on the last day of the
base period. The result is annualized on a compounding basis to
determine the fund's yield. For this calculation, interest
earned on debt obligations held by the fund is generally
calculated using the yield to maturity (or first expected call
date) of such obligations based on their market values (or, in
the case of receivables-backed securities such as GNMAs, based on
cost). Dividends on equity securities are accrued daily at their
stated dividend rates.
Putnam VT Money Market Fund's yield is computed by determining
the percentage net change, excluding capital changes, in the
value of an investment in one share of the fund over the seven-
day period for which yield is presented (the "base period"), and
multiplying the net change by 365/7 (or approximately 52 weeks).
The fund's effective yield represents a compounding of the fund's
yield by adding 1 to the number representing the percentage
change in value of the investment during the base period, raising
that sum to a power equal to 365/7, and subtracting 1 from the
result.
At times, Putnam Management may reduce its compensation or assume
expenses of a fund in order to reduce that fund's expenses. The
annual per share amount of any such reduction or assumption of
expenses is shown in the table entitled "Financial highlights" in
the prospectus. Any such waiver or assumption of expenses would
increase a fund's yield and total return during the period of the
waiver or assumption. The table below presents performance
information for the periods ended June 30, 1996. All data is
based on past performance and does not predict future results.
<PAGE>
Total Return
Putnam VT Fund Yield* 1 year 5 years Life of fund
Asia Pacific N/A 10.01% N/A 7.22%
Diversified Income % 8.56 N/A 6.21
Global Asset
Allocation 17.91 12.04% 10.89
Global Growth N/A 21.47 12.45 9.68
Growth and Income 25.67 15.11 15.33
High Yield 13.01 14.76 10.94
Money Market 5.24 4.17 5.55
New Opportunities N/A 44.58 N/A 31.79
U.S. Government and
High Quality Bond 4.52 8.66 8.58
Utilities
Growth and Income 21.55 N/A 11.01
Voyager N/A 34.13 20.88 17.88
* Information shown for all funds except for the Money Market
Fund represents 30-day yield. Information shown for the Money
Market Fund is 7-day yield.
See the prospectus for the inception date of each fund. The
foregoing performance information reflects an expense limitation
applicable to Putnam VT High Yield Fund for fiscal 1988, Putnam
VT Utilities Growth and Income Fund for fiscal 1992, Putnam VT
New Opportunities Fund for fiscal 1994 and Putnam VT Asia Pacific
Growth Fund for fiscal 1995. Performance information presented
for the funds should not be compared directly with performance
information of other insurance products without taking into
account insurance-related charges and expenses payable under
their variable annuity contracts. These charges and expenses
are not reflected in the funds' performance and would reduce an
investor's return under the annuity contract.
DETERMINATION OF NET ASSET VALUE
The Trust values the shares of each fund daily on each day the
New York Stock Exchange (the "Exchange") is open. Currently, the
New York Stock Exchange is closed Saturdays, Sundays and the
following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, the Fourth of July, Labor Day, Thanksgiving and
Christmas. The Trust determines net asset value as of the close
of regular trading on the Exchange, currently 4:00 p.m. However,
equity options held by a fund are priced as of the close of
trading at 4:10 p.m., and futures on U.S. government securities
and index options held by a fund are priced as of their close of
trading at 4:15 p.m.
Putnam VT Money Market fund. The valuation of the fund's
portfolio instruments at amortized cost is permitted in
accordance with Securities and Exchange Commission Rule 2a-7 and
certain procedures adopted by the Trustees. The amortized cost
of an instrument is determined by valuing it at cost originally
and thereafter amortizing any discount or premium from its face
value at a constant rate until maturity, regardless of the effect
of fluctuating interest rates on the market value of the
instrument. Although the amortized cost method provides
certainty in valuation, it may result at times in determinations
of value that are higher or lower than the price the fund would
receive if the instruments were sold. Consequently, changes in
the market value of portfolio instruments during periods of
rising or falling interest rates will not normally be reflected
either in the computation of net asset value of the fund's
portfolio or in the daily computation of net income. Under the
procedures adopted by the Trustees, the fund must maintain a
dollar-weighted average portfolio maturity of 397 days or less,
purchase only instruments having remaining maturities of 90 days
or less and invest in securities determined by the Trustees to be
of high quality with minimal credit risks. The Trustees have
also established procedures designed to stabilize, to the extent
reasonably possible, the fund's price per share as computed for
the purpose of distribution, redemption and repurchase at $1.00.
These procedures include review of the fund's portfolio holdings
by the Trustees, at such intervals as they may deem appropriate,
to determine whether the fund's net asset value calculated by
using readily available market quotations deviates from $1.00 per
share, and, if so, whether such deviation may result in material
dilution or is otherwise unfair to existing shareholders. In the
event the Trustees determine that such a deviation exists, they
will take such corrective action as they regard as necessary and
appropriate, including selling portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average
portfolio maturity, withholding dividends, redeeming shares in
kind, or establishing a net asset value per share by using
readily available market quotations.
Since the net income of the fund is declared as a dividend each
time it is determined, the net asset value per share of the fund
remains at $1.00 per share immediately after such determination
and dividend declaration. Any increase in the value of a
shareholder's investment in the fund representing the
reinvestment of dividend income is reflected by an increase in
the number of shares of the fund in the shareholder's account on
the first day of the next month (or, if that day is not a
business day, on the next business day). It is expected that the
fund's net income will be positive each time it is determined.
However, if because of realized losses on sales of portfolio
investments, a sudden rise in interest rates, or for any other
reason the net income of the fund determined at any time is a
negative amount, the fund will offset such amount allocable to
each then shareholder's account from dividends accrued during the
month with respect to such account. If at the time of payment of
a dividend (either at the regular monthly dividend payment date,
or, in the case of a shareholder who is withdrawing all or
substantially all of the shares in an account, at the time of
withdrawal), such negative amount exceeds a shareholder's accrued
dividends, the fund will reduce the number of outstanding shares
by treating the shareholder as having contributed to the capital
of the fund that number of full and fractional shares which
represent the amount of excess. Each shareholder is deemed to
have agreed to such contribution in these circumstances by his or
her investment in the fund.
Other Funds. Each of the other funds determines net asset value
as follows: Securities for which market quotations are readily
available are valued at prices which, in the opinion of the
Trustees or Putnam Management, most nearly represent the market
values of such securities. Currently, such prices are determined
using the last reported sale price or, if no sales are reported
(as in the case of some securities traded over-the-counter) the
last reported bid price, except that certain U.S. government
securities are stated at the mean between the reported bid and
asked prices. Short-term investments having remaining maturities
of 60 days or less are stated at amortized cost, which
approximates market value. All other securities and assets are
valued at their fair value following procedures approved by the
Trustees. Liabilities are deducted from the total, and the
resulting amount is divided by the number of shares outstanding.
Reliable market quotations are not considered to be readily
available for long-term corporate bonds and notes, certain
preferred stocks, tax-exempt securities, and certain foreign
securities. These investments are stated 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. If any securities held by a fund are
restricted as to resale, Putnam Management determines their fair
value following procedures approved by the Trustees. The
Trustees periodically review such valuations and procedures.
The fair value of such securities is generally determined as the
amount which the fund could reasonably expect to realize from an
orderly disposition of such securities over a reasonable period
of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However,
consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the
investment and to the nature of the restrictions on disposition
of the securities (including any registration expenses that might
be borne by the fund in connection with such disposition). In
addition, specific factors are also generally considered, such as
the cost of the investment, the market value of any unrestricted
securities of the same class, the size of the holding, the prices
of any recent transactions or offers with respect to such
securities and any available analysts' reports regarding the
issuer.
Generally, trading in certain securities (such as foreign
securities) is substantially completed each day at various times
prior to the close of the Exchange. The values of these
securities used in determining the net asset value of the Trust's
shares are computed as of such times. Also, because of the
amount of time required to collect and process trading
information as to large numbers of securities issues, the values
of certain securities (such as convertible bonds, U.S. government
securities, and tax-exempt securities) are determined based on
market quotations collected earlier in the day at the latest
practicable time prior to the close of the Exchange.
Occasionally, events affecting the value of such securities may
occur between such times and the close of the Exchange which will
not be reflected in the computation of the funds' net asset
values. If events materially affecting the values of such
securities occur during such period, then these securities will
be valued at their fair value following procedures approved by
the Trustees.
SUSPENSION OF REDEMPTIONS
The Trust may not suspend the right of redemption and/or postpone
payment for more than seven days unless the New York Stock
Exchange is closed for other than customary weekends or holidays,
or except, if permitted by the rules of the Securities and
Exchange Commission, during periods when trading on the Exchange
is restricted or during any emergency which makes it
impracticable for the Trust to dispose of its securities or to
determine fairly the value of its net assets, or during any other
period permitted by order of the Commission for the protection of
investors.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of
the Trust. However, the Agreement and Declaration of Trust
disclaims shareholder liability for acts or obligations of the
Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or
executed by the Trust or the Trustees. The Agreement and
Declaration of Trust provides for indemnification out of a fund's
property for all loss and expense of any shareholder held
personally liable for the obligations of that fund. Thus, the
risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances in which a fund
would be unable to meet its obligations.
CUSTODIAN
Putnam Fiduciary Trust Company ("PFTC") is the custodian of the
Trust's assets. In carrying out its duties under its custodian
contract, PFTC may employ one or more subcustodians whose
responsibilities will include safeguarding and controlling the
Trust's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Trust's
investments. PFTC and any subcustodians employed by it have a
lien on the securities of each fund (to the extent permitted by
the Trust's investment restrictions) to secure charges and any
advances made by such subcustodians at the end of any day for the
purpose of paying for securities purchased by the Trust for the
benefit of that fund. The Trust expects that such advances will
exist only in unusual circumstances. Neither PFTC nor any
subcustodian determines the investment policies of any fund or
decides which securities a fund will buy or sell. PFTC pays the
fees and other charges of any subcustodians employed by it. The
Trust may from time to time pay custodial expenses in full or in
part through the placement by Putnam Management of the Trust's
portfolio transactions with the subcustodians or with a third-
party broker having an agreement with the subcustodians. The
Trust pays PFTC an annual fee based on each fund's assets,
securities transactions and securities holdings and reimburses
PFTC for certain out-of-pocket expenses incurred by it or any
subcustodian employed by it in performing custodial services.
<PAGE>
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Price Waterhouse LLP are the Trust'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 and financial
statements included in the Trust's Annual Report for the fiscal
year ended December 31, 1995, filed electronically on March 7,
1996 (File No. 811-5346), are incorporated by reference into this
SAI.
The financial highlights in the prospectuses 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.
The unaudited financial statements included in the Trust's Semi-
Annual Report for the fiscal period ended June 30, 1996, filed on
September 4, 1996, are incorporated by reference in this SAI.
