PUTNAM VARIABLE TRUST
FORM N-1A
PART B
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
May 1, 1996, as revised January 27 , 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- 32
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
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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.
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.
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.
(6a)
(All funds except 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.
<PAGE>
(6b
) (Putnam VT Utilities Growth and Income Fund) With respect to
50% 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.
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.
---------------------
It is contrary to each funds' present policy, which may be
changed without shareholder approval, to:
(1) Invest in (a) securities which are not readily marketable,
(b) securities restricted as to resale (excluding securities
determined by the Trustees of the fund (or the person designated
by the Trustees of the fund to make such determinations) to be
readily marketable), and (c) repurchase agreements maturing in
more than seven days, if, as a result, more than 15% of the
fund's net assets (taken at current value) would be invested in
securities described in (a), (b) and (c) above.
All percentage limitations on investments (other than pursuant to
non-fundamental restriction (1)) 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.
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.
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.
<PAGE>
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 (52) , 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 (44) , Vice President. Managing Director
of Putnam Management. Vice President of certain of the Putnam
funds.
Michael Martino (44) , 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.
<PAGE>
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.
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.
<PAGE>
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 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
and prior to April, 1995 he was Director at Baring Asset
Management Company . 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
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
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
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.
/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 , 0.80% of the
first $500
Putnam VT International Growth Fund , and million of
average net
Putnam VT International Growth and assets,
0.70% of the
Income Fund 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 New the next
$500 million,
Value Fund, Putnam VT Utilities Growth 0.55% of the
next $500
and Income Fund, and Putnam VT million, 0.50%
of the
Voyager Fund 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, 0.65% of the first $500
Putnam VT U.S. Government and High million of average net
Quality Bond Fund , and Putnam VT assets, 0.55% of the
Vista Fund 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.
