Prospectus
January 31, 2000
Putnam Variable Trust
Class IA Shares
Putnam Variable Trust (the "Trust") offers shares of beneficial interest in
separate investment portfolios (collectively, the "funds") for purchase by
separate accounts of various insurance companies. The funds, which have
different investment objectives and policies, offered by this prospectus
are:
Growth Fund Income Fund
Putnam VT Growth Opportunities Fund Putnam VT American Government Income Fund
This prospectus explains what you should know about the funds of Putnam
Variable Trust listed above, which are available for purchase by separate
accounts of insurance companies. Certain other funds of the Trust are
offered through another prospectus.
Putnam Investment Management, Inc. (Putnam Management), which has managed
mutual funds since 1937, manages the funds. These securities have not been
approved or disapproved by the Securities and Exchange Commission nor has
the Commission passed upon the accuracy or adequacy of this prospectus.
Any statement to the contrary is a crime.
CONTENTS
2 Fund summaries (including Goal, Main investment strategies and Main risks)
3 What are the funds' main investment strategies and related risks?
4 Who manages the funds?
5 How to buy and sell fund shares
5 How do the funds price their shares?
6 Fund distributions and taxes
Fund summaries
The following summaries identify each fund's goal, principal investment
strategies and the main risks that could adversely affect the value of a
fund's shares and the total return on your investment. More detailed
descriptions of the funds, including the risks associated with investing in
the funds, can be found further back in this prospectus. Please be sure to
read this additional information before you invest.
You can lose money by investing in either of the funds. A fund may not
achieve its goals, and neither of the funds is, nor together are they,
intended as a complete investment program. An investment in either fund is
not a deposit in a bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
PUTNAM VT GROWTH OPPORTUNITIES FUND
GOAL
The fund seeks capital appreciation.
MAIN INVESTMENT STRATEGIES - GROWTH STOCKS
The fund invests mainly in common stocks of U.S. companies, with a focus on
growth stocks. Growth stocks are issued by companies whose earnings we
believe are likely to grow faster than the economy as a whole. Growth in a
company's earnings may lead to an increase in the price of its stock. The
fund invests in a relatively small number of companies that we believe will
benefit from long-term trends in the economy, business conditions, consumer
behavior or public perceptions of the economic environment. The fund
invests mainly in large companies.
MAIN RISKS
* The risk of loss from investing in fewer issuers than a fund that invests
more broadly. This vulnerability to factors affecting a single investment
can result in greater fund losses and volatility.
* The risk that the stock price of one or more of the companies in the fund's
portfolio will fall, or will fail to rise. Many factors can adversely affect
a stock's performance, including both general financial market conditions and
factors related to a specific company or industry.
* The risk that movements in financial markets will adversely affect the price
of the fund's investments, regardless of how well the companies in which we
invest perform. The market as a whole may not favor the types of investments
we make.
PUTNAM VT AMERICAN GOVERNMENT INCOME FUND
GOAL
The fund seeks high current income with preservation of capital as its
secondary objective.
MAIN INVESTMENT STRATEGIES - U.S. GOVERNMENT BONDS
We invest mostly in bonds that
* are obligations of the U.S. government, its agencies and instrumentalities,
* are either backed by the full faith and credit of the United States, such
as U.S. Treasury bonds and Ginnie Mae mortgage-backed bonds, or that are
backed only by the credit of a federal agency or government sponsored entity,
such as Fannie Mae mortgage-backed bonds, and
* have intermediate to long-term maturities (three years or longer).
We may also invest in mortgage-backed investments of private issuers rated
AAA or its equivalent, at the time of purchase, by a nationally recognized
securities rating agency, or if unrated, that we determine to be of
comparable quality.
MAIN RISKS
* The risk that movements in financial markets will adversely affect the
value of the fund's investments. This risk includes interest rate risk,
which means that the prices of the fund's investments are likely to fall if
interest rates rise. Interest rate risk is generally highest for investments
with long maturities.
* The risk that the issuers of the fund's investments will not make timely
payments of interest and principal.
* The risk that, compared to other debt, mortgage-backed investments may
increase in value less when interest rates decline, and decline in value more
when interest rates rise.
What are the funds' main investment strategies and related risks?
The funds are generally managed in styles similar to other open-end
investment companies that we manage and whose shares are generally offered
to the public. These other Putnam funds may, however, employ different
investment practices and may invest in securities different from those in
which their counterpart funds invest, and consequently will not have
identical portfolios or experience identical investment results. Any
investment carries with it some level of risk that generally reflects its
potential for reward.
The first part of this section describes the investment strategies and
related risks that are particular to each of the funds. The second part of
this section (Common Investment Strategies and Related Risks) provides
additional information on the investment strategies described in part one
of the section. It discusses investment strategies and related risks that
are common to both funds. In addition, the "Fund summaries" contain
important information about the funds. Investors are urged to read the
fund summaries and both parts of the section that follows for complete
information about the funds.
Putnam VT GROWTH OPPORTUNITIES FUND
We pursue the fund's goal by investing mainly in growth stocks. We will
consider, among other things, a company's financial strength, competitive
position in its industry, and projected future earnings, cash flows and
dividends when deciding whether to buy or sell investments.
* Common stocks. Common stock represents an ownership interest in a company.
The value of a company's stock may fall as a result of factors relating
directly to that company, such as decisions made by its management or lower
demand for the company's products or services. A stock's value may also fall
because of factors affecting not just the company, but also companies in the
same industry or in a number of different industries, such as increases in
production costs. The value of a company's stock may also be affected by
changes in financial markets that are relatively unrelated to the company or
its industry, such as changes in interest rates or currency exchange rates.
In addition, a company's stock generally pays dividends only after the
company invests in its own business and makes required payments to holders
of its bonds and other debt. For this reason, the value of a company's stock
will usually react more strongly than bonds and other debt to actual or
perceived changes in the company's financial condition or prospects. Stocks
of smaller companies may be more vulnerable to adverse developments than
those of larger companies.
* Growth stocks. These are stocks of companies whose earnings we believe are
likely to grow faster than the economy as a whole. Growth stocks typically
trade at higher multiples of current earnings than other stocks. Therefore,
the values of growth stocks may be more sensitive to changes in current or
expected earnings than the values of other stocks. If our assessment of the
prospects for a company's earnings growth is wrong, or if its judgment of how
other investors will value the company's earnings growth is wrong, then the
price of the company's stock may fall or not approach the value that we have
placed on it.
* Foreign investments. We may invest in securities of foreign issuers.
Foreign investments involve certain special risks. For example, their values
may decline in response to changes in currency exchange rates, unfavorable
political and legal developments, unreliable or untimely information, and
economic and financial instability. In addition, the liquidity of these
investments may be more limited than for U.S. investments, which means we may
at times be unable to sell them at desirable prices. Foreign settlement
procedures may also involve additional risks. These risks are generally
greater in the case of developing (also known as emerging) markets with less
developed legal and financial systems.
Certain of these risks may also apply to U.S. investments that are
denominated in foreign currencies or that are traded in foreign markets, or
to securities of U.S. companies that have significant foreign operations.
PUTNAM VT AMERICAN GOVERNMENT INCOME FUND
We pursue the fund's goal by investing mainly in U.S. government bonds. We
will consider, among other things, credit, interest rate and prepayment
risks as well as general market conditions when deciding whether to buy or
sell investments.
* Interest rate risk. The values of bonds and other debt usually rise and
fall in response to changes in interest rates. Declining interest rates
generally raise the value of existing debt instruments, and rising interest
rates generally lower the value of existing debt instruments. Changes in a
debt instrument's value usually will not affect the amount of interest income
paid to the fund , but will affect the value of the fund's shares. Interest
rate risk is generally greater for investments with longer maturities.
Some investments give the issuer the option to call, or redeem, these
investments before their maturity date. If an issuer "calls" its security
during a time of declining interest rates, we might have to reinvest the
proceeds in an investment offering a lower yield, and therefore might not
benefit from any increase in value as a result of declining interest rates.
"Premium investments" offer interest rates higher than prevailing market
rates. However, they involve a greater risk of loss, because their values
tend to decline over time. You may find it useful to compare the fund's
yield, which factors out the effect of premium investments, with its
current dividend rate, which does not factor out that effect.
* Mortgage-backed investments. Traditional debt investments typically pay a
fixed rate of interest until maturity, when the entire principal amount is
due. By contrast, payments on mortgage-backed investments typically include
both interest and partial payment of principal. Principal may also be
prepaid voluntarily, or as a result of refinancing or foreclosure. We may
have to invest the proceeds from prepaid investments in other investments
with less attractive terms and yields. Compared to debt that cannot be
prepaid, mortgage-backed investments are less likely to increase in value
during periods of declining interest rates and have a higher risk of decline
in value during periods of rising interest rates. They may increase the
volatility of a fund. Some mortgage-backed investments receive only the
interest portion or the principal portion of payments on the underlying
mortgages. The yields and values of these investments are extremely
sensitive to changes in interest rates and in the rate of principal payments
on the underlying mortgages. The market for these investments may be
volatile and limited, which may make them difficult to buy or sell.
* Credit risk. U.S. government investments generally have the least credit
risk but are not completely free of credit risk. Other bonds in which the
fund may invest are subject to varying degrees of risk. These risk factors
include the creditworthiness of the issuer and, in the case of
mortgage-backed securities, the ability of the underlying borrowers to meet
their obligations.
COMMON INVESTMENT STRATEGIES AND RELATED RISKS
* Frequent trading. We may buy and sell investments relatively often, which
involves higher brokerage commissions and other expenses.
* Other investments. In addition to the main investment strategies described
above, we may make other types of investments, such as investments in
derivatives, which may be subject to other risks, as described in the Trust's
statement of additional information (SAI).
* Alternative strategies. At times we may judge that market conditions make
pursuing a fund's usual investment strategies inconsistent with the best
interests of its shareholders. We then may temporarily use alternative
strategies that are mainly designed to limit losses. However, we may choose
not to use these strategies for a variety of reasons, even in very volatile
market conditions. These strategies may cause the affected fund to miss out
on investment opportunities, and may prevent the fund from achieving its
goal.
* Changes in policies. The Trust's Trustees may change the funds' goals,
investment strategies and other policies without shareholder approval, except
as otherwise indicated.
Who manages the funds?
The Trust's Trustees oversee the general conduct of each fund's business.
The Trustees have retained Putnam Management to be the funds' investment
manager, responsible for making investment decisions for the funds and
managing the funds' other affairs and business. Each fund pays Putnam
Management a quarterly management fee for these services based on the
fund's average net assets. Putnam Management's address is One Post Office
Square, Boston, MA 02109. Putnam VT Growth Opportunities Fund pays Putnam
Management a quarterly management fee for these services at the annual rate
of 0.70% of the first $500 million of average net assets, 0.60% of the next
$500 million, 0.55% of the next $500 million, 0.50% of the next $5 billion,
0.475% of the next $5 billion, 0.455% of the next $5 billion, 0.44% of the
next $5 billion, 0.43% of the next $5 billion and 0.42% of any excess
thereafter. Putnam VT American Government Income Fund pays Putnam
Management a quarterly management fee for these services at the annual rate
of 0.65% of the first $500 million of average net assets, 0.55% of the next
$500 million, 0.50% of the next $500 million, 0.45% of the next $5 billion,
0.425% of the next $5 billion, 0.405% of the next $5 billion, 0.39% of the
next $5 billion, 0.38% of the next $5 billion, 0.37% of the next $5
billion, 0.36% of the next $5 billion, 0.35% of the next $5 billion and
0.34% of any excess thereafter.
In order to limit expenses for Putnam VT American Government Income Fund,
Putnam Management has agreed to limit its compensation (and, to the extent
necessary, bear other expenses) through December 31, 2000 to the extent
that the expenses of the fund (exclusive of brokerage, interest, taxes and
extraordinary expenses, and payments under the fund's distribution plans)
would exceed an annual rate of 0.90% of the fund's average net assets. For
the purpose of determining any such limitation on Putnam Management's
compensation, expenses of the fund do not reflect the application of
commissions or cash management credits that may reduce designated fund
expenses.
The following officers of Putnam Management have had primary responsibility
for the day-to-day management of the relevant fund's portfolio since the
years shown below. Their experience as either portfolio managers or
investment analysts over at least the last five years is also shown.
<TABLE>
<CAPTION>
Manager Since Experience
- ---------------------------------------------------------------------------------------
PUTNAM VT GROWTH OPPORTUNITIES FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
C. Beth Cotner 2000 1995-Present Putnam Management
Managing Director Prior to Sept. 1995 Kemper Financial
Services
Jeffrey R. Lindsey 2000 1994-Present Putnam Management
Senior Vice President
David J. Santos 2000 1986-Present Putnam Management
Senior Vice President
PUTNAM VT AMERICAN GOVERNMENT INCOME FUND
Kevin Cronin 2000 1997-Present Putnam Management
Managing Director Prior to Feb. 1997 MFS Investment
Management
Michael Martino 2000 1994-Present Putnam Management
Managing Director
</TABLE>
Year 2000 Issues. The funds could be adversely affected if the computer
systems that we and the funds' other service providers use do not properly
process and calculate the date-related information relating to the year
2000. While year 2000-related computer problems could have a negative
effect on a fund, both in its operations and in its investments, we are
working to avoid such problems and to obtain assurances from service
providers that they are taking similar steps. No assurances, though, can
be provided that the funds will not be adversely impacted by these matters.
How to buy and sell fund shares
The Trust has an underwriting agreement relating to the funds with Putnam
Mutual Funds, One Post Office Square, Boston, Massachusetts 02109. Putnam
Mutual Funds presently offers shares of each fund of the Trust continuously
to separate accounts of various insurers. The underwriting agreement
presently provides that Putnam Mutual Funds accepts orders for shares at
net asset value and no sales commission or load is charged. Putnam Mutual
Funds may, at its expense, provide promotional incentives to dealers that
sell variable insurance products.
Shares are sold or redeemed at the net asset value per share next
determined after receipt of an order. Orders for purchases or sales of
shares of a fund must be received by Putnam Mutual Funds before the close
of regular trading on the New York Stock Exchange in order to receive that
day's net asset value. No fee is charged to a separate account when it
redeems fund shares.
Please check with your insurance company to determine which funds are
available under your variable annuity contract or variable life insurance
policy. The funds may not be available in your state due to various
insurance regulations. Inclusion in this prospectus of a fund that is not
available in your state is not to be considered a solicitation. This
prospectus should be read in conjunction with the prospectus of the
separate account of the specific insurance product which accompanies this
prospectus.
The funds currently do not foresee any disadvantages to policyowners
arising out of the fact that the funds offer their shares to separate
accounts of various insurance companies to serve as the investment medium
for their variable products. Nevertheless, the Trustees intend to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise, and to determine what action, if any, should be taken in
response to such conflicts. If such a conflict were to occur, one or more
insurance companies' separate accounts might be required to withdraw their
investments in one or more funds and shares of another fund may be
substituted. This might force a fund to sell portfolio securities at
disadvantageous prices. In addition, the Trustees may refuse to sell
shares of any fund to any separate account or may suspend or terminate the
offering of shares of any fund if such action is required by law or
regulatory authority or is in the best interests of the shareholders of the
fund.
Under unusual circumstances, the Trust may suspend repurchases or postpone
payment for up to seven days or longer, as permitted by federal securities
law.
How do the funds price their shares?
The price of a fund's shares is based on its net asset value (NAV). The
NAV per share of each class equals the total value of its assets, less its
liabilities, divided by the number of its outstanding shares. Shares are
only valued as of the close of regular trading on the New York Stock
Exchange each day the exchange is open.
Each fund values its investments for which market quotations are readily
available at market value. It values short-term investments that will
mature within 60 days at amortized cost, which approximates market value.
It values all other investments and assets at their fair value.
Each fund translates prices for its investments quoted in foreign
currencies into U.S. dollars at current exchange rates. As a result,
changes in the value of those currencies in relation to the U.S. dollar may
affect each fund's NAV. Because foreign markets may be open at different
times than the New York Stock Exchange, the value of each fund's shares may
change on days when shareholders are not able to buy or sell them. If
events materially affecting the values of each fund's foreign investments
occur between the close of foreign markets and the close of regular trading
on the New York Stock Exchange, these investments will be valued at their
fair value.
Fund distributions and taxes
Each of the funds will distribute any net investment income and net
realized capital gains at least annually. Both types of distributions will
be made in shares of such funds unless an election is made on behalf of a
separate account to receive some or all of the distributions in cash.
Distributions are reinvested without a sales charge, using the net asset
value determined on the ex-dividend date. Distributions on each share are
determined in the same manner and are paid in the same amount, regardless
of class, except for such differences as are attributable to differential
class expenses.
Generally, owners of variable annuity and variable life contracts are not
taxed currently on income or gains realized with respect to such contracts.
However, some distributions from such contracts may be taxable at ordinary
income tax rates. In addition, distributions made to an owner who is
younger than 59 1/2 may be subject to a 10% penalty tax. Investors should
ask their own tax advisors for more information on their own tax situation,
including possible foreign, state or local taxes.
In order for investors to receive the favorable tax treatment available to
holders of variable annuity and variable life contracts, the separate
accounts underlying such contracts, as well as the funds in which such
accounts invest, must meet certain diversification requirements. Each fund
intends to comply with these requirements. If a fund does not meet such
requirements, income allocable to the contracts would be taxable currently
to the holders of such contracts.
Each fund intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements necessary
for it to be relieved of federal income taxes on income and gains it
distributes to the separate accounts. For information concerning federal
income tax consequences for the holders of variable annuity contracts and
variable life insurance policies, contract holders should consult the
prospectus of the applicable separate account.
Fund investments in foreign securities may be subject to withholding taxes
at the source on dividend or interest payments. In that case, a fund's
return on those investments would be decreased.
A fund's investments in certain debt obligations may cause the fund to
recognize taxable income in excess of the cash generated by such
obligations. Thus, the fund could be required at times to liquidate other
investments in order to satisfy its distribution requirements.
For more information
about the funds of Putnam Variable Trust
The Trust's statement of additional information (SAI) with respect to
Putnam VT American Government Income Fund and Putnam VT Growth
Opportunities Fund includes additional information about the funds. The
SAI is incorporated by reference into this prospectus, which means it is
part of this prospectus for legal purposes. You may get free copies of the
SAI, request other information about the funds and other Putnam funds, or
make shareholder inquiries, by contacting your financial advisor or by
calling Putnam toll-free at 1-800-225-1581.
You may review and copy information about the funds, including the Trust's
SAI, at the Securities and Exchange Commission's public reference room in
Washington, D.C. You may call the Commission at 1-800-SEC-0330 for
information about the operation of the public reference room. You may also
access reports and other information about the funds on the Commission's
Internet site at http://www.sec.gov. You may get copies of this
information, with payment of a duplication fee, by writing the Public
Reference Section of the Commission, Washington, D.C. 20549-6009. You may
need to refer to the Trust's file number.
PUTNAM INVESTMENTS
One Post Office Square
Boston, Massachusetts 02109
1-800-225-1581
Address correspondence to
Putnam Investor Services
P.O. Box 989
Boston, Massachusetts 02103
www.putnaminv.com
File No. 811-5346
Prospectus
January 31, 2000
Putnam Variable Trust
Class IB Shares
Putnam Variable Trust (the "Trust") offers shares of beneficial interest in
separate investment portfolios (collectively, the "funds") for purchase by
separate accounts of various insurance companies. The funds, which have
different investment objectives and policies, offered by this prospectus
are:
Growth Fund Income Fund
Putnam VT Growth Opportunities Fund Putnam VT American Government Income Fund
This prospectus explains what you should know about the funds of Putnam
Variable Trust listed above, which are available for purchase by separate
accounts of insurance companies. Certain other funds of the Trust are
offered through another prospectus.
Putnam Investment Management, Inc. (Putnam Management), which has managed
mutual funds since 1937, manages the funds. These securities have not been
approved or disapproved by the Securities and Exchange Commission nor has
the Commission passed upon the accuracy or adequacy of this prospectus.
Any statement to the contrary is a crime.
CONTENTS
2 Fund summaries (including Goal, Main investment strategies and Main risks)
3 What are the funds' main investment strategies and related risks?
4 Who manages the funds?
5 How to buy and sell fund shares
5 Distribution Plan
6 How do the funds price their shares?
6 Fund distributions and taxes
Fund summaries
The following summaries identify each fund's goal, principal investment
strategies and the main risks that could adversely affect the value of a
fund's shares and the total return on your investment. More detailed
descriptions of the funds, including the risks associated with investing in
the funds, can be found further back in this prospectus. Please be sure to
read this additional information before you invest.
You can lose money by investing in either of the funds. A fund may not
achieve its goals, and neither of the funds is, nor together are they,
intended as a complete investment program. An investment in either fund is
not a deposit in a bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
PUTNAM VT GROWTH OPPORTUNITIES FUND
GOAL
The fund seeks capital appreciation.
MAIN INVESTMENT STRATEGIES - GROWTH STOCKS
The fund invests mainly in common stocks of U.S. companies, with a focus on
growth stocks. Growth stocks are issued by companies whose earnings we
believe are likely to grow faster than the economy as a whole. Growth in a
company's earnings may lead to an increase in the price of its stock. The
fund invests in a relatively small number of companies that we believe will
benefit from long-term trends in the economy, business conditions, consumer
behavior or public perceptions of the economic environment. The fund
invests mainly in large companies.
MAIN RISKS
* The risk of loss from investing in fewer issuers than a fund that invests
more broadly. This vulnerability to factors affecting a single investment
can result in greater fund losses and volatility.
* The risk that the stock price of one or more of the companies in the fund's
portfolio will fall, or will fail to rise. Many factors can adversely affect
a stock's performance, including both general financial market conditions and
factors related to a specific company or industry.
* The risk that movements in financial markets will adversely affect the price
of the fund's investments, regardless of how well the companies in which we
invest perform. The market as a whole may not favor the types of investments
we make.
PUTNAM VT AMERICAN GOVERNMENT INCOME FUND
GOAL
The fund seeks high current income with preservation of capital as its
secondary objective.
MAIN INVESTMENT STRATEGIES - U.S. GOVERNMENT BONDS
We invest mostly in bonds that
* are obligations of the U.S. government, its agencies and instrumentalities,
* are either backed by the full faith and credit of the United States, such as
U.S. Treasury bonds and Ginnie Mae mortgage-backed bonds, or that are backed
only by the credit of a federal agency or government sponsored entity, such
as Fannie Mae mortgage-backed bonds, and
* have intermediate to long-term maturities (three years or longer).
We may also invest in mortgage-backed investments of private issuers rated
AAA or its equivalent, at the time of purchase, by a nationally recognized
securities rating agency, or if unrated, that we determine to be of
comparable quality.
MAIN RISKS
* The risk that movements in financial markets will adversely affect the value
of the fund's investments. This risk includes interest rate risk, which
means that the prices of the fund's investments are likely to fall if
interest rates rise. Interest rate risk is generally highest for investments
with long maturities.
* The risk that the issuers of the fund's investments will not make timely
payments of interest and principal.
* The risk that, compared to other debt, mortgage-backed investments may
increase in value less when interest rates decline, and decline in value
more when interest rates rise.
What are the funds' main investment strategies and related risks?
The funds are generally managed in styles similar to other open-end
investment companies that we manage and whose shares are generally offered
to the public. These other Putnam funds may, however, employ different
investment practices and may invest in securities different from those in
which their counterpart funds invest, and consequently will not have
identical portfolios or experience identical investment results. Any
investment carries with it some level of risk that generally reflects its
potential for reward.
The first part of this section describes the investment strategies and
related risks that are particular to each of the funds. The second part of
this section (Common Investment Strategies and Related Risks) provides
additional information on the investment strategies described in part one
of the section. It discusses investment strategies and related risks that
are common to both funds. In addition, the "Fund summaries" contain
important information about the funds. Investors are urged to read the
fund summaries and both parts of the section that follows for complete
information about the funds.
PUTNAM VT GROWTH OPPORTUNITIES FUND
We pursue the fund's goal by investing mainly in growth stocks. We will
consider, among other things, a company's financial strength, competitive
position in its industry, and projected future earnings, cash flows and
dividends when deciding whether to buy or sell investments.
* Common stocks. Common stock represents an ownership interest in a company.
The value of a company's stock may fall as a result of factors relating
directly to that company, such as decisions made by its management or lower
demand for the company's products or services. A stock's value may also fall
because of factors affecting not just the company, but also companies in the
same industry or in a number of different industries, such as increases in
production costs. The value of a company's stock may also be affected by
changes in financial markets that are relatively unrelated to the company or
its industry, such as changes in interest rates or currency exchange rates.
In addition, a company's stock generally pays dividends only after the
company invests in its own business and makes required payments to holders of
its bonds and other debt. For this reason, the value of a company's stock
will usually react more strongly than bonds and other debt to actual or
perceived changes in the company's financial condition or prospects. Stocks
of smaller companies may be more vulnerable to adverse developments than
those of larger companies.
* Growth stocks. These are stocks of companies whose earnings we believe are
likely to grow faster than the economy as a whole. Growth stocks typically
trade at higher multiples of current earnings than other stocks. Therefore,
the values of growth stocks may be more sensitive to changes in current or
expected earnings than the values of other stocks. If our assessment of the
prospects for a company's earnings growth is wrong, or if its judgment of how
other investors will value the company's earnings growth is wrong, then the
price of the company's stock may fall or not approach the value that we have
placed on it.
* Foreign investments. We may invest in securities of foreign issuers. Foreign
investments involve certain special risks. For example, their values may
decline in response to changes in currency exchange rates, unfavorable
political and legal developments, unreliable or untimely information, and
economic and financial instability. In addition, the liquidity of these
investments may be more limited than for U.S. investments, which means we may
at times be unable to sell them at desirable prices. Foreign settlement
procedures may also involve additional risks. These risks are generally
greater in the case of developing (also known as emerging) markets with less
developed legal and financial systems.
Certain of these risks may also apply to U.S. investments that are
denominated in foreign currencies or that are traded in foreign markets, or
to securities of U.S. companies that have significant foreign operations.
PUTNAM VT AMERICAN GOVERNMENT INCOME FUND
We pursue the fund's goal by investing mainly in U.S. government bonds. We
will consider, among other things, credit, interest rate and prepayment
risks as well as general market conditions when deciding whether to buy or
sell investments.
* Interest rate risk. The values of bonds and other debt usually rise and
fall in response to changes in interest rates. Declining interest rates
generally raise the value of existing debt instruments, and rising interest
rates generally lower the value of existing debt instruments. Changes in a
debt instrument's value usually will not affect the amount of interest income
paid to the fund , but will affect the value of the fund's shares. Interest
rate risk is generally greater for investments with longer maturities.
Some investments give the issuer the option to call, or redeem, these
investments before their maturity date. If an issuer "calls" its security
during a time of declining interest rates, we might have to reinvest the
proceeds in an investment offering a lower yield, and therefore might not
benefit from any increase in value as a result of declining interest rates.
"Premium investments" offer interest rates higher than prevailing market
rates. However, they involve a greater risk of loss, because their values
tend to decline over time. You may find it useful to compare the fund's
yield, which factors out the effect of premium investments, with its
current dividend rate, which does not factor out that effect.
* Mortgage-backed investments. Traditional debt investments typically pay a
fixed rate of interest until maturity, when the entire principal amount is
due. By contrast, payments on mortgage-backed investments typically include
both interest and partial payment of principal. Principal may also be
prepaid voluntarily, or as a result of refinancing or foreclosure. We may
have to invest the proceeds from prepaid investments in other investments
with less attractive terms and yields. Compared to debt that cannot be
prepaid, mortgage-backed investments are less likely to increase in value
during periods of declining interest rates and have a higher risk of decline
in value during periods of rising interest rates. They may increase the
volatility of a fund. Some mortgage-backed investments receive only the
interest portion or the principal portion of payments on the underlying
mortgages. The yields and values of these investments are extremely
sensitive to changes in interest rates and in the rate of principal payments
on the underlying mortgages. The market for these investments may be
volatile and limited, which may make them difficult to buy or sell.
* Credit risk. U.S. government investments generally have the least credit
risk but are not completely free of credit risk. Other bonds in which the
fund may invest are subject to varying degrees of risk. These risk factors
include the creditworthiness of the issuer and, in the case of
mortgage-backed securities, the ability of the underlying borrowers to meet
their obligations.
COMMON INVESTMENT STRATEGIES AND RELATED RISKS
* Frequent trading. We may buy and sell investments relatively often, which
involves higher brokerage commissions and other expenses.
* Other investments. In addition to the main investment strategies described
above, we may make other types of investments, such as investments in
derivatives, which may be subject to other risks, as described in the
Trust's statement of additional information (SAI).
* Alternative strategies. At times we may judge that market conditions make
pursuing a fund's usual investment strategies inconsistent with the best
interests of its shareholders. We then may temporarily use alternative
strategies that are mainly designed to limit losses. However, we may choose
not to use these strategies for a variety of reasons, even in very volatile
market conditions. These strategies may cause the affected fund to miss out
on investment opportunities, and may prevent the fund from achieving its goal.
* Changes in policies. The Trust's Trustees may change the funds' goals,
investment strategies and other policies without shareholder approval, except
as otherwise indicated.
Who manages the funds?
The Trust's Trustees oversee the general conduct of each fund's business.
The Trustees have retained Putnam Management to be the funds' investment
manager, responsible for making investment decisions for the funds and
managing the funds' other affairs and business. Each fund pays Putnam
Management a quarterly management fee for these services based on the
fund's average net assets. Putnam Management's address is One Post Office
Square, Boston, MA 02109. Putnam VT Growth Opportunities Fund pays Putnam
Management a quarterly management fee for these services at the annual rate
of 0.70% of the first $500 million of average net assets, 0.60% of the next
$500 million, 0.55% of the next $500 million, 0.50% of the next $5 billion,
0.475% of the next $5 billion, 0.455% of the next $5 billion, 0.44% of the
next $5 billion, 0.43% of the next $5 billion and 0.42% of any excess
thereafter. Putnam VT American Government Income Fund pays Putnam
Management a quarterly management fee for these services at the annual rate
of 0.65% of the first $500 million of average net assets, 0.55% of the next
$500 million, 0.50% of the next $500 million, 0.45% of the next $5 billion,
0.425% of the next $5 billion, 0.405% of the next $5 billion, 0.39% of the
next $5 billion, 0.38% of the next $5 billion, 0.37% of the next $5
billion, 0.36% of the next $5 billion, 0.35% of the next $5 billion and
0.34% of any excess thereafter.
In order to limit expenses for Putnam VT American Government Income Fund,
Putnam Management has agreed to limit its compensation (and, to the extent
necessary, bear other expenses) through December 31, 2000 to the extent
that the expenses of the fund (exclusive of brokerage, interest, taxes and
extraordinary expenses, and payments under the fund's distribution plans)
would exceed an annual rate of 0.90% of the fund's average net assets. For
the purpose of determining any such limitation on Putnam Management's
compensation, expenses of the fund do not reflect the application of
commissions or cash management credits that may reduce designated fund
expenses.
The following officers of Putnam Management have had primary responsibility
for the day-to-day management of the relevant fund's portfolio since the
years shown below. Their experience as either portfolio managers or
investment analysts over at least the last five years is also shown.
<TABLE>
<CAPTION>
Manager Since Experience
- ---------------------------------------------------------------------------------------
PUTNAM VT GROWTH OPPORTUNITIES FUND
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
C. Beth Cotner 2000 1995-Present Putnam Management
Managing Director Prior to Sept. 1995 Kemper Financial
Services
Jeffrey R. Lindsey 2000 1994-Present Putnam Management
Senior Vice President
David J. Santos 2000 1986-Present Putnam Management
Senior Vice President
Putnam VT American Government Income Fund
Kevin Cronin 2000 1997-Present Putnam Management
Managing Director Prior to Feb. 1997 MFS Investment
Management
Michael Martino 2000 1994-Present Putnam Management
Managing Director
</TABLE>
Year 2000 Issues. The funds could be adversely affected if the computer
systems that we and the funds' other service providers use do not properly
process and calculate the date-related information relating to the year
2000. While year 2000-related computer problems could have a negative
effect on a fund, both in its operations and in its investments, we are
working to avoid such problems and to obtain assurances from service
providers that they are taking similar steps. No assurances, though, can
be provided that the funds will not be adversely impacted by these matters.
How to buy and sell fund shares
The Trust has an underwriting agreement relating to the funds with Putnam
Mutual Funds, One Post Office Square, Boston, Massachusetts 02109. Putnam
Mutual Funds presently offers shares of each fund of the Trust continuously
to separate accounts of various insurers. The underwriting agreement
presently provides that Putnam Mutual Funds accepts orders for shares at
net asset value and no sales commission or load is charged. Putnam Mutual
Funds may, at its expense, provide promotional incentives to dealers that
sell variable insurance products.
Shares are sold or redeemed at the net asset value per share next
determined after receipt of an order. Orders for purchases or sales of
shares of a fund must be received by Putnam Mutual Funds before the close
of regular trading on the New York Stock Exchange in order to receive that
day's net asset value. No fee is charged to a separate account when it
redeems fund shares.
Please check with your insurance company to determine which funds are
available under your variable annuity contract or variable life insurance
policy. The funds may not be available in your state due to various
insurance regulations. Inclusion in this prospectus of a fund that is not
available in your state is not to be considered a solicitation. This
prospectus should be read in conjunction with the prospectus of the
separate account of the specific insurance product which accompanies this
prospectus.
The funds currently do not foresee any disadvantages to policyowners
arising out of the fact that the funds offer their shares to separate
accounts of various insurance companies to serve as the investment medium
for their variable products. Nevertheless, the Trustees intend to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise, and to determine what action, if any, should be taken in
response to such conflicts. If such a conflict were to occur, one or more
insurance companies' separate accounts might be required to withdraw their
investments in one or more funds and shares of another fund may be
substituted. This might force a fund to sell portfolio securities at
disadvantageous prices. In addition, the Trustees may refuse to sell
shares of any fund to any separate account or may suspend or terminate the
offering of shares of any fund if such action is required by law or
regulatory authority or is in the best interests of the shareholders of the
fund.
Under unusual circumstances, the Trust may suspend repurchases or postpone
payment for up to seven days or longer, as permitted by federal securities
law.
Distribution plan
The Trust has adopted a Distribution Plan with respect to class IB shares
to compensate Putnam Mutual Funds for services provided and expenses
incurred by it as principal underwriter of the class IB shares, including
the payments to insurance companies and their affiliated dealers mentioned
below. The plans provide for payments by each fund to Putnam Mutual Funds
at the annual rate (expressed as a percentage of average net assets) of up
to 0.35% on class IB shares. The Trustees currently limit payments on
class IB shares to 0.15% of average net assets.
Putnam Mutual Funds compensates insurance companies (or affiliated
broker-dealers) whose separate accounts invest in the Trust through class
IB shares for providing services to their contract holders investing in the
Trust.
Putnam Mutual Funds makes quarterly payments to dealers at the annual rate
of up to 0.15% of the average net asset value of class IB shares.
Putnam Mutual Funds may suspend or modify its payments to dealers. The
payments are also subject to the continuation of the Distribution Plan, the
terms of service agreements between dealers and Putnam Mutual Funds, and
any applicable limits imposed by the National Association of Securities
Dealers, Inc.
How do the funds price their shares?
The price of a fund's shares is based on its net asset value (NAV). The
NAV per share of each class equals the total value of its assets, less its
liabilities, divided by the number of its outstanding shares. Shares are
only valued as of the close of regular trading on the New York Stock
Exchange each day the exchange is open.
Each fund values its investments for which market quotations are readily
available at market value. It values short-term investments that will
mature within 60 days at amortized cost, which approximates market value.
It values all other investments and assets at their fair value.
Each fund translates prices for its investments quoted in foreign
currencies into U.S. dollars at current exchange rates. As a result,
changes in the value of those currencies in relation to the U.S. dollar may
affect each fund's NAV. Because foreign markets may be open at different
times than the New York Stock Exchange, the value of each fund's shares may
change on days when shareholders are not able to buy or sell them. If
events materially affecting the values of each fund's foreign investments
occur between the close of foreign markets and the close of regular trading
on the New York Stock Exchange, these investments will be valued at their
fair value.
Fund distributions and taxes
Each of the funds will distribute any net investment income and net
realized capital gains at least annually. Both types of distributions will
be made in shares of such funds unless an election is made on behalf of a
separate account to receive some or all of the distributions in cash.
Distributions are reinvested without a sales charge, using the net asset
value determined on the ex-dividend date. Distributions on each share are
determined in the same manner and are paid in the same amount, regardless
of class, except for such differences as are attributable to differential
class expenses.
Generally, owners of variable annuity and variable life contracts are not
taxed currently on income or gains realized with respect to such contracts.
However, some distributions from such contracts may be taxable at ordinary
income tax rates. In addition, distributions made to an owner who is
younger than 59 1/2 may be subject to a 10% penalty tax. Investors should
ask their own tax advisors for more information on their own tax situation,
including possible foreign, state or local taxes.
In order for investors to receive the favorable tax treatment available to
holders of variable annuity and variable life contracts, the separate
accounts underlying such contracts, as well as the funds in which such
accounts invest, must meet certain diversification requirements. Each fund
intends to comply with these requirements. If a fund does not meet such
requirements, income allocable to the contracts would be taxable currently
to the holders of such contracts.
Each fund intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements necessary
for it to be relieved of federal income taxes on income and gains it
distributes to the separate accounts. For information concerning federal
income tax consequences for the holders of variable annuity contracts and
variable life insurance policies, contract holders should consult the
prospectus of the applicable separate account.
Fund investments in foreign securities may be subject to withholding taxes
at the source on dividend or interest payments. In that case, a fund's
return on those investments would be decreased.
A fund's investments in certain debt obligations may cause the fund to
recognize taxable income in excess of the cash generated by such
obligations. Thus, the fund could be required at times to liquidate other
investments in order to satisfy its distribution requirements.
For more information
about the funds of Putnam Variable Trust
The Trust's statement of additional information (SAI) with respect to
Putnam VT American Government Income Fund and Putnam VT Growth
Opportunities Fund includes additional information about the funds. The
SAI is incorporated by reference into this prospectus, which means it is
part of this prospectus for legal purposes. You may get free copies of the
SAI, request other information about the funds and other Putnam funds, or
make shareholder inquiries, by contacting your financial advisor or by
calling Putnam toll-free at 1-800-225-1581.
You may review and copy information about the funds, including the Trust's
SAI, at the Securities and Exchange Commission's public reference room in
Washington, D.C. You may call the Commission at 1-800-SEC-0330 for
information about the operation of the public reference room. You may also
access reports and other information about the funds on the Commission's
Internet site at http://www.sec.gov. You may get copies of this
information, with payment of a duplication fee, by writing the Public
Reference Section of the Commission, Washington, D.C. 20549-6009. You may
need to refer to the Trust's file number.
PUTNAM INVESTMENTS
One Post Office Square
Boston, Massachusetts 02109
1-800-225-1581
Address correspondence to
Putnam Investor Services
P.O. Box 989
Boston, Massachusetts 02103
www.putnaminv.com
File No. 811-5346
PUTNAM VT AMERICAN GOVERNMENT INCOME FUND
PUTNAM VT GROWTH OPPORTUNITIES FUND
TWO SERIES OF PUTNAM VARIABLE TRUST
FORM N-1A
PART B
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
January 31, 2000
This SAI is not a prospectus and is only authorized for distribution when
accompanied or preceded by the prospectus of the funds dated January 31,
2000, 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 funds have more than one form of current prospectus, each reference to
the prospectus in this SAI shall include all of the funds' prospectuses,
unless otherwise noted. The SAI should be read together with the
applicable prospectus. For a free copy of the funds' prospectus, call
Putnam Investor Services at 1-800-225-1581 or write Putnam Investor
Services, Mailing address: P.O. Box 41203, Providence, RI 02940-1203.
Table of Contents
DEFINITIONS B-2
TRUST ORGANIZATION AND CLASSIFICATION B-2
INVESTMENT OBJECTIVES AND POLICIES B-3
TAXES B-26
INVESTMENT RESTRICTIONS B-28
MANAGEMENT B-30
INVESTMENT PERFORMANCE OF THE TRUST B-43
DETERMINATION OF NET ASSET VALUE B-43
DISTRIBUTION PLAN B-44
SUSPENSION OF REDEMPTIONS B-45
SHAREHOLDER LIABILITY B-45
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS B-45
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.
TRUST ORGANIZATION AND CLASSIFICATION
Putnam Variable Trust is a Massachusetts business trust organized on
September 24, 1987. A copy of the Agreement and Declaration of Trust,
which is governed by Massachusetts law, is on file with the Secretary of
State of The Commonwealth of Massachusetts. Prior to January 1, 1997, the
Trust was known as Putnam Capital Manager Trust. As of the date of this
SAI, Putnam Investments owned 100% of the shares of the Putnam VT American
Government Income Fund and Putnam VT Growth Opportunities Fund and
therefore may be deemed to "control" these funds.
The Trust is an open-end management investment company with an unlimited
number of authorized shares of beneficial interest. Shares of the Trust
may, without shareholder approval, be divided into two or more series of
shares representing separate investment portfolios, and are currently
divided into twenty-four series of shares, each representing a separate
investment portfolio which is being offered to separate accounts of various
insurance companies. Each portfolio is a diversified investment company.
Any series of shares of the Trust may be further divided without
shareholder approval into two or more classes of shares having such
preferences and special or relative rights and privileges as the Trustees
may determine. Shares of each series are currently divided into two
classes: class IA shares and class IB shares. Class IB shares are subject
to fees imposed pursuant to a distribution plan. The funds may also offer
other classes of shares with different sales charges and expenses. Because
of these different sales charges and expenses, the investment performance
of the classes will vary.
The two classes of shares are offered under a multiple class distribution
system approved by the Trust's Trustees, and are designed to allow
promotion of insurance products investing in the Trust through alternative
distribution channels. The insurance company issuing a variable contract
selects the class of shares in which the separate account funding the
contract invests.
Each share has one vote, with fractional shares voting proportionately.
Shares vote as a single class without regard to series or classes of shares
except (i) when required by the 1940 Act, or when the Trustees have
determined that the matter affects one or more series or classes of shares
materially differently, shares shall be voted by individual series or
class, and (ii) when the Trustees have determined that the matter affects
only the interests of one or more series or classes, only the shareholders
of such series or class shall be entitled to vote. Shares are freely
transferable, are entitled to dividends as declared by the Trustees, and,
if the portfolio were liquidated, would receive the net assets of the
portfolio. The Trust may suspend the sale of shares of any portfolio at
any time and may refuse any order to purchase shares. Although the Trust
is not required to hold annual meetings of its shareholders, shareholders
holding at least 10% of the outstanding shares entitled to vote have the
right to call a meeting to elect or remove Trustees, or to take other
actions as provided in the Agreement and Declaration of Trust.
Each of Putnam VT American Government Income Fund and Putnam VT Growth
Opportunities Fund is a "diversified" investment company under the
Investment Company Act of 1940. This means that with respect to 75% of its
total assets, each fund may not invest more than 5% of its total assets in
the securities of any one issuer (except U.S. government securities) nor
may it purchase more than 10% of the voting securities of any such issuer.
The remaining 25% of its total assets is not subject to this restriction.
To the extent each fund invests a significant portion of its assets in the
securities of a particular issuer, it will be subject to an increased risk
of loss if the market value of such issuer's securities declines.
Shares of the funds may only be purchased by an insurance company separate
account. For matters requiring shareholder approval, you may be able to
instruct the insurance company separate account how to vote the fund shares
attributable to your contract or policy. See the Voting Rights section of
your insurance product prospectus.
INVESTMENT OBJECTIVES AND POLICIES
The Trust consists of twenty-four separate investment portfolios (the
"funds") with differing investment objectives and policies. The investment
objectives and policies of the funds are described in the prospectus
offering such funds. This SAI contains the investment restrictions of
Putnam VT American Government Income Fund and Putnam VT Growth
Opportunities Fund. It also contains information concerning certain
investment practices in which some or all of the twenty-four funds may
engage. The prospectus indicates which practices are applicable to each
fund that 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.
Short-term Trading
In seeking a fund's objective or objectives, 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. As a result of a 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 a fund's portfolio.
Convertible Securities. Convertible securities include bonds, debentures,
notes, preferred stocks and other securities that may be converted into or
exchanged for, at a specific price or formula within a particular period of
time, a prescribed amount of common stock or other equity securities of the
same or a different issuer. Convertible securities entitle the holder to
receive interest paid or accrued on debt or dividends paid or accrued on
preferred stock until the security matures or is redeemed, converted or
exchanged.
The market value of a convertible security is a function of its
"investment value" and its "conversion value." A security's "investment
value" represents the value of the security without its conversion feature
(i.e., a nonconvertible fixed income security). The investment value may
be determined by reference to its credit quality and the current value of
its yield to maturity or probable call date. At any given time, investment
value is dependent upon such factors as the general level of interest
rates, the yield of similar nonconvertible securities, the financial
strength of the issuer and the seniority of the security in the issuer's
capital structure. A security's "conversion value" is determined by
multiplying the number of shares the holder is entitled to receive upon
conversion or exchange by the current price of the underlying security.
If the conversion value of a convertible security is significantly below
its investment value, the convertible security will trade like
nonconvertible debt or preferred stock and its market value will not be
influenced greatly by fluctuations in the market price of the underlying
security. Conversely, if the conversion value of a convertible security is
near or above its investment value, the market value of the convertible
security will be more heavily influenced by fluctuations in the market
price of the underlying security.
The funds' investments in convertible securities may at times include
securities that have a mandatory conversion feature, pursuant to which the
securities convert automatically into common stock or other equity
securities at a specified date and a specified conversion ratio, or that
are convertible at the option of the issuer. Because conversion of the
security is not at the option of the holder, the funds may be required to
convert the security into the underlying common stock even at times when
the value of the underlying common stock or other equity security has
declined substantially.
The funds' investments in convertible securities, particularly securities
that are convertible into securities of an issuer other than the issuer of
the convertible security, may be illiquid. The funds may not be able to
dispose of such securities in a timely fashion or for a fair price, which
could result in losses to the fund.
Lower-rated Securities
A 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 or objectives.
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 of which the fund, by itself or together with other funds and
accounts managed by Putnam Management or 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. A fund is nonetheless required to
accrue interest income on such investments and to distribute such amounts
at least annually to shareholders, even though such bonds do not pay
current interest in cash. Thus, it may be necessary at times for a fund to
liquidate other investments in order to satisfy its dividend requirements.
To the extent the fund invests in securities in the lower rating
categories, the achievement of the fund's goals is more dependent on Putnam
Management's investment analysis than would be the case if the fund were
investing in securities in the higher rating categories.
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.
While such private placements may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities," i.e., securities which
cannot be sold to the public without registration under the Securities Act
of 1933 or the availability of an exemption from registration (such as
Rules 144 or 144A), or which are "not readily marketable" because they are
subject to other legal or contractual delays in or restrictions on resale.
The absence of a trading market can make it difficult to ascertain a market
value for illiquid investments. Disposing of illiquid investments may
involve time-consuming negotiation and legal expenses, and it may be
difficult or impossible for the fund to sell them promptly at an acceptable
price. The fund may have to bear the extra expense of registering such
securities for resale and the risk of substantial delay in effecting such
registration. Also market quotations are less readily available. The
judgment of Putnam Management may at times play a greater role in valuing
these securities than in the case of unrestricted securities.
Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held
for a specified period of time and other conditions are met pursuant to an
exemption from registration, or in a public offering for which a
registration statement is in effect under the Securities Act of 1933. A
fund may be deemed to be an "underwriter" for purposes of the Securities
Act of 1933 when selling restricted securities to the public, and in such
event the fund may be liable to purchasers of such securities if the
registration statement prepared by the issuer, or the prospectus forming a
part of it, is materially inaccurate or misleading.
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 or 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
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 and the original lending institutions credit analysis 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.
Floating Rate and Variable Rate Demand Notes
Certain funds may purchase floating rate and variable rate demand notes and
bonds. These securities may have a stated maturity in excess of one year,
but permit a holder to demand payment of principal plus accrued interest
upon a specified number of days notice. Frequently, such obligations are
secured by letters of credit or other credit support arrangements provided
by banks. The issuer has a corresponding right, after a given period, to
prepay in its discretion the outstanding principal of the obligation plus
accrued interest upon a specific number of days notice to the holders. The
interest rate of a floating rate instrument may be based on a known lending
rate, such as a bank's prime rate, and is reset whenever such rate is
adjusted. The interest rate on a variable rate demand note is reset at
specified intervals at a market rate.
Mortgage-Backed and Asset-Backed 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.
Each fund may also invest in asset-backed securities. Asset-backed
securities are structured like mortgage-backed securities, but instead of
mortgage loans or interests in mortgage loans, the underlying assets may
include such items as motor vehicle installment sales or installment loan
contracts, leases of various types of real and personal property, and
receivables from credit card agreements. The ability of an issuer of
asset-backed securities to enforce its security interest in the underlying
assets may be limited.
Mortgage-backed 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 the volatility of a fund.
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.
Structured notes
Each fund may invest in so-called structured notes. These securities are
generally derivative instruments whose value is tied to an underlying index
or other security or asset class. Such structured notes may include, for
example, notes that allow a fund to invest indirectly in certain foreign
investments which the fund would otherwise would not be able to directly
invest, often because of restrictions imposed by local laws.
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 sets aside, on the books and records of its custodian, liquid
assets 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 on up to 25% of its total
assets. 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 unless the security subsequently
appreciates in value.
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, a fund may invest without limit in futures
contracts and related options 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 Commodity 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 expiration 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 intend 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.
In return for the premium paid, options on futures contracts give the
purchaser the right 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
or buying 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
selling 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 maintenance 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. The
successful use of these strategies further depends on the ability of Putnam
Management to forecast interest rates and market movements correctly.
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 such 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 direction of 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 and sell 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 amount of the purchase price paid by it 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 time, or in such quantities, as the fund would otherwise wish to do.
Foreign Investments
A fund may invest in securities of foreign issuers that are not actively
traded in U.S. markets. These foreign investments involve certain special
risks described below.
Foreign securities are normally denominated and traded in foreign
currencies. As a result, the value of a fund's foreign investments and the
value of its shares may be affected favorably or unfavorably by changes in
currency exchange rates relative to the U.S. dollar. There may be less
information publicly available about a foreign issuer than about a U.S.
issuer, and foreign issuers are not generally subject to accounting,
auditing and financial reporting standards and practices comparable to
those in the United States. The securities of some foreign issuers are
less liquid and at times more volatile than securities of comparable U.S.
issuers. Foreign brokerage commissions and other fees are also generally
higher than in the United States. Foreign settlement procedures and trade
regulations may involve certain risks (such as delay in payment or delivery
of securities or in the recovery of a fund's assets held abroad) and
expenses not present in the settlement of investments in U.S. markets.
In addition, a fund's investments in foreign securities may be subject to
the risk of nationalization or expropriation of assets, imposition of
currency exchange controls or restrictions on the repatriation of foreign
currency, confiscatory taxation, political or financial instability and
diplomatic developments which could affect the value of a fund's
investments in certain foreign countries. Dividends or interest on, or
proceeds from the sale of, foreign securities may be subject to foreign
withholding taxes, and special U.S. tax considerations may apply.
Legal remedies available to investors in certain foreign countries may be
more limited than those available with respect to investments in the United
States or in other foreign countries. The laws of some foreign countries
may limit a fund's ability to invest in securities of certain issuers
organized under the laws of those foreign countries.
The risks described above, including the risks of nationalization or
expropriation of assets, are typically increased in connection with
investments in "emerging markets." For example, political and economic
structures in 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. High rates of inflation or currency devaluations may adversely
affect the economies and securities markets of such countries. Investments
in emerging markets may be considered speculative.
The 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 emerging markets and the availability to a
fund of additional investments in these markets. The small size, limited
trading volume and relative inexperience of the securities markets in these
countries may make a fund's investments in securities traded in emerging
markets illiquid and more volatile than investments in securities traded in
more developed countries, and a fund may be required to establish special
custodial or other arrangements before making investments in securities
traded in emerging markets. There may be little financial or accounting
information available with respect to issuers of emerging market
securities, and it may be difficult as a result to assess the value or
prospects of an investment in such securities.
Certain of the foregoing risks may also apply to some extent to securities
of U.S. issuers that are denominated in foreign currencies or that are
traded in foreign markets, or securities of U.S. issuers having significant
foreign operations.
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 manage its exposure to foreign currencies. 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." The fund may also engage in foreign currency transactions for
non-hedging purposes, subject to applicable law. 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 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 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, on exchanges or in
over-the-counter markets, 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 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 the fund. Cross hedging transactions by the fund
involve the risk of imperfect correlation between changes in the values of
the currencies to which such transactions relate and changes in the value
of the currency or other asset or liability which is the subject of the
hedge.
The fund may also engage in non-hedging currency transactions. For
example, Putnam Management may believe that exposure to a currency is in
the fund's best interest but that securities denominated in that currency
will not assist the fund in meeting its objective. In that case the fund
may purchase a currency forward contract or option in order to increase its
exposure to the currency. In accordance with SEC regulations, the fund
will segregate liquid assets in its portfolio to cover forward contracts
used for non-hedging purposes.
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 amount 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.
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 euro, the joint currency
of most countries in the European Union.
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.
Swap Agreements
The funds may enter into swap agreements and other types of
over-the-counter transactions with broker-dealers or other financial
institutions, in which its investment return will depend on the change in
value of a specified security or index. A fund would typically receive
from the counterparty the amount of any increase, and pay to the
counterparty the amount of any decrease, in the value of the underlying
security or index. The contracts would thus, absent the failure of the
counterparty to complete its obligations, provide to the investing fund
approximately the same return as it would have realized if it had owned the
security or index directly.
A fund's ability to realize a profit from such transactions will depend on
the ability of the financial institutions with which it enters into the
transactions to meet their obligations to the fund. Under certain
circumstances, suitable transactions may not be available to the funds, or
the fund may be unable to close out their positions under such transactions
at the same time, or at the same price, as if they purchased comparable
publicly traded securities.
Derivatives
Certain of the instruments in which the funds may invest, such as futures
contracts, options and forward contracts, are considered to be
"derivatives." Derivatives are financial instruments whose value depends
upon, or is derived from, the value of an underlying asset, such as a
security or an index. Further information about specific derivatives and
the risks involved in their use is included elsewhere in the prospectus or
in this SAI.
Year 2000
Like other financial and business organizations, the funds depend on the
proper function of their service providers' computer systems. To the
extent that the systems used by the funds or their service providers cannot
distinguish between the year 1900 and the year 2000 or have other operating
difficulties as a result of the year 2000, the operations of and services
provided to the funds and their shareholders could be adversely impacted.
Putnam Management and its affiliates have reported that each expects to
modify its systems, as necessary, to address this so-called "year 2000
problem," and will, on behalf of the funds, inquire as to the year 2000
compliance of the funds' other major service providers. However, there can
be no assurance that the operations of and services provided to the funds
and their shareholders will not be adversely affected. Similarly,
companies in which the funds invest may also experience "year 2000
problems," which could ultimately result in losses to a fund to the extent
that the securities of any such company decline in value as a result of a
"year 2000 problem."
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 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) Distribute with respect to each taxable year at least 90% of the sum of
its taxable net investment income, its net tax-exempt income, and the
excess, if any, of net short-term capital gains over net long-term capital
losses for such year; and
(c) 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.
Internal Revenue Service regulations applicable to variable annuity and
variable life insurance separate accounts generally require that portfolios
that serve as the funding vehicles for such separate accounts meet certain
diversification requirements by investing no more than 55% of the value of
their assets in one investment, 70% in two investments, 80% in three
investments, and 90% in four investments. Alternatively, a portfolio will
be treated as meeting these requirements for any quarter of its taxable
year if, as of the close of such quarter, the portfolio meets the
diversification requirements applicable to regulated investment companies
described above and no more than 55% of the value of its total assets
consist of cash and cash items (including receivables), U.S. government
securities and securities of other regulated investment companies. Each of
the funds intends to comply with these requirements. Please refer to the
prospectus of the separate accounts that hold interests in the funds for a
discussion of the tax consequences of variable annuity and variable life
contracts.
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."
Securities issued or purchased at a discount. A fund's investment in
securities 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 generally
made after applying any available capital loss carryovers. The amounts and
expiration dates 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.
Foreign securities. A fund's investment in foreign securities may be
subject to withholding taxes at the source on dividend or interest
payments. In that case, the fund's yield on these securities would be
decreased.
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."
The qualified electing fund and mark-to-market elections may have the
effect of accelerating the recognition of income (without the receipt of
cash) and increase the amount required to be distributed for the fund to
avoid taxation. Making either of these elections therefore may require a
fund to liquidate other investments (including times when it is not
advantageous to do so) to meet its distribution requirement, which may
affect a fund's total return.
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 Putnam VT American Government Income Fund and Putnam VT
Growth Opportunities Fund:
(1) Borrow money in excess of 33 1/3% of the value of its total assets (not
including the amount borrowed) at the time the borrowing is made.
(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 (including without
limitation debt obligations issued by other Putnam Funds), by entering into
repurchase agreements, or by lending its portfolio securities.
(6) With respect to 75% of its total assets, invest in the securities of
any issuer if, immediately after such investment, more than 5% of the total
assets of the fund (taken at current value) would be invested in the
securities of such issuer; provided that this limitation does not apply to
obligations issued or guaranteed as to interest or principal by the U.S.
government or its agencies or instrumentalities.
(7) With respect to 75% 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.
(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.
---------------------
With respect to Putnam VT American Government Income Fund, we normally
invest at least 65% of the fund's total assets in U.S. government
securities. We may invest up to 35% of the fund's total assets in
mortgage-backed securities that are privately issued and not supported by
the credit of any government agency or instrumentality.
---------------------
It is contrary to each fund's 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.
MANAGEMENT
Trustees Name (Age)
*+George Putnam (72), Chairman and President. Chairman and Director of
Putnam Management and Putnam Mutual Funds. Director, Freeport Copper and
Gold, Inc. (a mining and natural resource company), Houghton Mifflin
Company (a major publishing company) and Marsh & McLennan Companies, Inc.
John A. Hill (57), Vice Chairman. Chairman and Managing Director, First
Reserve Corporation (a registered investment adviser investing in companies
in the world-wide energy industry on behalf of institutional investors).
Director of Snyder Oil Corporation, TransMontaigne Oil Company and various
private companies owned by First Reserve Corporation, such as James River
Coal and Anker Coal Corporation.
+William F. Pounds (70), Vice Chairman. Professor Emeritus of Management,
Alfred P. Sloan School of Management, Massachusetts Institute of
Technology. Director of IDEXX Laboratories, Inc. (a provider of diagnostic
products and services for the animal health and food and environmental
industries), Management Sciences for Health, Inc. (a non-profit
organization), and Sun Company, Inc. (a petroleum refining and marketing
company).
Jameson A. Baxter (55), Trustee. President, Baxter Associates, Inc. (a
management consulting and private investments firm). Director of MB
Financial, Inc., ASHTA Chemicals, Inc., Banta Corporation (printing and
digital imaging) and Ryerson Tull, Inc. (America's largest steel service
corporation). Chairman Emeritus of the Board of Trustees, Mount Holyoke
College.
+Hans H. Estin (70), Trustee. Chartered Financial Analyst and Vice
Chairman, North American Management Corp. (a registered investment
adviser).
Ronald J. Jackson (55), Trustee. Former Chairman, President and Chief
Executive Officer of Fisher-Price, Inc. (a major toy manufacturer).
*Paul L. Joskow (52), Trustee. Professor of Economics and Management and
former Chairman of the Department of Economics, Massachusetts Institute of
Technology. Director, New England Electric System (a public utility
holding company), State Farm Indemnity Company (an automobile insurance
company) and Whitehead Institute for Biomedical Research (a non-profit
research institution).
Elizabeth T. Kennan (61), Trustee. President Emeritus and Professor, Mount
Holyoke College. Director, Bell Atlantic (a telecommunications company),
the Kentucky Home Life Insurance Companies, Northeast Utilities and
Talbots (a distributor of women's apparel).
*Lawrence J. Lasser (56), 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.
and the United Way of Massachusetts Bay.
John H. Mullin, III (58), Trustee. Chairman and CEO of Ridgeway Farm,
Director of ACX Technologies, Inc. (a company engaged in the manufacture of
industrial ceramics and packaging products), Alex. Brown Realty, Inc. , The
Liberty Corporation (a company engaged in the life insurance and
broadcasting industries) and Carolina Power & Light (a utility company
providing power and distribution thereof in the Southeast United States).
+Robert E. Patterson (53), Trustee. President and Trustee of Cabot
Industrial Trust (a publicly traded real estate investment trust).
Director of Brandywine Trust Company.
*#George Putnam III (48), Trustee. President, New Generation Research,
Inc. (a publisher of financial advisory and other research services
relating to bankrupt and distressed companies) and New Generation Advisers,
Inc. (a registered investment adviser). Director, The Boston Family
Office, L.L.C. (a registered investment advisor).
*A.J.C. Smith (65), Trustee. Chairman and Chief Executive Officer, Marsh &
McLennan Companies, Inc. Director, Trident Partnership (a $667 million
10-year partnership with over 30 institutional investors.)
W. Thomas Stephens (56), Trustee. President and Chief Executive Officer of
MacMillan Bloedel Ltd. (a major forest products company.) Director, Qwest
Communications (a fiber optics manufacturer) and New Century Energies (a
public utility company).
W. Nicholas Thorndike (65), Trustee. Director of various corporations and
charitable organizations, including Courier Corporation (a book
manufacturer), Data General Corporation (a provider of customized computer
solutions), 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 fund, 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 fund and may exercise
all of the powers of the Trustees.
#George Putnam, III is the son of George Putnam.
The mailing address of each of the officers and Trustees is One Post Office
Square, Boston, Massachusetts 02109.
Officers Name (Age)
Charles E. Porter (60), Executive Vice President. Managing Director of
Putnam Investments, Inc. and Putnam Management.
Patricia C. Flaherty (52), Vice President. Senior Vice President of Putnam
Investments, Inc. and Putnam Management.
Gordon H. Silver (51), Vice President. Director and Senior Managing
Director of Putnam Investments, Inc. and Putnam Management.
Brett C. Browchuck (36), Vice President. Managing Director of Putnam
Management.
Ian C. Ferguson (41), Vice President. Senior Managing Director of Putnam
Investments, Inc., Putnam Management and Putnam Mutual Funds.
Richard Monaghan (44), Vice President, Managing Director of Putnam
Investments, Inc. and Putnam Management.
John R. Verani (59), Vice President. Senior Vice President of Putnam
Investments, Inc. and Putnam Management.
John D. Hughes (64), Senior Vice President and Treasurer.
Judith Cohen (54), Associate Clerk.
----------------
Each of the following persons is also a Vice President of the Trust and
certain of the other Putnam funds, the total of which is noted
parenthetically. Officers of Putnam Management hold the same offices in
Putnam Management's parent company, Putnam Investments, Inc.
Robert R. Beck (59) (4 funds), Managing Director of Putnam Management.
Edward P. Bousa (41) (5 funds), Senior Vice President of Putnam Management.
David G. Carlson (38) (2 funds), Senior Vice President of Putnam
Management.
Dana Clark (44) (2 funds), Vice President of Putnam Management.
C. Beth Cotner (47) (4 funds), Managing Director of Putnam Management.
Prior to September 1995, Ms. Cotner was employed at Kemper Financial
Services.
Kevin M. Cronin (38) (6 funds), Managing Director of Putnam Management.
Prior to February 1997, Mr. Cronin was employed at MFS Investment
Management.
Steven Dexter (41) (2 funds), Senior Vice President of Putnam Management.
Prior to June 1999, Mr. Dexter was employed at Scudder Kemper Inc.
Joanne M. Driscoll (29) (2 funds), Vice President of Putnam Management.
Prior to April 1995, Ms. Driscoll was a Graduate Teaching Assistant in the
Finance Department at Northeastern University.
Richard B. England (41) (4 funds), Senior Vice President of Putnam
Management.
Roland W. Gillis (50) (6 funds), Managing Director of Putnam Management.
Prior to March 1995, Mr. Gillis was employed at Keystone Custodian Funds,
Inc.
J. Peter Grant (57) (3 funds), Senior Vice President of Putnam Management.
Omid Kamshad (37) (7 funds), Managing Director of Putnam Management. Prior
to January 1996, Mr. Kamshad was employed at Lomdard Odier International
and prior to April 1995 was employed at Baring Asset Management Company.
Jeffrey A. Kaufman (34) (8 funds), Senior Vice President of Putnam
Management. Prior to August 1998, Mr. Kaufman was employed at MFS
Investment Management.
David L. King (43) (4 funds), Managing Director of Putnam Management.
Steven L. Kirson (39) (2 funds), Senior Vice President of Putnam
Management.
D. William Kohli (38) (7 funds), Managing Director of Putnam Management.
Deborah Kuenstner (41) (3 funds), Managing Director of Putnam Management.
Prior to March 1997, Ms. Kuenstner was employed at Dupont Pension Fund
Investment.
Kenneth W. Lang (33) (2 funds), Vice President of Putnam Management. Prior
to April 1997, Mr. Lang was employed at Montgomery Securities.
Jennifer E. Leichter (39) (5 funds), Managing Director of Putnam
Management.
Jeffrey R. Lindsey (37) (6 funds), Senior Vice President of Putnam
Management.
Michael Martino (47) (4 funds), Managing Director of Putnam Management.
Krishna K. Memani (39) (9 funds), Managing Director of Putnam Management.
Prior to September 1998, Mr. Memani was employed at Morgan Stanley & Co.
Daniel L. Miller (42) (2 funds), Managing Director of Putnam Management.
Jeanne L. Mockard (36) (4 funds), Senior Vice President of Putnam
Management.
Kelly A. Morgan (37) (2 funds), Senior Vice President of Putnam Management.
Prior to December 1996, Ms. Morgan was employed at Alliance Capital
Management L.P.
Michael J. Mufson (36) (2 funds), Senior Vice President of Putnam
Management.
Hugh H. Mullin (37) (3 funds), Senior Vice President of Putnam Management.
Jeffrey Netols (46) (2 funds), Senior Vice President of Putnam Management.
Stephen Oler (38) (4 funds), Senior Vice President of Putnam Management.
Prior to June 1997, Mr. Oler was employed at Templeton Investments and
prior to March 1996 was employed at Baring Asset Management Co.
Margery C. Parker (49) (4 funds), Senior Vice President of Putnam
Management. Prior to December 1997, Ms. Parker was employed at Keystone
Investments.
Carmel Peters (48) (4 funds), Senior Vice President of Putnam Management.
Prior to May 1997, Ms. Peters was employed at Wheelock Natwest Investment
Management, Hong Kong, and prior to February 1996 was employed at
Rothschild Asset Management Asia Pacific, Hong Kong.
Mark D. Pollard (40) (3 funds), Senior Vice President of Putnam Management.
James Prusko (33) (5 funds), Senior Vice President of Putnam Management.
David J. Santos (42) (6 funds), Senior Vice President of Putnam Management.
Anthony C. Santosus (41) (2 funds), Senior Vice President of Putnam
Management.
Justin M. Scott (42) (4 funds), Managing Director of Putnam Management.
Edward T. Shadek, Jr. (39) (2 funds), Managing Director of Putnam
Management. Prior to March 1997, Mr. Shadek was employed at Newbold's
Asset Management Co.
Sheldon N. Simon (42) (2 funds), Senior Vice President of Putnam
Management.
Michael P. Stack (41) (4 funds), Senior Vice President of Putnam
Management. Prior to November 1997, Mr. Stack was employed at Independence
Investment Associates, Inc.
George W. Stairs (50) (3 funds), Senior Vice President of Putnam
Management.
Lisa Svensson (37) (2 funds), Senior Vice President of Putnam Management.
Charles H. Swanberg (51) (4 funds), Senior Vice President of Putnam
Management.
Robert Swift (39) (5 funds), Managing Director of Putnam Management. Prior
to August 1995, Mr. Swift was employed at IAI International/Hill Samuel
Investments Advisors.
Rosemary H. Thomsen (39) (3 funds), Senior Vice President of Putnam
Management.
David L. Waldman (33) (9 funds), Managing Director of Putnam Management.
Prior to June 1997, Mr. Waldman was employed at Lazard Freres and prior to
April 1995 was employed at Goldman Sachs.
Paul Warren (39) (7 funds), Senior Vice President of Putnam Management.
Prior to May 1997, Mr. Warren was employed at IDS Fund Management.
Manuel Weiss (51) (5 funds), Senior Vice President of Putnam Management.
Eric M. Wetlaufer (37) (2 funds), Managing Director of Putnam Management.
Prior to November 1997, Mr. Wetlaufer was employed at Cadence Capital
Management.
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 September, 1998, Mr. Joskow was a consultant to
National Economic Research Associates. Prior to 1996, Mr. Stephens was
Chairman of the Board of Directors, President and Chief Executive Officer
of Johns Manville Corporation. Prior to April, 1996, Mr. Ferguson was CEO
at Hong Kong Shanghai Banking Corporation. Prior to February, 1998, Mr.
Patterson was Executive Vice President and Director of Acquisitions of
Cabot Partners Limited Partnership.
The Trustees are responsible for generally overseeing the conduct of fund
business. Subject to such policies as the Trustees may determine, Putnam
Management furnishes a continuing investment program for the fund and makes
investment decisions on its behalf. Subject to the control of the
Trustees, Putnam Management also manages the fund's other affairs and
business.
The 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 Board Policy
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 estimated fees
expected to be paid for the first full fiscal year, and the fees paid to
each Trustee by all of the Putnam funds for the year ended December 31,
1999:
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ---------------------------------------------------------------------------------------
Pension or retirement benefits
Estimated Aggregate accrued as part of fund expenses
compensation (1) from: from:
Putnam VT Putnam VT Putnam VT Putnam VT
American Growth American Growth
Government Opportunities Government Opportunities
Income Fund + Fund + Income Fund ++ Fund ++
- ---------------------------------------------------------------------------------------
Trustee/Year
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jameson A. Baxter/1994 $130 $280 $0 $0
- ---------------------------------------------------------------------------------------
Hans H. Estin/1972 122 272 0 0
- ---------------------------------------------------------------------------------------
John A. Hill/1985 (5) 130 301 0 0
- ---------------------------------------------------------------------------------------
Ronald J. Jackson/1996 131 285 0 0
- ---------------------------------------------------------------------------------------
Paul L. Joskow/1997 122 272 0 0
- ---------------------------------------------------------------------------------------
Elizabeth T. Kennan/1992 128 278 0 0
- ---------------------------------------------------------------------------------------
Lawrence J. Lasser/1992 121 271 0 0
- ---------------------------------------------------------------------------------------
John H. Mullin, III/1997 127 285 0 0
- ---------------------------------------------------------------------------------------
Robert E. Patterson/1984 121 268 0 0
- ---------------------------------------------------------------------------------------
William F. Pounds/1971 (5) 122 280 0 0
- ---------------------------------------------------------------------------------------
George Putnam/1957 121 271 0 0
- ---------------------------------------------------------------------------------------
George Putnam, III/1984 121 271 0 0
- ---------------------------------------------------------------------------------------
A.J.C. Smith/1986 118 265 0 0
- ---------------------------------------------------------------------------------------
W. Thomas Stephens 121 269 0 0
- ---------------------------------------------------------------------------------------
W. Nicholas Thorndike/1992 122 272 0 0
- ---------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------
Estimated annual
benefits from all Total compensation
Putnam funds from all
upon retirement (2) Putnam funds (3)
- ---------------------------------------------------------------------------------------
Trustee/Year
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Jameson A. Baxter/1994 $95,000 $191,000(4)
- ---------------------------------------------------------------------------------------
Hans H. Estin/1972 95,000 190,000
- ---------------------------------------------------------------------------------------
John A. Hill/1985 (5) 115,000 239,750(4)
- ---------------------------------------------------------------------------------------
Ronald J. Jackson/1996 95,000 193,500(4)
- ---------------------------------------------------------------------------------------
Paul L. Joskow/1997 95,000 191,000(4)
- ---------------------------------------------------------------------------------------
Elizabeth T. Kennan/1992 95,000 190,000
- ---------------------------------------------------------------------------------------
Lawrence J. Lasser/1992 95,000 189,000
- ---------------------------------------------------------------------------------------
John H. Mullin, III/1997 95,000 196,000(4)
- ---------------------------------------------------------------------------------------
Robert E. Patterson/1984 95,000 190,250
- ---------------------------------------------------------------------------------------
William F. Pounds/1971 (5) 115,000 231,000
- ---------------------------------------------------------------------------------------
George Putnam/1957 95,000 190,000
- ---------------------------------------------------------------------------------------
George Putnam, III/1984 95,000 190,000
- ---------------------------------------------------------------------------------------
A.J.C. Smith/1986 95,000 188,000
- ---------------------------------------------------------------------------------------
W. Thomas Stephens 95,000 188,000(4)
- ---------------------------------------------------------------------------------------
W. Nicholas Thorndike/1992 95,000 190,000
- ---------------------------------------------------------------------------------------
</TABLE>
+ Reflects estimated amounts to be paid for the current fiscal year.
++ For certain newly created funds, actual pension or retirement benefit
information is not yet available.
(1) Includes an annual retainer and an attendance fee for each meeting
attended.
(2) Assumes that each Trustee retires at the normal retirement date.
Estimated benefits for each Trustee are based on Trustee fee rates in
effect during calendar 1999.
(3) As of December 31, 1999, there were 114 funds in the Putnam family.
(4) Includes compensation deferred pursuant to a Trustee Compensation
Deferral Plan.
(5) Includes additional compensation for service as Vice Chairman of the
Putnam funds.
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 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.
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. As of the date of
this SAI, the officers and Trustees as a group owned directly no shares of
the Trust or any fund.
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 nearly $222 billion in assets in nearly 11 million
shareholder accounts at December 31, 1998. 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
December 31, 1998, Putnam Management and its affiliates managed over $294
billion in assets, including over $20 billion in tax-exempt securities and
over $71 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 in
turn is, except for a minority stake owned by employees, owned by Marsh &
McLennan Companies, Inc., a publicly-owned holding company whose principal
businesses are international insurance and reinsurance brokerage, employee
benefit consulting and investment management.
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, February 6, 1998, and July 10, 1998, March 4, 1999, July 1, 1999
and November 8, 1999, 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 value, 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 American Government Income Fund 0.65% of the first $500 million
of average net assets, 0.55% of
the next $500 million, 0.50% of
the next $500 million, 0.45% of
the next $5 billion, 0.425% of
the next $5 billion, 0.405% of
the next $5 billion, 0.39% of
the next $5 billion, 0.38% of
the next $5 billion, 0.37% of
the next $5 billion, 0.36% of
the next $5 billion, 0.35% of
the next $5 billion and 0.34%
of any excess thereafter.
Putnam VT Growth Opportunities Fund 0.70% of the first $500 million
of average net assets, 0.60% of
the next $500 million, 0.55% of
the next $500 million, 0.50% of
the next $5 billion, 0.475% of
the next $5 billion, 0.455% of
the next $5 billion, 0.44% of
the next $5 billion, 0.43% of
the next $5 billion and 0.42%
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. 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
who provide certain administrative services for the fund and the other
Putnam funds, each of which bears an allocated share of the foregoing
costs. 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. Putnam Management's compensation under the Management
Contract may be reduced in any year if the fund's expenses exceed the
limits on investment company expenses imposed by any statute or regulatory
authority of any jurisdiction in which shares of the fund are qualified for
offer or sale. The term "expenses" is defined in the statutes or
regulations of such jurisdictions, and generally excludes brokerage
commissions, taxes, interest, extraordinary expenses and, if the fund has a
distribution plan, payments made under such plan.
Under the Management Contract, Putnam Management may reduce its
compensation to the extent that a fund's expenses exceed such lower expense
limitation as Putnam Management may, by notice to the fund, declare to be
effective. The expenses subject to this limitation are exclusive of
brokerage commissions, interest, taxes, extraordinary expenses and, if the
fund has a distribution plan, payments required under such plan. For the
purpose of determining any such limitation on Putnam Management's
compensation, expenses of the fund shall not reflect the application of
commissions or cash management credits that may reduce designated fund
expenses.
Management fees
In order to limit expenses for Putnam VT American Government Income Fund,
Putnam Management has agreed to limit its compensation (and, to the extent
necessary, bear other expenses) through December 31, 2000 to the extent
that the expenses of the fund (exclusive of brokerage, interest, taxes and
extraordinary expenses, and payments under the fund's distribution plans)
would exceed an annual rate of 0.90% of the fund's average net assets. For
the purpose of determining any such limitation on Putnam Management's
compensation, expenses of the fund do not reflect the application of
commissions or cash management credits that may reduce designated fund
expenses.
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 that execute portfolio transactions for the clients of such
advisers and from third parties with which these broker-dealers have
arrangements. 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 these 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 purposes, 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
securities transactions 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 also 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. 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 by the fund 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.
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 Putnam Investor Services is determined on the basis of the number of
shareholder accounts, the number of transactions and the assets of the
fund. Putnam Investor Services has won the DALBAR Service Award eight
times in the past nine years. In 1997 and 1998, Putnam was the only
company to win all three DALBAR Awards: for service to investors, to
financial advisors, and to variable annuity contract holders. DALBAR, Inc.
an independent research firm, presents the awards to financial services
firms that provide consistently excellent service.
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.
The fees paid by the Trust for investor servicing and custody may be
reduced by credits allowed by PFTC.
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. In the case of
funds with more than one class of shares, all performance information is
calculated separately for each class. The data is calculated as follows.
Total return for the one-, five- and ten year periods (or for such shorter
periods as the fund has been in operation or shares of the relevant class
have been outstanding) 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, at net asset value for class IA and IB shares 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. Total return calculations assume
deduction of the fund's maximum sales charge or CDSC, if applicable, and
reinvestment of all fund distributions at net asset value on their
respective reinvestment dates.
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 for class IA and IB shares 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. The amount of expenses used in
determining the fund's yield includes, in addition to expenses actually
accrued by the fund, an estimate of the amount of expenses that the fund
would have incurred if brokerage commissions had not been used to reduce
such expenses.
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 Exchange is closed
Saturdays, Sundays and the following holidays: New Year's Day, Rev. Dr.
Martin Luther King, Jr. 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 contracts on
U.S. government and other fixed-income securities and index options held by
a fund are priced as of their close of trading at 4:15 p.m.
Each of the 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
valued at the mean between the last 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 of the class
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 valued
at fair value on the basis of valuations furnished by pricing services
approved by the Trustees, which determine valuations for normal,
institutional-size trading units of such securities using methods based on
market transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders.
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 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. In addition, securities held by some
of the funds may be traded in foreign markets that are open for business on
days that a fund is not, and the trading of such securities on those days
may have an impact on the value of a shareholder's investment at a time
when the shareholder cannot buy and sell shares of the fund.
DISTRIBUTION PLAN
The Trust has adopted a distribution plan with respect to class IB shares,
the principal features of which are described in the prospectus. This SAI
contains additional information which may be of interest to investors.
Continuance of the plan is subject to annual approval by a vote of the
Trustees, including a majority of the Trustees who are not interested
persons of a fund and who have no direct or indirect interest in the plan
or related arrangements (the "Qualified Trustees"), cast in person at a
meeting called for that purpose. All material amendments to the plan must
be likewise approved by the Trustees and the Qualified Trustees. The class
IB plan may not be amended in order to increase materially the costs which
a fund may bear for distribution pursuant to such plan without also being
approved by a majority of the outstanding voting securities of a fund. The
class IB plan may terminate automatically in the event of its assignment
and may be terminated without penalty, at any time, by a vote of a majority
of the Qualified Trustees or by a vote of a majority of the outstanding
voting securities of the fund or the relevant class of a fund, as the case
may be.
Putnam Mutual Funds pays service fees to insurance companies and their
affiliated dealers at the rates set forth in the Prospectus. Service fees
are paid quarterly to the insurance company or dealer of record for that
quarter.
Financial institutions receiving payments from Putnam Mutual Funds as
described above may be required to comply with various state and federal
regulatory requirements, including among others those regulating the
activities of insurance companies and securities brokers or dealers.
Except as otherwise agreed between Putnam Mutual Funds and a dealer, for
purposes of determining the amounts payable to insurance companies or their
affiliates, "average net asset value" means the product of (i) the average
daily share balance in such account(s) and (ii) the average daily net asset
value of the relevant class of shares over the quarter.
SUSPENSION OF REDEMPTIONS
The Trust may not suspend shareholders' right of redemption 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 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 fund property for all loss and expense
of any shareholder held personally liable for the obligations of that fund.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which a fund would be
unable to meet its obligations. The likelihood of such circumstances is
remote.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
PricewaterhouseCoopers 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.
