As filed with the Securities and Exchange Commission on
July 28, 1997
Registration No. 333-28271
File No. 811-5498
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. [ ]
(Check appropriate box or boxes)
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PUTNAM MASTER INTERMEDIATE INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
One Post Office Square, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
617-292-1000
(Area Code and Telephone Number)
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JOHN R. VERANI, Vice President
PUTNAM MASTER INTERMEDIATE INCOME TRUST
One Post Office Square
Boston, Massachusetts 02109
(Name and address of Agent for Service)
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Copy to:
JOHN W. GERSTMAYR, Esquire
ROPES & GRAY
One International Place
Boston, Massachusetts 02110
<PAGE>
Approximate Date of Proposed Offering: As soon as practicable after this
Registration Statement becomes effective.
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<PAGE>
PUTNAM MASTER INTERMEDIATE INCOME TRUST
CROSS-REFERENCE SHEET
(as required by Rule 481(a))
Form N-14 Item No.
Part A Caption in Prospectus/Proxy Statement of Putnam Intermediate
Government Income Trust
1. Cross-Reference Sheet; Front Cover
2. Front Cover
3. Synopsis; Risk factors
4. Introduction; Proposal regarding approval or disapproval of Agreement and
Plan of Reorganization; Background and reasons for the proposed
reorganization; Information about the reorganization
5. Front Cover
6. Front Cover
7. Introduction; Proposal regarding approval or disapproval of Agreement and
Plan of Reorganization; Information about the reorganization; Voting
information
8. Not Applicable
9. Not Applicable
Part B Caption in Statement of Additional Information
10. Cover Page
11. Cover Page
12. Cover Page; Additional Information about the Master Fund and the Government
Fund
13. Cover Page; Additional Information about the Master Fund and the Government
Fund
14. Independent Accountants and Financial Statements
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<PAGE>
Part C
The information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
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<PAGE>
IMPORTANT INFORMATION
FOR SHAREHOLDERS IN
PUTNAM INTERMEDIATE GOVERNMENT INCOME TRUST
This document is a combined prospectus/proxy statement and proxy card.
The enclosed proxy card is, in essence, a ballot. It tells us how to vote
on your behalf on important issues relating to your fund. If you complete
and sign the proxy, we'll vote it exactly as you tell us. If you simply
sign the proxy, we'll vote it according to the Trustees' recommendations
on page 5.
We urge you to review carefully the prospectus/proxy statement, fill out
your proxy card, and return it to us. When shareholders don't return
their proxies in sufficient numbers, we have to make follow-up
solicitations, which can cost your fund money.
We want to know how you would like to vote and welcome your comments.
Please take a few minutes with these materials and return your proxy to
us.
[encircled scales]
BOSTON [bullet] LONDON [bullet] TOKYO
<PAGE>
Table of Contents
A Message from the Chairman .......................................1
Notice of Shareholder Meeting ......................................3
Combined Prospectus/Proxy Statement ................................4
Proxy card enclosed
If you have any questions, please contact
us at the special toll-free number we have
set up for you (1-800-225-1581)
or call your financial adviser.
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<PAGE>
A Message from the Chairman
Dear Shareholder:
I am writing you to ask you for your vote on important [photo of George Putnam]
questions that affect your investment in Putnam
Intermediate Government Income Trust (the "Government
Fund"). While you are, of course, welcome to join us at
the Government Fund's meeting, most shareholders cast
their vote by filling out and signing the enclosed proxy
card.
In addition to the annual selection of Trustees and approval of auditors, we
are asking for your vote on the following special matters:
1. Approval or disapproval of a proposed reorganization of the Government Fund
into Putnam Master Intermediate Income Trust (the "Master Fund"). In this
transaction, the assets of the Government Fund will be combined with those of
the Master Fund and your shares of the Government Fund will, in effect, be
exchanged at net asset value and on a tax-free basis for shares of the Master
Fund.
The proposed transaction would combine two closed-end funds which seek high
current income and relative stability of net asset value. The Government Fund
seeks its objective by investing in two sectors--a U.S. government sector and a
foreign government sector. The Master Fund seeks its objective by investing in
three sectors--a U.S. government and high grade corporate sector, a foreign
sector and a high yield, lower-rated sector. Unlike the Government Fund, the
Master Fund invests a substantial portion of its assets in below investment
grade securities. Both funds exclude longer-term securities as portfolio
investments. Putnam Investment Management, Inc. ("Putnam Management") serves as
the investment manager to both funds.
The Trustees are recommending the transaction because they believe that the
broader and more flexible investment policies of the Master Fund will offer
shareholders of the Government Fund the opportunity for increased yield and
stronger long-term performance. The Trustees also believe that the
reorganization is likely to result in a lower expense ratio for the combined
fund.
2. Approval or disapproval of the conversion of your fund from a closed-end
fund to an open-end fund.
This proposal is on the agenda as a result of provisions in your fund's
governing legal document which require that shareholders be given the
opportunity to consider a conversion to open-end status in the event the fund's
shares trade at a greater than 10% discount from net asset value over a
specified time period.
The Trustees believe that remaining as a closed-end fund provides significant
ongoing investment benefits that are not available to open-end funds. In
general, if the fund remains a closed-end fund, the portfolio manager can
continue to manage the fund with a steadier long-term perspective, without the
short-term pressures from sales and redemptions of fund shares typically
experienced by open-end funds. In addition, a conversion to open-end status,
while ending the discount, is likely to result in increased fund expenses and
thus a lower yield.
Your Trustees have continued to explore various ways of increasing investor
interest in the fund which may help over time to reduce discounts. The
reorganization proposal described above is an outgrowth of these efforts. Other
recent efforts in this regard include a policy permitting periodic repurchases
of shares in the market when discount levels make such purchases an attractive
investment.
In light of these reasons, the Trustees do not believe that the current level
of discount justifies the fundamental changes which would result from
conversion, and believe that the reorganization proposal described above
presents a better alternative for shareholders. Accordingly, the Trustees are
recommending that you vote against the conversion.
[bullet]
1
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***********
Although we would like very much to have each shareholder attend his or her
fund's meeting, we realize this is not possible. Whether or not you plan to be
present, we need your vote. We urge you to complete, sign, and return the
enclosed proxy card promptly. A postage-paid envelope is enclosed.
I'm sure that you, like most people, lead a busy life and are tempted to put
this proxy aside for another day. Please don't. When shareholders don't return
their proxies, their fund may have to incur the expense of follow-up
solicitations. All shareholders benefit from the speedy return of proxies.
Your vote is important to us. We appreciate the time and consideration I am
sure you will give this important matter. If you have questions about these
proposals, please call 1-800-225-1581, or call your financial advisor.
Sincerely yours,
/s/ George Putnam
George Putnam, Chairman
[bullet]
2
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PUTNAM INTERMEDIATE GOVERNMENT INCOME TRUST
Notice of Annual Meeting of Shareholders
- - This is the formal agenda for the shareholder meeting. It tells you what
matters will be voted on and the time and place of the meeting, if you can
attend in person.
To the Shareholders of Putnam Intermediate Government Income Trust:
An Annual Meeting of Shareholders of Putnam Intermediate Government Income
Trust (the "Government Fund") will be held October 9, 1997 at 2:00 p.m., Boston
time, on the eighth floor of One Post Office Square, Boston, Massachusetts, to
consider the following:
1. Approving or disapproving an Agreement and Plan of Reorganization providing
for the transfer of all of the assets of the Government Fund to Putnam Master
Intermediate Income Trust (the "Master Fund") in exchange for shares of the
Master Fund and the assumption by the Master Fund of all of the liabilities of
the Government Fund, and the distribution of such shares to the shareholders of
the Government Fund in complete liquidation of the Government Fund. See page 6.
2. Fixing the number of Trustees and electing Trustees. See page 35.
3. Ratifying the selection by the Trustees of the independent auditors of your
fund for its current fiscal year. See page 42.
4. Approving or disapproving the conversion of your fund from closed-end to
open-end status. See page 42.
5. Transacting other business as may properly come before the meeting.
By the Trustees
George Putnam, Chairman
William F. Pounds, Vice Chairman
<TABLE>
<S> <C>
Jameson A. Baxter Robert E. Patterson
Hans H. Estin Donald S. Perkins
John A. Hill George Putnam, III
Ronald J. Jackson A.J.C. Smith
Elizabeth T. Kennan W. Nicholas Thorndike
Lawrence J. Lasser
</TABLE>
WE URGE YOU TO MARK, SIGN, DATE, AND MAIL THE ENCLOSED PROXY IN THE
POSTAGE-PAID ENVELOPE PROVIDED SO YOU WILL BE REPRESENTED AT THE MEETING.
July 29, 1997
[bullet]
3
<PAGE>
Prospectus/Proxy Statement
July 29, 1997
<TABLE>
<CAPTION>
Table of Contents
_____________________________________________________________________________________________
<S> <C>
1. Proposal regarding approval or disapproval of Agreement and Plan of Reorganization 6
Synopsis ........................................................................... 6
Risk factors ........................................................................ 9
Introduction ........................................................................ 11
Background and reasons for the proposed reorganization .............................. 11
Information about the reorganization ................................................ 12
Information about the Master Fund ................................................... 14
Information about the Government Fund ............................................. 24
Additional information about the funds ............................................. 27
2. Proposal regarding election of trustees .......................................... 35
3. Proposal regarding ratification of auditors ....................................... 42
4. Proposal regarding open-ending ................................................... 42
Voting information .................................................................. 47
Appendix A: Agreement and Plan of Reorganization .................................... 51
Appendix B: Securities Ratings ...................................................... 63
</TABLE>
- - This document will give you the information you need to vote on the proposed
combination and the other matters listed on the previous page. Much of the
information is required under rules of the Securities and Exchange Commission
(the "SEC"); some of it is technical. If there is anything you don't
understand, please contact us at our special toll-free number, 1-800-225-1581,
or call your financial advisor.
This Prospectus/Proxy Statement relates to the proposed combination of Putnam
Intermediate Government Income Trust (the "Government Fund") with Putnam Master
Intermediate Income Trust (the "Master Fund") through the transfer of all of
the assets of the Government Fund to the Master Fund in exchange for shares of
the Master Fund (the "Master Shares") and the assumption by the Master Fund of
all of the liabilities of the Government Fund. (The Master Fund and the
Government Fund are collectively referred to herein as the "funds," and each is
referred to individually as a "fund.") As a result of the proposed transaction,
each shareholder of the Government Fund will receive a number of Master Shares
equal in net asset value at the date of the exchange to the aggregate net asset
value of the shareholder's Government Fund shares. This Prospectus/Proxy
Statement also includes proposals with respect to electing Trustees for the
Government Fund, ratification of auditors for the Government Fund and
open-ending the Government Fund. The address and telephone number of each fund
is One Post Office Square, Boston Massachusetts 02109, (617) 292-1000.
This Prospectus/Proxy Statement explains concisely what you should know before
investing in the Master Fund, a diversified, closed-end management investment
company. Please read it and keep it for future reference.
The following document has been filed with the Securities and Exchange
Commission and is incorporated into this Prospectus/Proxy Statement by
reference: (i) a Statement of Additional Information, dated July 29, 1997,
relating to the proposed transaction (the "SAI").
For a free copy of the SAI, please contact us at the special toll-free number we
have set up for you (1-800-225-1581).
The Master Fund and the Government Fund are listed on the New York Stock
Exchange (the "NYSE") under the symbols "PIM" and "PGT", respectively. Proxy
materials, information statements and other information filed by the funds can
be inspected and copied at the Public Reference Facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and may be inspected at
the offices of the NYSE, 11 Wall Street, New York, New York 10005. Copies of
such material can also be obtained from the Public Reference Branch, Office
of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20549 at prescribed rates.
[bullet]
4
<PAGE>
THE SECURITIES OFFERED BY THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF SUCH PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE MASTER FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR
ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
- - Who is asking for my vote?
The enclosed proxy is solicited by the Trustees of Putnam Intermediate
Government Income Trust for use at the Annual Meeting of Shareholders of the
fund to be held on October 9, 1997 (and, if your fund's meeting is adjourned,
at any adjourned meetings) for the purposes stated in the Notice of Annual
Meeting (see page 3).
- - How do your fund's Trustees recommend that shareholders vote on these
proposals?
The Trustees recommend that you vote
1. For the proposed combination in which assets of the Government Fund would be
transferred to the Master Fund in exchange for shares of the Master Fund with
an equal net asset value.
2. For fixing the number of Trustees as proposed and the election of all
nominees;
3. For ratifying the selection of Price Waterhouse LLP as the independent
auditors of your fund; and
4. Against converting your fund from closed-end to open-end status.
- - Who is eligible to vote?
Shareholders of record at the close of business on July 11, 1997, are entitled
to be present and to vote at the meeting or any adjourned meeting. On July 11,
1997, there were outstanding 64,333,052.213 shares of beneficial interest of the
Government Fund. The Notice of Annual Meeting, the combined Prospectus/Proxy
Statement and the enclosed form of proxy are being mailed to shareholders of
record on or about July 30, 1997.
Each share is entitled to one vote, with fractional shares voting
proportionally. Shares represented by duly executed proxies will be voted in
accordance with shareholders' instructions. Any shareholder giving a proxy has
the power to revoke it by mail (addressed to the fund's Clerk at the principal
office of the Government Fund, One Post Office Square, Boston, Massachusetts
02109) or in person at the meeting, by executing a superseding proxy, or by
submitting a notice of revocation to the Government Fund. If you sign the
proxy, but don't fill in a vote, your shares will be voted in accordance with
the Trustees' recommendations. If any other business is brought before the
meeting, your shares will be voted at the Trustees' discretion.
[bullet]
5
<PAGE>
1. PROPOSAL REGARDING APPROVAL OR DISAPPROVAL OF AGREEMENT
AND PLAN OF REORGANIZATION
Synopsis
The responses to the questions that follow provide an overview of key points
typically of concern to shareholders considering the proposed transaction
involving the funds. These responses are qualified in their entirety by the
remainder of this Prospectus/Proxy Statement, which contains additional
information about the funds and further details regarding the proposed
transaction.
1. What is being proposed?
The Trustees of your fund are recommending that shareholders approve the
combination of the Government Fund with the Master Fund. The transaction is
proposed to be accomplished pursuant to an Agreement and Plan of Reorganization
providing for the transfer of all of the assets of the Government Fund to the
Master Fund in exchange for shares of the Master Fund and for the assumption by
the Master Fund of all of the liabilities of the Government Fund. The
completion of these transactions, followed by the distribution of the Master
Fund shares to the Government Fund's shareholders, will result in the
combination of the two funds' assets and liabilities, with shareholders of the
Government Fund becoming shareholders of Master Fund, and the liquidation of
the Government Fund.
The securities in which the Master Fund invests involve greater risks than the
securities in which the Government Fund invests, primarily because the Master
Fund invests significantly in lower-rated securities. However, Putnam
Investment Management, Inc., the funds' investment manager ("Putnam
Management"), believes that the Master Fund provides the benefit of increased
diversification which serves to reduce overall portfolio risk. Of course, there
can be no assurance that the benefits resulting from increased diversification
will outweigh the risks associated with investment in lower-rated securities.
2. What will happen to my shares of the Government Fund as a result of the
transaction?
Your shares of the Government Fund will, in effect, be exchanged on a tax-free
basis for shares of the Master Fund with an equal aggregate net asset value on
the date of the transaction. It is possible, however, that the market value of
such shares may differ. See question 11 below.
3. Why are the Trustees proposing the transaction?
The Government Fund's investment policies limit the fund to purchasing U.S. and
foreign government securities. The Trustees believe that the broader and more
flexible investment policies of the Master Fund offer the potential for both
increased yield and improved returns and, through additional diversification,
greater stability of net asset value. Although past performance is no guarantee
of future performance, the Master Fund performance record, as set forth on page
11, is superior to that of the Government Fund. In addition, the combination of
the two funds offers the prospect of lower expenses for shareholders of both
funds. Finally, the Trustees also believe that the larger fund resulting from
the combination may attract greater investor interest, which may lead to lower
share trading discount levels in the market price of the Master Fund's shares
following the combination.
4. How do the investment objectives and policies of the two funds compare?
Both funds seek, with equal emphasis, high current income and relative
stability of net asset value, by investing in a diversified portfolio of fixed
income securities having a dollar-weighted average maturity of from three to
ten years. The Government Fund does not invest in a security having a remaining
effective maturity of more than 10 years, while the Master Fund does not invest
in a security having a remaining effective maturity of more than 12 years.
While both funds invest substantially all of their assets in fixed income
securities, the Master Fund invests in a wider range of such securities.
The Government Fund invests substantially all of its assets in the following
two market sectors:
[bullet] a U.S. government sector, consisting of debt obligations issued or
guaranteed by the U.S. government, or by its agencies or
instrumentalities ("U.S. government securities"), and related options
and futures; and
[bullet] a foreign government sector, consisting of debt obligations issued or
guaranteed by foreign national, provincial, state or other
governments with taxing authority, by their agencies or
instrumentalities, or by suprana-
[bullet]
6
<PAGE>
tional entities ("foreign government securities"). Up to 50% of the
Government Fund's assets may be invested in foreign government securities.
By comparison, the Master Fund invests in the following three market sectors:
[bullet] a U.S. high grade sector, consisting of U.S. government securities,
related options, futures and repurchase agreements, high grade
corporate debt obligations and high grade mortgage-backed and
asset-backed securities;
[bullet] a high yield sector, consisting primarily of high yield, lower-rated
U.S. and foreign corporate fixed income securities; and
[bullet] an international sector, consisting primarily of foreign government
securities and other fixed income securities denominated in foreign
currencies or U.S. dollars.
The Master Fund may invest up to 65% of its assets in any of these sectors, and
must invest at least 15% of its assets in each sector.
The funds have different credit quality limitations, with the Master Fund
having significantly greater flexibility to invest in lower-rated securities.
The Government Fund may invest up to 15% of its assets in securities rated
below investment grade (rated below Baa or BBB by a recognized rating agency
such as Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
("S&P")), but will not invest in securities rated below B. By contrast, the
Master Fund may invest up to 65% of its assets in securities rated below
investment grade, although it may invest no more than 20% of its assets in
lower-rated foreign securities. The Master Fund also may invest up to 5% of its
assets in securities rated below Caa or CCC. With respect to both funds, the
above limitations also apply to unrated securities of comparable quality. The
table below shows the percentages of each fund's net assets invested at June
30, 1997 in securities assigned to the various rating categories by S&P, or if
unrated by S&P, assigned to comparable rating categories by another rating
agency, and in unrated securities determined to be of comparable quality.
<TABLE>
<CAPTION>
Credit Quality Government Fund Master Fund
- ---------------- ----------------- ------------
<S> <C> <C>
AAA 80.88% 42.96%
AA 9.47% 9.82%
A 0.00% 0.74%
BBB 1.73% 1.68%
BB 7.52% 12.29%
B 0.00% 29.66%
CCC 0.00% 1.40%
Not Rated 0.40% 1.45%
</TABLE>
Both funds may engage in a variety of futures and options strategies, and may
engage in foreign currency exchange transactions, for hedging purposes and for
non-hedging purposes. Both funds may also enter into securities loans,
repurchase agreements and forward commitments.
Both funds may hold a portion of their assets in cash or money market
instruments and may use temporary defensive strategies.
Both funds are closed-end, diversified investment companies organized as
Massachusetts business trusts. The Government Fund was organized on May 10,
1988. The Master Fund was organized on March 10, 1988.
5. How do the management fees and other expenses of the two funds compare, and
what are they estimated to be following the transaction?
The funds pay management fees at the following identical rates: 0.75% of the
first $500 million of average weekly net assets, 0.65% of the next $500
million, 0.60% of the next $500 million, and 0.55% of any amount over $1.5
billion. As shown in the table below, the Government Fund currently has lower
management fees and total fund operating expenses than the Master Fund due to
asset size, and the combined fund is expected to have lower management fees and
total fund operating expenses than are currently being paid by either fund.
The following table summarizes expenses that each of the funds incurred for the
12-month period beginning April 1, 1996 and ending March 31, 1997, and expenses
that Putnam Management believes the combined fund
[bullet]
7
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would have incurred for that period, assuming that the transaction had taken
place on the first day of that period. The estimated expenses of the combined
fund do not reflect the expenses of either fund in carrying out its obligations
under the Agreement and Plan of Reorganization.
<TABLE>
<CAPTION>
Master Master Fund
Government Fund Fund (Pro Forma Combined)
----------------- --------- ---------------------
<S> <C> <C> <C>
Shareholder transaction expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) None(a) None(a) None(a)
Dividend Reinvestment and Cash Purchase Plan None(b) None(b) None(b)
Annual fund operating expenses (as a percentage of
average net assets)
Management fees .74% .75% .69%
Other expenses .16% .20% .19%
Total fund operating expenses .90% .95% .88%
</TABLE>
- -------
(a)Shares of either fund purchased on the secondary market are not subject to
sales charges but may be subject to brokerage commissions or other charges. The
table does not include an underwriting commission of 7% paid by shareholders in
initial offering of each fund.
(b)Each participant in a fund's dividend reinvestment plan pays a proportionate
share of the brokerage commissions incurred with respect to open market
purchases in connection with such plan.
The tables are provided to help you understand the expenses of investing in the
funds and your share of the operating expenses which each fund incurred for the
period and which Putnam Management believes the combined fund would have
incurred for the period. The expenses shown in the table do not reflect the
application of credits related to expense offset arrangements that reduce
certain fund expenses.
Examples
An investment of $1,000 would incur the following expenses, assuming 5% annual
return.
<TABLE>
<CAPTION>
1 3 5 10
year years years years
------ ------- ------- ------
<S> <C> <C> <C> <C>
Government Fund $ 9 $29 $50 $111
Master Fund $10 $30 $53 $117
Master Fund (Pro forma combined) $ 9 $28 $49 $108
</TABLE>
The examples do not represent past or future expense levels. Actual expenses
may be greater or less than those shown. Federal regulations require the
examples to assume a 5% annual return, but actual annual return varies.
6. What are the federal income tax consequences of the proposed transaction?
For federal income tax purposes, no gain or loss will be recognized by the
Government Fund or its shareholders as a result of the transaction.
7. Will my dividend be affected by the transaction?
The frequency of your dividends should not change, since both funds pay a
monthly dividend from net investment income and distribute any net realized
capital gains at least annually. However, the amount of these distributions
will reflect the investment policies and dividend policies of the Master Fund.
For a description of the Master Fund's dividend policy, see "Additional
information about the funds" on page 27. Information regarding the dividends
paid by the Master Fund in recent years is included in "Financial Highlights"
on page 23.
Both Funds have adopted a dividend reinvestment plan pursuant to which each
participating shareholder may have all income and distributions of capital
gains automatically invested in additional shares of the relevant fund.
The Master Fund will not permit any Government Fund shareholder to receive
certificates for Master Shares, or pledge Master Shares until certificates
representing Government Fund shares have been surrendered, or, in the
[bullet]
8
<PAGE>
case of lost certificates, an adequate surety bond has been posted.
8. Will I still be able to participate in a dividend reinvestment plan?
Yes. If you currently participate in the Government Fund's dividend
reinvestment plan, you will be automatically enrolled in the dividend
reinvestment plan of the Master Fund, which is similar to your fund's plan. See
page 30 for a description of the plan for the Master Fund.
9. Do the procedures for purchasing and selling shares of the two funds differ?
No. The procedures for purchasing and selling shares of each fund are
identical. As closed-end funds, the funds do not redeem outstanding shares or
continuously offer shares. The funds' shares currently may be bought and sold
at prevailing market prices on the New York Stock Exchange. Shares may also be
purchased through each fund's dividend reinvestment plan.
10. Will the number of shares I own change?
Yes, but the total net asset value of the shares of the Master Fund you receive
will, at the time of the transaction, equal the total net asset value of the
shares of the Government Fund that you hold at the time of the transaction.
Even though the net asset value per share of each fund is different, the total
net asset value of a shareholder's holdings will not change as a result of the
transaction. Of course, the newly issued shares of the Master Fund may trade at
a discount from net asset value, which might be greater or less than the
trading discount of a shareholder's Government Fund shares.
11. Will the market value of my investment change?
The funds will continue to be traded on the New York Stock Exchange until the
time of the transaction, and may at times trade at a market price greater or
less than net asset value. In recent years, shares of both funds have traded at
a discount to net asset value. Depending on market conditions immediately prior
to the exchange, shares of the Master Fund may trade at a greater or smaller
discount to net asset value than shares of the Government Fund. This could
result in your shares having a market value that is greater or less than they
currently have.
12. How will I be notified of the outcome of the transaction?
If the proposed transaction is approved by shareholders, you will receive
confirmation after the reorganization is completed, indicating your new account
number and the number of shares of the Master Fund issued to you in the
reorganization. If the transaction is not approved or is not implemented for
any reason, shareholders will be notified, and the results of the meeting will
be provided in the next annual report of the Government Fund.
Risk factors
- - What are the principal risk factors associated with an investment in the
Master Fund, and how do they compare with those for the Government Fund?
The risks related to the Master Fund's portfolio securities are greater than
the risks of those held by the Government Fund. In contrast to the Government
Fund, the Master Fund invests a substantial portion of its assets in corporate
fixed income securities and lower-rated securities. The broader diversification
of the Master Fund is intended to reduce overall portfolio risk, although there
can be no assurance that this diversification will be effective. A more
detailed description of certain risks associated with an investment in the
Master Fund is included in the section "Investment objectives and policies"
on page 14 and in the SAI.
Lower-rated securities. The Master Fund may invest a significant portion (up to
65%) of its assets in lower-rated securities (rated below BBB/Baa), and may
invest up to 5% of its assets in securities rated below CCC/Caa. These
lower-rated securities are commonly known as junk bonds. By contrast, the
Government Fund may invest only up to 15% of its assets in securities rated
below BBB/Baa, and may not invest in securities rated below B. The lower
ratings 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. Securities in the lower-rating
categories are considered to be of poor standing and predominantly speculative,
and have large uncertainties and major risk exposures. The issuers of the
lowest-rated securities may be in default.
[bullet]
9
<PAGE>
Fixed income securities. The values of fixed income securities in which both
funds invest fluctuate in response to changes in interest rates. A decrease in
interest rates will generally result in an increase in the value of fund
assets. Conversely, during periods of rising interest rates, the value of fund
assets will generally decline. In addition, the values of fixed income
securities are affected by adverse changes in the financial condition of
individual issuers or in general economic conditions.
Foreign investments. Since the Master Fund invests in a broader range of
foreign securities than the Government Fund and may invest a larger percentage
of its assets in foreign securities, an investment in the Master Fund will have
more foreign security risk than the Government Fund. Foreign securities may be
affected favorably or unfavorably by currency exchange rates and exchange
control regulations. The values of foreign securities may be less liquid and
more volatile than comparable U.S. securities. There may be less information
publicly available about foreign companies than about U.S. companies. Political
developments and economic activity may affect the value of foreign investments,
and legal remedies may be limited. The risks described above are typically
increased for investments in securities principally traded in emerging markets.
Longer-term securities. Since the Master Fund may invest in slightly
longer-term securities than the Government Fund, the value of the Master Fund's
portfolio could at times be more sensitive to changes in interest rates.
Mortgage-backed securities. Like the Government Fund, the Master Fund may
invest in mortgage-backed securities. Prepayments on mortgage-backed securities
may require reinvestment of principal under less attractive terms. 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. Prepayments may cause losses in
securities purchased at a premium.
Options and futures transactions. As with the Government Fund, the ability of
the Master Fund to engage in futures and options transactions involves certain
risks, including the risk that the Master Fund will be unable at times to close
out such positions, that such transactions may not accomplish their purpose
because of imperfect market correlations, or that Putnam Management may not
forecast market movements correctly.
Other investment practices. As with the Government Fund, to the extent the
Master Fund exercises its ability to engage in certain investment practices,
such as securities loans, repurchase agreements and forward commitments, it may
be delayed in recovering or unable to recover its collateral in the event of
default by the other party.
[bullet]
10
<PAGE>
Introduction
The shareholders of the Government Fund are being asked to approve or
disapprove a transaction between the Government Fund and the Master Fund
pursuant to an Agreement and Plan of Reorganization between the funds, dated as
of July 23, 1997 (the "Agreement"), which is attached to this Prospectus/Proxy
Statement as Appendix A. The transaction will result in a combination of the
assets of the two funds.
The Agreement provides, among other things, for the transfer of all of the
assets of the Government Fund to the Master Fund in exchange (i) for the
assumption by the Master Fund of all of the liabilities of the Government Fund
and (ii) for shares of the Master Fund (the "Master Shares") with an aggregate
net asset value equal to the net asset value of the assets of the Government
Fund acquired by the Master Fund, as more fully described below under
"Information about the reorganization."
After receipt of the Master Shares, the Government Fund will distribute the
Master Shares to its shareholders in complete liquidation of the Government
Fund, and the legal existence of the Government Fund as a separate business
trust under Massachusetts law will be terminated. Each shareholder of the
Government Fund will receive a number of full and fractional Master Shares
equal in net asset value at the date of the exchange to the aggregate net asset
value of the shareholder's Government Fund shares.
Prior to the date of the transfer (the "Exchange Date"), the Government Fund
will declare a distribution to shareholders which, together with all previous
distributions, will have the effect of distributing to shareholders all of its
investment company taxable income (computed without regard to the deduction for
dividends paid) and net realized capital gains, if any, through the Exchange
Date.
The Trustees have voted unanimously to approve the proposed transaction and to
recommend that shareholders also approve the transaction. The affirmative vote
of a majority of the outstanding shares of the Government Fund is necessary for
the consummation of the proposed transaction.
In the event that this proposal is not approved by the shareholders of the
Government Fund, the Government Fund will continue to be managed as a separate
closed-end fund in accordance with its current investment objectives and
policies subject to the outcome of Proposal 4 regarding open-ending. In such
event, the Trustees may consider such alternatives as may be in the best
interests of its shareholders.
Background and reasons for the proposed reorganization
The Trustees of the Government Fund, including all Trustees who are not
"interested persons" of the fund, have determined that the transaction would be
in the best interests of the fund's shareholders. In addition, the Trustees of
both funds have determined that the interests of existing shareholders would
not be diluted as a result of effecting the transaction. The Trustees have
unanimously approved the proposed transaction and have recommended its approval
by shareholders of the Government Fund.
The principal reasons why the Trustees are recommending the transaction are:
Greater investment flexibility; opportunity for increased performance. The
Trustees, at meetings held earlier this year, reviewed the long-term
performance of the two funds and similar Putnam closed-end funds in light of
concerns about the continued discount of the share prices to net asset value.
This review indicated that funds such as the Master Fund, with broader
investment policies, especially the ability to invest a significant portion of
its assets in higher yield bonds, have tended to perform better over the
long-term than the Government Fund. Set forth below is total return information
for the two funds over the one, three, and five year periods and from inception
(April 29, 1988 for the Master Fund; June 27, 1988 for the Government Fund):
Annualized Total Return (periods ending June 30, 1997)
<TABLE>
<CAPTION>
Government Fund Master Fund
------------------------ ------------------------
NAV Market Price NAV Market Price
------- -------------- -------- -------------
<S> <C> <C> <C> <C>
1 year 7.34% 7.26% 10.43% 16.25%
3 year 8.18% 7.31% 10.23% 10.06%
5 year 6.93% 5.07% 9.32% 7.73%
From Inception 8.46% 6.12% 9.52% 7.63%
</TABLE>
[bullet]
11
<PAGE>
The dividend yield for each fund as of June 30, 1997 was as follows:
<TABLE>
<CAPTION>
Government Fund Master Fund
------------------------ -----------------------
NAV Market Price NAV Market Price
------- -------------- ------- -------------
<S> <C> <C> <C> <C>
7.25% 8.21% 7.80% 8.50%
</TABLE>
Past performance is no guarantee of future performance.
In lieu of proposing to amend the Government Fund's investment policies to
provide for greater investment flexibility, the Trustees concluded that a
reorganization of the Government Fund into the Master Fund would provide
Government Fund shareholders the opportunity to invest in a portfolio with
broader and more flexible policies, which may lead to better performance over
the long-term. There are, of course, risks associated with having a substantial
portion of a fund's assets invested in higher risk, higher yielding securities.
However, the Trustees concluded that the increase in investment flexibility and
potential increased performance outweighed these risks. Putnam Management has
advised the Trustees that the diversified nature of a fixed income fund such as
the Master Fund, which invests in U.S. government and investment grade
corporate bonds, high yield bonds and international securities, will serve to
reduce the risks of investing in any one fixed income asset class. In addition,
the Trustees believe, based on the advice of Putnam Management, that shares of
closed-end fixed income funds trade primarily on yield and, that, although
there can be no assurances, investment in higher yielding securities may lead
to lower trading discounts over the long-term.
Reduced expenses. The transaction will result in a combined fund with lower
expense ratios than either fund prior to the transaction. Based on the
management fee schedules for the funds, which are identical, the management fee
rate for both funds will be lower immediately following the transaction due to
the application of fee breakpoints. Further, Putnam Management expects that the
combined fund, with approximate net assets of $850 million, will experience
lower overall expenses due to efficiencies resulting from operating a fund of
that size. The total fund operating expenses of the Government Fund and the
Master Fund for the 12-month period ended March 31, 1997 were .90% and .95% of
average net assets, respectively. For the same period, the annualized total
fund operating expenses of the combined fund on a pro forma basis would have
been .88% of average net assets.
Potential for increased liquidity. Putnam Management believes that the
transaction could result in increased liquidity for shareholders of both funds.
Increased liquidity might result from the significant increase in the number of
shares outstanding for the combined fund, which Putnam Management believes
might attract greater investor interest and create a more liquid market for
shareholders in the combined fund.
Exchange without recognition of gain or loss. If a Government Fund shareholder
were to sell his or her shares to invest in another fund like the Master Fund,
gain or loss would be recognized by that shareholder for federal income tax
purposes. In contrast, the proposed transaction affords Government Fund
shareholders the ability to invest in the Master Fund through a tax-free
exchange of shares at net asset value. Of course, a shareholder would realize a
gain or loss on any subsequent sale of Master Fund shares.
Information about the reorganization.
Agreement and Plan of Reorganization. The Agreement and Plan of Reorganization
provides that the Master Fund will acquire all of the assets of the Government
Fund in exchange for the assumption by the Master Fund of all of the
liabilities of the Government Fund and for the issuance of Master Shares with
an aggregate net asset value equal to the net asset value of the acquired
assets. The transaction would occur on or about October 27, 1997 (that date
being the "Exchange Date"). The value of the acquired assets of the Government
Fund and the net asset value of the Master Shares would be determined as of
4:00 p.m. Boston time on the business day immediately prior to the Exchange
Date. The following discussion of the Agreement is qualified in its entirety by
the full text of the Agreement, which is attached as Appendix A to this
Prospectus/Proxy Statement.
Immediately following the Exchange Date, the Government Fund will distribute
pro rata to its shareholders of record as of the close of business on the
Exchange Date the full and fractional Master Shares received by the Government
Fund. As a result of the proposed transaction, each holder of shares of the
Government Fund will receive a number of Master Shares equal in aggregate net
asset value at the Exchange Date to the net asset value
[bullet]
12
<PAGE>
of the Government Fund shares held by the shareholder. New certificates for
Master Shares will be issued only upon written request. Since fractional shares
of the Master Fund cannot be sold on the New York Stock Exchange, former
Government Fund shareholders holding fractional Master Shares following the
reorganization can request to receive cash from the Master Fund for such shares
equal to the market value of such shares and consistent with the Master Fund's
policies as in effect from time to time.
The consummation of the reorganization is subject to the conditions set forth
in the Agreement. The Agreement may be terminated and the reorganization
abandoned at any time, before or after approval by the shareholders, prior to
the Exchange Date by mutual consent of the Master Fund and the Government Fund
or, if any condition set forth in the Agreement has not been fulfilled and has
not been waived by the party entitled to its benefits, by such party. Further,
if Proposal 4 to open-end the Government Fund is approved, the transaction will
be abandoned.
If shareholders approve the reorganization, Putnam Management will be
authorized to reposition the Government Fund's portfolio, subject to tax and
other regulatory restraints, so that it reflects the broader investment
policies of the Master Fund. It is expected that all or a substantial portion
of this repositioning will be completed prior to the consummation of the
transaction. Government Fund shareholders will bear the portfolio trading costs
associated with this repositioning.
Except for the trading costs associated with the repositioning described above,
the fees and expenses for the transaction are estimated to be approximately
$460,000. The costs of proxy materials and proxy solicitations will be borne by
the Government Fund. The Master Fund will bear the cost of SEC filing fees to
register the Master Shares, estimated to be $170,000. All other fees and
expenses, including legal and accounting expenses, portfolio transfer taxes (if
any) or other similar expenses incurred in connection with the consummation of
the transactions contemplated by the Agreement will be allocated ratably
between the two funds in proportion to their net assets as of the day of the
transfer. However, to the extent that any payment by either fund of such fees
or expenses would result in the disqualification of the Master Fund or the
Government Fund as a "regulated investment company" within the meaning of
Section 851 of the Internal Revenue Code of 1986, as amended (the "Code"), such
fees and expenses will be paid directly by the party incurring them.
The Master Shares. Master Shares will be issued to the Government Fund's
shareholders in accordance with the procedure under the Agreement as described
above. The Master Shares are shares of beneficial interest of the Master Fund.
Each of the Master Shares will be fully paid and nonassessable when issued,
will be transferable without restriction, and will have no preemptive,
conversion, exchange or redemption rights. Each share has one vote, with
fractional shares voting proportionately. Shares are freely transferable, are
entitled to dividends as declared by the Trustees and, if the Master Fund were
liquidated, would receive the net assets of the fund.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Master Fund. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Master Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Master Fund or its 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 the Master Fund.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Master Fund
would be unable to meet its obligations. The likelihood of such circumstances
is remote. The shareholders of the Government Fund are currently subject to
this same risk of shareholder liability.
Federal income tax consequences. It is a condition to the Government Fund's
obligation to consummate the reorganization that it will either receive a
ruling from the Internal Revenue Service or an opinion of counsel to the effect
that, on the basis of the existing provisions of the Code, current
administrative rules and court decisions, for federal income tax purposes:
(i) under Section 361 of the Code, no gain or loss will be recognized by the
Government Fund as a result of the reorganization;
(ii) under Section 354 of the Code, no gain or loss will be recognized by
shareholders of the Government Fund on the distribution of Master Shares
to them in exchange for their shares of the Government Fund;
[bullet]
13
<PAGE>
(iii) under Section 358 of the Code, the tax basis of the Master Shares that
the Government Fund's shareholders receive in place of their Government
Fund shares will be the same as the basis of the Government Fund shares
exchanged; and
(iv) under Section 1223(1) of the Code, a shareholder's holding period for
the Master Shares received pursuant to the Agreement will be determined by
including the holding period for the Government Fund shares exchanged for
the Master Shares, provided that the shareholder held the Government Fund
shares as a capital asset.
If an Internal Revenue Service ruling or legal opinion is not received, the
transaction will not take place as currently contemplated and the Trustees of
the Government Fund will consider other alternatives.
The Trustees of each fund have determined that the interests of that fund's
shareholders will not be diluted as a result of the transactions contemplated
by the reorganization, and that the proposed reorganization is in the best
interests of each fund.
Capitalization
The following table shows the capitalization of the funds as of March 31, 1997,
and on a pro forma combined basis, giving effect to the proposed acquisition of
assets at net asset value as of that date:
(UNAUDITED)
<TABLE>
<CAPTION>
Master Fund
Government Master Pro Forma
Fund(1) Fund(2) Combined(3)
------------ ---------- ------------
<S> <C> <C> <C>
Net assets (000's omitted) $528,330 $325,735 $853,975
Shares outstanding (000's omitted) 64,333 38,448 100,818
Net asset value per share $ 8.21 $ 8.47 $ 8.47
</TABLE>
(1)Government Fund assets do not reflect estimated proxy-related costs of
$200,000.
(2)Master Fund assets do not reflect estimated SEC filing fees of $170,000.
(3)Pro forma combined net assets reflect estimated legal and accounting
transaction-related costs of $90,000.
Unaudited pro forma combining financial statements of the funds as of March 31,
1997 and for the twelve-month period then ended are included in the SAI.
Because the Agreement provides that the Master Fund will be the surviving fund
following the transaction and because the Master Fund's investment objectives
and policies will remain unchanged, the pro forma combining financial
statements reflect the transfer of the assets and liabilities of the Government
Fund to the Master Fund as contemplated by the Agreement.
Information about the Master Fund
Investment objectives and policies
The investment objective of the Master Fund is to seek, with equal emphasis,
high current income and relative stability of net asset value. The Master Fund
invests in a diversified portfolio of fixed income securities having a
dollar-weighted average maturity of more than three years but not more than 10
years, with no security having a remaining maturity in excess of 12 years. The
Master Fund diversifies its investments among the following three sectors of
the fixed income securities market:
[bullet] a U.S. High Grade Sector, consisting of debt obligations of the U.S.
government, its agencies and instrumentalities, related options,
futures and repurchase agreements, and high grade U.S. corporate debt
obligations and mortgage-backed and asset-backed securities;
[bullet] a High Yield Sector, consisting primarily of high yield, lower-rated
U.S. and foreign corporate fixed income securities; and
[bullet] an International Sector, consisting primarily of obligations of
foreign governments, their agencies and instrumentalities, and other
fixed income securities denominated in foreign currencies or U.S.
dollars.
Putnam Management believes that the Master Fund's policies of limiting the
maturity of its portfolio investments and diversifying investments among these
sectors will reduce fluctuations in net asset value over the long term.
[bullet]
14
<PAGE>
Subject to the foregoing limitations, Putnam Management adjusts the average
maturity of the investments held in the portfolio from time to time, depending
on its assessment of relative yields and risks of securities of different
maturities and its expectations of future changes in interest rates.
Historically, the markets for U.S. government securities and other high-grade
U.S. fixed income securities, high yield fixed income securities and foreign
fixed income securities have tended to behave independently and have at times
moved in opposite directions. For example, U.S. government securities have
generally been affected negatively by inflationary concerns resulting from
increased economic activity. High yield U.S. corporate fixed income securities,
on the other hand, have generally benefited from increased economic activity
due to improvements in the credit quality of corporate issuers. The reverse has
generally been true during periods of economic decline. Similarly, U.S.
government securities have often been negatively affected by a decline in the
value of the dollar against foreign currencies, while the bonds of foreign
issuers held by U.S. investors have generally benefited from such decline.
Putnam Management believes that, when financial markets exhibit such a lack of
correlation, a pooling of investments among these markets may lead to greater
stability of net asset value over the long term than investing exclusively in
any one of the markets.
Putnam Management determines the amount of assets to be allocated to each
market sector based on its assessment of the returns that can be achieved from
a portfolio which is invested in all three sectors. In doing so, it will seek
to maximize current income without incurring undue risk to capital. In making
this determination, Putnam Management will rely in part on quantitative
analytical techniques that measure relative risks and opportunities of each
market sector based on current and historical market data for each sector, as
well as on its own assessment of economic and market conditions. Putnam
Management will continuously review this allocation of assets and make such
adjustments as it deems appropriate. Under normal market conditions, the Master
Fund will not invest more than 65% of its assets in any one market sector, and
will invest at least 15% of its assets in each market sector. The Master Fund's
assets allocated to each of these market sectors will be managed in accordance
with the particular investment policies described below. The Master Fund will
not invest more than 65% of its assets (across all sectors) in securities rated
below BBB/Baa by a nationally recognized securities rating agency, such as
Moody's or S&P (or in unrated securities determined by Putnam Management to be
of comparable quality). To the extent a security is assigned a different rating
by one or more of the various ratings agencies, Putnam Management will use the
highest rating assigned by an agency.
The U.S. High Grade Sector
The Master Fund will invest assets allocated to the U.S. High Grade Sector in
U.S. government securities, related options, futures contracts and repurchase
agreements, high grade U.S. corporate debt obligations and high grade
mortgage-backed and asset-backed securities. All securities purchased by this
sector must have, at the time of purchase, at least an "A" rating from a
nationally recognized securities rating agency (or unrated securities of
comparable quality).
"U.S. government securities" are debt securities issued or guaranteed by the
U.S. government, by various of its agencies, or by various instrumentalities
established or sponsored by the U.S. government. Some of these obligations,
including U.S. Treasury bills, notes and bonds, mortgage participation
certificates guaranteed by the Government National Mortgage Association
("Ginnie Mae"), and Federal Housing Administration debentures, are supported by
the full faith and credit of the United States. Other U.S. government
securities issued or guaranteed by federal agencies or government-sponsored
enterprises are not supported by the full faith and credit of the United
States. These securities include obligations supported by the right of the
issuer to borrow from the U.S. Treasury, such as obligations of Federal Home
Loan Banks, and obligations supported only by the credit of the
instrumentality, such as Federal National Mortgage Association ("Fannie Mae")
bonds.
The Master Fund may invest assets allocated to the U.S. High Grade Sector in
mortgage-backed securities, including collateralized mortgage obligations
("CMOs"). CMOs and other mortgaged-backed securities represent participations
in, or are secured by, mortgage loans and include:
[bullet]
15
<PAGE>
-- Certain securities issued or guaranteed by the U.S. government or one of
its agencies or instrumentalities;
-- Securities issued by private issuers that represent an interest in or are
secured by mortgage-backed securities issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities; and
-- Securities issued by private issuers that represent an interest in or are
secured by mortgage loans or mortgage-backed securities without a
government guarantee but usually having some form of private credit
enhancement.
The Master Fund may also invest assets allocated to the U.S. High Grade Sector
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.
High Yield Sector
The Master Fund will invest assets allocated to the High Yield Sector primarily
in high yielding, lower-rated, higher risk fixed income securities of U.S.
companies, including debt securities, convertible securities and preferred
stocks. The High Yield Sector may also invest in high yielding, lower-rated
fixed income securities of corporate issuers located in foreign countries. As
described below, however, the Master Fund may invest all or any part of the
High Yield Sector portfolio in higher-rated and unrated fixed-income
securities. The Master Fund will not necessarily invest in the highest yielding
securities available if in Putnam Management's opinion the differences in yield
are not sufficient to justify the higher risks involved.
Differing yields on fixed income securities of the same maturity are a function
of several factors, including the relative financial strength of the issuers.
Higher yields are generally available from lower-rated fixed income securities.
Lower-rated fixed income securities are generally regarded as those rated below
investment grade (rated Baa/BBB by nationally recognized securities rating
agencies such as Moody's or S&P, or unrated securities of comparable quality).
Securities rated below Baa or BBB, commonly known as "junk bonds", are
considered to be of poor standing and predominantly speculative. The entire
High Yield Sector and up to 65% of the Master Fund's assets may be invested in
such lower-rated securities, although the Master Fund may not invest more than
20% of its assets in such lower-rated securities issued by foreign issuers. In
addition, the Master Fund may invest up to 5% of its assets in securities rated
below Caa or CCC by a nationally recognized rating agency, or in unrated
securities of comparable quality. Such securities may be in default and are
generally regarded by the rating agencies as having extremely poor prospects of
ever attaining any real investment standing. The rating services' descriptions
of these rating categories, including the speculative characteristics of the
lower categories, are included in Appendix B to this Prospectus/Proxy
Statement.
Securities ratings are based largely on the issuer's historical financial
information and the rating agencies' investment analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better
or worse than the rating would indicate. Although Putnam Management considers
security ratings when making investment decisions, it performs its own
investment analysis and does not rely principally on the ratings assigned by
the rating services. Putnam Management's analysis may include consideration of
the issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and its responsiveness to
changes in business conditions and interest rates. It also considers relative
values based on anticipated cash flow, interest or dividend coverage, asset
coverage and earnings prospects. Because of the greater number of investment
considerations involved in investing in lower-rated securities, the achievement
of the Master Fund's objectives depends more on Putnam Management's analytical
abilities than would be the case if the Master Fund were investing primarily in
securities in the higher rating categories.
The Master 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 continued investment in the
security will assist in meeting the Master Fund's investment objective.
[bullet]
16
<PAGE>
Putnam Management believes that diversification of the Master Fund's
investments in the High Yield Sector among several lower-rated securities of
different issuers will help to reduce the risks of owning any of such
securities separately.
The Master Fund may invest assets allocated to the High Yield Sector in
lower-rated securities of foreign corporate issuers denominated either in U.S.
dollars or in foreign currencies. For a discussion of the risks associated with
foreign investing, see "International Sector" below.
International Sector
The Master Fund will invest the assets allocated to the International Sector in
debt obligations and other fixed income securities primarily denominated in
non-U.S. currencies including:
[bullet] debt obligations issued or guaranteed by foreign national,
provincial, state or other governments with taxing authority, or by
their agencies or instrumentalities;
[bullet] debt obligations of supranational entities (described below);
[bullet] debt obligations and other fixed income securities of foreign and
U.S. corporate issuers; and
[bullet] foreign currency denominated obligations of U.S. issuers.
Historically, yields available from securities of issuers in many foreign
countries have often been higher than those available from securities of U.S.
issuers. The Master Fund has the flexibility to invest in any country where
Putnam Management sees potential for high income. Putnam Management expects
that the Master Fund will invest primarily in securities of issuers in
industrialized Western European countries (including Scandinavian countries)
and in Canada, Japan, Australia and New Zealand. However, the International
Sector also may make substantial investments in emerging market countries. The
Master Fund will not invest more than 20% of its assets in foreign fixed income
securities rated, at the time of purchase, below BBB or Baa by securities
ratings agencies, or unrated securities of comparable quality. To the extent a
security is assigned a different rating by one or more ratings agencies, Putnam
Management will use the highest rating assigned by any agency. Putnam
Management will also consider expected changes in foreign currency exchange
rates in determining the anticipated returns of securities denominated in
foreign currencies.
The obligations of foreign governmental entities, including supranational
issuers, have various kinds of government support. Obligations of foreign
governmental entities include obligations issued or guaranteed by national,
provincial, state or other governments with taxing power or by their agencies.
These obligations may or may not be supported by the full faith and credit of a
foreign government.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
members or "stockholders" usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowing.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by members at the
entity's call), reserves, and net income.
The Master Fund may engage in foreign currency exchange transactions and
futures and options to manage its foreign currency exposure. The Master Fund
may also engage in the writing of covered call and put options with respect to
foreign fixed income securities and related futures in order to supplement the
Master Fund's portfolio income. See "Other investment practices."
Risk Factors
Set forth below are the principal risk factors of investing in the Master Fund.
Several risk factors, such as interest rate risk, also apply to an investment
in the Government Fund. Others, such as the risks associated with investment in
lower-rated securities, apply especially to the Master Fund.
[bullet]
17
<PAGE>
Fixed income securities. The values of fixed income securities fluctuate in
response to changes in interest rates. Changes in the value of portfolio
securities will not affect interest income from those securities but will be
reflected in the Master Fund's net asset value. Thus, a decrease in interest
rates will generally result in an increase in the value of the Master Fund's
assets. Conversely, during periods of rising interests rates, the value of the
Master Fund's assets will generally decline. The magnitude of these
fluctuations will generally be greater for securities with longer maturities.
U.S. government securities are considered among the safest of fixed income
investments, but their values, like those of other debt securities, will
fluctuate with changes in interest rates. Because of their added safety, the
yields available from U.S. government securities are generally lower than the
yields available from comparable corporate debt securities.
While certain U.S. government securities, such as U.S. Treasury obligations and
Ginnie Mae certificates, are backed by the full faith and credit of the U.S.
government, other securities in which the Master Fund may invest are subject to
varying degrees of risk of default. These risk factors include the
creditworthiness of the issuer and, in the case of mortgage-backed and
corporate debt securities, the ability of the underlying mortgagors or other
borrowers to meet their obligations.
Lower-rated securities. Like those of other fixed income securities, the values
of lower-rated securities will fluctuate in response to changes in interest
rates. However, the yields on such securities are also generally higher. In
addition, the values of such lower-rated securities will also be affected by
general economic and business conditions affecting the specific industries of
their issuers. Changes by recognized rating agencies in their ratings of a
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.
Investors should carefully consider their ability to assume the risks of owning
shares of a fund that invests in lower-rated securities. The lower rating of
certain securities reflects a greater possibility of adverse changes in the
financial condition of the issuer or adverse changes in general economic
conditions, or both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal. The inability
(or perceived inability) of issuers to make timely payments of interest and
principal would likely make the values of securities held by the Master Fund
more volatile and could limit the Master Fund's ability to sell its securities
at prices approximating the values placed on such securities. In the absence of
a liquid trading market for its portfolio securities the Master Fund at times
may be unable to establish the fair value of such securities.
The rating assigned to a security by a rating agency does not reflect an
assessment of the volatility of the security's market value or of the liquidity
of an investment in the security.
Putnam Management seeks to minimize the risks of investing in lower-rated
securities through careful investment analysis. When the Master Fund invests in
securities in the lower rating categories, the achievement of its goals is more
dependent on Putnam Management's ability than would be the case if the Master
Fund were investing in securities in the higher rating categories.
At times, a substantial portion of Master Fund assets allocated to the High
Yield Sector may be invested in securities which the Master Fund, by itself or
together with other funds and accounts managed by Putnam Management or its
affiliates, holds all or a major portion. Under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, it may be more difficult to sell these securities when Putnam
Management believes it advisable to do so or the Master Fund may be able to
sell the securities only at prices lower than if they were more widely held.
Under these circumstances, it may also be more difficult to determine the fair
value of such securities for purposes of computing the Master Fund's net asset
value.
In order to enforce its rights in the event of a default of these securities,
the Master Fund may be required to participate in various legal proceedings or
take possession of and manage assets securing the issuer's obligations on the
securities. This could increase fund operating expenses and adversely affect
net asset value.
Prepayment risk. Mortgage-backed and asset-backed securities have yield and
maturity characteristics corresponding to the underlying assets. Unlike
traditional debt securities, which may pay a fixed rate of interest until
[bullet]
18
<PAGE>
maturity when the entire principal amount comes due, payments on certain
mortgage-backed and asset-backed securities include both interest and a partial
payment of principal. Besides the scheduled repayment of principal, payments of
principal may result from the voluntary prepayment, refinancing, or foreclosure
of the underlying mortgage loans or other assets.
Mortgage-backed and asset-backed securities are less effective than other types
of securities as a means of "locking in" attractive long-term interest rates.
One reason is the need to reinvest prepayments of principal; another is the
possibility of significant unscheduled prepayments resulting from declines in
interest rates. These prepayments would have to be reinvested at lower rates.
As a result, these securities may have less potential for capital appreciation
during periods of declining interest rates than other securities of comparable
maturities, although they may have a similar risk of decline in market value
during periods of rising interest rates. Prepayments may also significantly
shorten the effective maturities of these securities, especially during periods
of declining interest rates. Conversely, during periods of rising interest
rates, a reduction in prepayments may increase the effective maturities of
these securities, subjecting them to a greater risk of decline in market value
in response to rising interest rates than traditional debt securities, and,
therefore, potentially increasing the volatility of the Master Fund.
Prepayments may cause losses on securities purchased at a premium. At times,
some of the mortgage-backed and asset-backed securities in which the Master
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 Master Fund to experience a loss equal to any
unamortized premium.
CMOs. CMOs are issued with a number of classes or series that have different
maturities and that may represent interests in some or all of the interest or
principal on the underlying collateral. Payment of interest or principal on
some classes or series of CMOs may be subject to contingencies and some classes
or series may bear some or all of the risk of default on the underlying
mortgages. CMOs of different classes or series are generally retired in
sequence as the underlying mortgage loans in the mortgage pool are repaid. If
enough mortgages are repaid ahead of schedule, the classes or series of a CMO
with the earliest maturities generally will be retired prior to their
maturities. Thus, the early retirement of particular classes or series of a CMO
would have the same effect as the prepayment of mortgages underlying other
mortgage-backed securities. Conversely, slower than anticipated prepayments can
extend the effective maturities of CMOs, subjecting them to a greater risk of
decline in market value in response to rising interest rates than traditional
debt securities, and, therefore, potentially increasing the volatility of the
Master Fund.
Foreign investments. Foreign investments involve certain risks that are not
present with respect to domestic securities. Because most securities held in
the International Sector are denominated in foreign currencies, a change in the
value of any such currency against the U.S. dollar will result in a change in
the U.S. dollar value of the Master Fund's assets and the Master Fund's income
available for distribution. In addition, although a portion of the Master
Fund's investment income may be received or realized in such currencies, the
Master Fund will be required to compute and distribute its income in U.S.
dollars. Therefore, if the exchange rate for any such currency declines after
the Master Fund's income has been earned and translated into U.S. dollars but
before payment, the Master Fund could be required to liquidate portfolio
securities to make such distributions.
The values of foreign investments and the investment income derived from them
may also be affected favorably or unfavorably by changes in currency exchange
control regulations. Although the Master Fund will invest only in securities
denominated in foreign currencies that are fully exchangeable into U.S. dollars
without legal restriction at the time of investment, there is no assurance that
currency controls will not be imposed subsequently. In addition, the values of
foreign fixed income investments will fluctuate in response to changes in U.S.
and foreign interest rates.
Investments in foreign securities may subject the Master Fund to other risks as
well. For example, there may be less information publicly available about a
foreign issuer than about a U.S. issuer, and foreign issuers are not generally
subject to accounting, auditing and financial reporting standards and practices
comparable to those in
[bullet]
19
<PAGE>
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 those in
the United States. Foreign settlement procedures and trade regulations may
involve certain risks (such as delay in payment or delivery of securities or in
the recovery of Master Fund assets held abroad) and expenses not present in the
settlement of investments in U.S. markets.
In addition, the Master 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 investments in certain
foreign countries. Dividends or interest on, or proceeds from the sale of,
foreign securities may be subject to foreign withholding taxes, and special
U.S. tax considerations may apply. Legal remedies available to investors in
certain foreign countries may be more limited than those available with respect
to investments in the United States or in other foreign countries. The laws of
some foreign countries may limit the fund's ability to invest in securities of
certain issuers organized under the laws of those foreign countries.
The risks described above are typically increased in connection with
investments in less developed and developing nations, sometimes referred to as
"emerging markets." For example, political and economic structures in these
countries may be in their infancy and developing rapidly, causing instability.
High rates of inflation or currency devaluations may adversely affect the
economies and securities markets of such countries. In addition, the small
size, limited trading volume and relative inexperience of the securities
markets in these countries may make the Master Fund's investments in such
countries illiquid and more volatile than investments in more developed
countries. Investments in emerging markets may be considered speculative.
Defensive strategies
At times, Putnam Management may judge that conditions in the securities markets
make pursuing the Master Fund's basic investment strategy inconsistent with the
best interests of its shareholders. At such times, Putnam Management may
temporarily use alternative strategies that are designed primarily to reduce
fluctuations in the value of the Master Fund's assets. In implementing these
defensive strategies, depending on the circumstances, the Master Fund may shift
its portfolio emphasis to higher rated securities in the High Yield Sector,
hedge currency risks in the International Sector, or generally reduce the
average maturity of its holdings in any or all of the sectors. Under unusual
market conditions, the Master Fund could invest up to 100% of its assets in
short-term U.S. government securities when the risks of investing into other
sectors are perceived to outweigh the possible benefits of sector
diversification. It is impossible to predict when, or for how long, these
alternative strategies will be used.
Other investment practices
The Master Fund may also engage in the following investment practices, each of
which involves certain special risks.
Options. The Master Fund may seek to increase its current return by writing
covered call and put options on U.S. government securities, foreign
fixed-income securities and foreign currencies. The Master Fund receives a
premium from writing a call or put option, which increases the Master Fund's
return if the option expires unexercised or is closed out at a net profit.
When the Master Fund writes a call option, it gives up the opportunity to
profit from any increase in the price of a security or currency above the
exercise price of the option; when it writes a put option, it takes the risk
that it will be required to purchase a security or currency from the option
holder at a price above the current market price of the security or currency.
The Master 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 Master Fund may also buy and sell put and call options, including
combinations of put and call options on the same underlying security or
currency. The use of these strategies may be limited by applicable law.
[bullet]
20
<PAGE>
Foreign currency exchange transactions. The Master Fund may engage in foreign
currency exchange transactions to manage its exposure to foreign currencies.
Putnam Management may engage in foreign currency exchange transactions in
connection with the purchase and sale of portfolio securities ("transaction
hedging") and to protect against changes in the value of specific portfolio
positions ("position hedging"). It may also engage in foreign currency
transactions for non-hedging purposes, subject to applicable law.
The Master Fund may engage in transaction hedging to protect against a change
in foreign currency exchange rates between the date on which the Master Fund
contracts to purchase or sell a security and the settlement date, or to "lock
in" the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. The Master 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 the Master 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 the Master 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.
The Master 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 Master Fund intends to buy are
denominated, when the Master Fund holds cash or short-term investments). For
position hedging purposes, the Master Fund may purchase or sell foreign
currency futures contracts, foreign currency forward contracts and options on
foreign currency futures contracts and on foreign currencies on exchanges or in
over-the-counter markets. In connection with position hedging, the Master Fund
may also purchase or sell foreign currency on a spot basis.
The Master 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 Master Fund. Cross hedging transactions by the Master 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 Master Fund may also engage in non-hedging currency transactions. For
example, Putnam Management may believe that exposure to a currency is in the
Master Fund's best interest but that bonds dominated in that currency are
unattractive. In that case the Master Fund may purchase a currency forward or
option to give it exposure to the currency. The Master Fund will segregate
liquid securities in its portfolio to cover forward contracts used for
non-hedging purposes in accordance with SEC regulations.
The decision as to whether and to what extent the Master Fund will engage in
foreign currency exchange transactions will depend on a number of factors,
including prevailing market conditions, the composition of the Master Fund's
portfolio and the availability of suitable transactions. Accordingly, there can
be no assurance that the Master Fund will engage in foreign currency exchange
transactions at any given time or from time to time.
For a further discussion of the risks associated with purchasing and selling
futures contracts and options, see "Financial futures and options" below. The
SAI also contains additional information concerning the Master Fund's use of
foreign currency exchange transactions.
[bullet]
21
<PAGE>
Financial futures and options. The Master Fund may purchase and sell futures
contracts on U.S. government securities, foreign fixed income securities and on
foreign currencies. A futures contract is a contract to buy or sell a certain
amount of a particular U.S. government security, foreign fixed income security
or foreign currency at an agreed price on a specified future date. Depending on
the change in the value of the security or currency between the time the Master
Fund enters into and terminates a futures contract, the Master Fund realizes a
gain or loss. The Master Fund may purchase and sell call and put options on
futures contracts or on securities it is permitted to purchase in addition to
or as an alternative to purchasing and selling futures contracts. The Master
Fund may engage in futures and options transactions for hedging purposes and
for nonhedging purposes, such as to adjust its exposure to relevant markets or
as a substitute for direct investment.
The use of futures and options involves certain special risks. Futures and
options transactions involve costs and may result in losses.
The successful use of futures and related options will usually depend on Putnam
Management's ability to forecast interest rate and market movements correctly.
The use of futures and options strategies also involves the risk of imperfect
correlation between movements in the prices of futures and options and
movements in the prices of the underlying securities or currencies or in the
values of the securities or currencies that are the subject of a hedge. The
successful use of futures and options also depends on the availability of a
liquid secondary market to enable the Master Fund to close its positions on a
timely basis. There can be no assurance that such a market will exist at a
particular time. The Master Fund's ability to terminate option positions
established in the over-the-counter market may be more limited than for
exchange-traded options and may also involve the risk that securities dealers
participating in such transactions would fail to meet their obligations to the
Master Fund.
Because the markets for futures and options on foreign fixed income securities
and foreign currencies are relatively new and still developing and are subject
to certain regulatory constraints, the Master Fund's ability to engage in such
transactions may be limited. The use of futures and options transactions for
purposes other than hedging entails greater risks. Certain provisions of the
Internal Revenue Code and certain regulatory requirements may limit the use of
futures and options transactions.
A more detailed description of futures and options strategies, including the
risks associated with them, is included in the SAI.
Securities loans, repurchase agreements and forward commitments. The Master
Fund may lend portfolio securities amounting to not more than 25% of its assets
to broker-dealers and may enter into repurchase agreements on up to 25% of its
assets. These transactions must be fully collateralized at all times. The
Master Fund may also purchase securities for future delivery, which may
increase its overall investment exposure and involves a risk of loss if the
value of the securities declines prior to the settlement date. These
transactions involve some risk if the other party should default on its
obligation and the Master Fund is delayed or prevented from recovering the
collateral or completing the transaction.
[bullet]
22
<PAGE>
Financial highlights
The following table presents per share financial information for the Master
Fund since its inception. With the exception of the information for the six
months ended March 31, 1997, this information has been audited and reported on
by Coopers & Lybrand, L.L.P., the fund's independent accountants.
<TABLE>
<CAPTION>
Six months
ended
March 31,
1997 Year ended September 30
(Unaudited) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 8.58 $ 8.38 $ 8.13 $ 8.91 $ 8.71 $ 8.16
Investment
operations
Net investment
income .33 .63 .67 .62 .68 .74
Net realized and
unrealized gain
(loss) on
investments (.13) .19 .21 (.71) .29 .63
Total from investment
operations .20 .82 .88 (.09) .97 1.37
Less distributions:
From net investment
income (.31) (.61) (.49) (.55) (.68) (.74)
In excess of net
investment income -- -- -- -- (.09) --
From net realized
gain on
investments -- -- -- (.06) -- --
Return of capital -- (.01) (.14) (.08) -- (.08)
Total distributions (.31) (.62) (.63) (.69) (.77) (.82)
Net asset value, end
of period $ 8.47 $ 8.58 $ 8.38 $ 8.13 $ 8.91 $ 8.71
Market value, end of
period $ 7.500 $ 7.500 $ 7.375 $ 7.250 $ 8.375 $ 8.500
Total investment
return at market
value (%)(a) 4.12(c) 10.34 10.90 (5.57) 7.89 21.13
Net assets, end of
period (in
thousands) $ 325,735 $332,537 $326,735 $317,296 $347,620 $339,871
Ratio of expenses to
average net assets
(%)(b) .46(c) .99 1.03 .92 .96 .98
Ratio of net
investment income
to average net
assets (%) 3.79(c) 7.44 8.24 7.18 7.83 8.76
Portfolio turnover (%) 107.73(c) 232.90 219.63 204.92 237.63 134.43
- ----------------------- ------------ -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
For the
period
April 29,
1988
(commence-
ment of
opera-
tions) to
1991 1990 1989 September
30, 1988*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 7.60 $ 8.62 $ 9.27 $ 9.29
Investment
operations
Net investment
income .76 .84 .97 .38
Net realized and
unrealized gain
(loss) on
investments .67 (.91) (.55) (.06)
Total from investment
operations 1.43 (.07) .42 .32
Less distributions:
From net investment
income (.76) (.85) (.99) .34
In excess of net
investment income -- -- -- --
From net realized
gain on
investments -- (.08) (.08) --
Return of capital (.11) (.02) -- --
Total distributions (.87) (.95) (1.07) (.34)
Net asset value, end
of period $ 8.16 $ 7.60 $ 8.62 $ 9.27
Market value, end of
period $ 7.750 $ 6.375 $ 8.375 $ 9.250
Total investment
return at market
value (%)(a) 36.82 (13.29) 1.92 (4.05)(c)
Net assets, end of
period (in
thousands) $317,747 $301,613 $345,931 $ 371,282
Ratio of expenses to
average net assets
(%)(b) 1.08 1.04 1.04 .39(c)
Ratio of net
investment income
to average net
assets (%) 9.65 10.4 10.61 4.13(c)
Portfolio turnover (%) 204.31 211.22 202.47 33.18(c)
- --------------------------------------------------------------------------------
</TABLE>
*Activity for the period March 10, 1988 to April 28, 1988 is not included.
(a)Total investment return does not reflect the effect of sales charges.
(b)The ratio of expenses to average net assets for the year ended September 30,
1995 and thereafter includes amounts paid through expense offset arrangements.
(c)Not annualized.
[bullet]
23
<PAGE>
Information about the Government Fund
The investment objective of the Government Fund is to seek, with equal
emphasis, high current income and relative stability of net asset value, by
investing in a diversified portfolio of fixed income securities having a
dollar-weighted average maturity of more than 3 years but not more than 10
years, with no security having a remaining effective maturity of more than 10
years. The Government Fund invests in the following two sectors of the fixed
income securities market:
[bullet] a U.S. government sector, consisting primarily of debt obligations
issued or guaranteed by the U.S. government, its agencies and
instrumentalities, and related options, futures and repurchase
agreements ("U.S. government securities"); and
[bullet] a foreign government sector, consisting primarily of debt obligations
of foreign governments, their agencies and intrumentalities, and
supranational entities ("foreign government securities")
The Government Fund may engage in foreign currency exchange transactions and
options to manage its foreign currency exposure. The Government Fund may also
hold a portion of its assets in cash and money-market instruments.
Putnam Management believes that, because the Government Fund limits the
maturity of its portfolio investments and normally invests a portion of its
assets in foreign securities, the Government Fund's net asset value is likely
to be more stable over the long term than if the Government Fund invested
exclusively in longer-term U.S. government securities. The values of fixed
income securities generally rise during periods of falling interest rates and
decline during periods of rising interest rates. The magnitude of these
fluctuations generally has been smaller for intermediate-term securities than
for securities with longer maturities. While the volatility associated with
intermediate-term securities is lower, the yields available on such securities
are also generally lower. Options on intermediate-term securities generally
carry smaller premiums and, therefore, the additional income that can be
generated by the Government Fund's options and futures strategies described
below is likely to be less than if the Government Fund invested in longer-term
securities.
Putnam Management adjusts the average maturity of the investments held in the
portfolio from time to time, depending on its assessment of relative yields and
risks of securities of different maturities and its expectations of future
changes in interest rates.
Historically, the markets for U.S. government securities and foreign government
securities have tended to behave independently and have at times moved in
opposite directions. For example, U.S. government securities have often been
negatively affected by a decline in the value of the dollar against foreign
currencies, while the bonds of foreign issuers held by U.S. investors have
generally benefitted from such decline. Putnam Management believes that,
because the markets for U.S. government securities and for foreign securities
often exhibit such a lack of correlation, the Government Fund should be able to
achieve greater stability of net asset value over the long term by investing a
portion of its assets in foreign securities than by investing exclusively in a
portfolio of U.S. government securities.
Putnam Management expects that a portion of the Government Fund's assets will
normally be invested in foreign government securities. Such investments may
represent up to 50% of the Government Fund's assets. Putnam Management
determines the amount of the Government Fund's assets invested in foreign
government securities based on its assessment of the maximum level of current
income that can be achieved from a portfolio invested in U.S. government
securities and foreign government securities, consistent with reducing
fluctuations in net asset value. In making these adjustments, Putnam Management
will consider changing market, economic, and currency conditions and the
relative risks and opportunities of investing in foreign securities.
The Government Fund may invest up to 15% of its assets in securities rated
below investment grade (rated below Baa or BBB by a recognized securities
rating agency, such as Moody's or S&P), or in unrated securities determined to
be of comparable quality. The Government Fund will not invest in securities
rated below B at the time of purchase.
[bullet]
24
<PAGE>
For more information about the Government Fund's investments in U.S. government
securities and foreign government securities and the risks they may entail, see
"Information about the Master Fund--Investment objectives and policies" above.
Defensive strategies
There may be times when, in Putnam Management's judgment, conditions in the
securities markets would make pursuing the Government Fund's basic investment
strategy inconsistent with the best interests of the Government Fund's
shareholders. At such times, Putnam Management may employ alternative
strategies, primarily seeking to reduce fluctuations in the value of the
Government Fund's assets. In implementing these defensive strategies, depending
on the circumstances, the Government Fund may reduce or eliminate its foreign
securities holdings, or generally reduce the average maturity of its holdings.
Under unusual market conditions the Government Fund could invest up to 100% of
its assets in short term U.S. government securities. It is impossible to
predict when, or for how long, such defensive strategies will be utilized.
Other investment practices
The Government Fund may engage in futures and options transactions, foreign
currency exchange transactions, securities loans, forward commitments, and
repurchase agreements. For a description of these investment practices, and
special risks they may involve, see "Information about the Master Fund--Other
investment practices."
[bullet]
25
<PAGE>
Financial highlights
The following table presents per share financial information for the Government
Fund since inception. With the exception of the information for the six months
ended May 31, 1997, this information has been audited and reported on by Price
Waterhouse, LLP, the fund's independent accountants.
<TABLE>
<CAPTION>
Six months Year ended November 30,
ended
May 31,
1997 1996 1995 1994 1993 1992 1991 1990
(Unaudited)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 8.66 $ 8.70 $ 8.07 $ 9.05 $ 9.32 $ 9.21 $ 9.08 $ 9.11
Investment
operations
Net investment income .25 .54 .58 .56 .55 .60 .68 .73
Net realized and
unrealized gain
(loss) on investments (.36) .01 .65 (.84) .21 .28 .34 .22
Total from investment
operations (.11) .55 1.23 (.28) .76 .88 1.02 .95
Less distributions:
From net investment
income (.30) (.59) (.60) (.39) (.55) (.60) (.68) (.73)
In excess of net
investment income -- (.01) -- -- (.04) -- -- --
From net realized
gain on
investments -- -- -- (.07) (.44) (.17) (.05) (.08)
Return of capital -- -- -- (.24) -- -- (.16) (.17)
Total distributions (.30) (.60) (.60) (.70) (1.03) (.77) (.89) (.98)
Increase in net asset
value from shares
repurchased -- .01 -- -- -- -- -- --
Net asset value, end
of period $ 8.25 $ 8.66 $ 8.70 $ 8.07 $ 9.05 $ 9.32 $ 9.21 $ 9.08
Market value, end of
period $ 7.500 $ 7.625 $ 7.750 $ 7.250 $ 8.125 $ 9.125 $ 9.125 $ 9.00
Total investment
return at market
value (%)(a) 2.29(c) 6.44 15.58 (2.38) (.01) 8.69 11.80 11.90
Net assets, end of
period
(in thousands) $ 531,059 $559,137 $566,049 $525,592 $589,227 $601,573 $585,649 $567,117
Ratio of expenses to
average net assets
(%)(b) .45(c) .90 1.00 .87 .89 .92 1.01 1.02
Ratio of net
investment income
to average net
assets (%) 3.00(c) 6.31 6.85 6.64 5.98 6.51 7.51 8.19
Portfolio turnover
(%) 162.70(c) 326.92 416.86 242.42 303.68 216.24 255.49 268.42
- ---------------------- ------------ -------- -------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
For the period
June 27, 1988
(commencement
of operations) to
1989 November 30, 1988
----------- -----------------
<S> <C> <C>
Net asset value,
beginning of period $ 9.38 $ 9.30
Investment
operations
Net investment income .79 .35
Net realized and
unrealized gain
(loss) on investments (.05) .07
Total from investment
operations .74 .42
Less distributions:
From net investment
income (.79) (.34)
In excess of net
investment income -- --
From net realized
gain on
investments (.22) --
Return of capital -- --
Total distributions (1.01) (.34)
Increase in net asset
value from shares
repurchased -- --
Net asset value, end
of period $ 9.11 $ 9.38
Market value, end of
period $ 9.00 $ 9.250
Total investment
return at market
value (%)(a) 8.52 (4.11)(c)
Net assets, end of
period
(in thousands) $562,115 $ 569,990
Ratio of expenses to
average net assets
(%)(b) 1.00 .42(c)
Ratio of net
investment income
to average net
assets (%) 8.43 3.71(c)
Portfolio turnover
(%) 174.57 34.74(c)
- ---------------------- -------- -----------
</TABLE>
(a)Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b)The ratio of expenses to average net assets for the year ended November 30,
1995 and thereafter includes amounts paid through expense offset arrangements.
Prior period ratios exclude these amounts.
(c)Not annualized.
[bullet]
26
<PAGE>
Additional information about the funds
Except as otherwise noted, the following additional information relates to both
the Master Fund and the Government Fund.
Portfolio turnover
The length of time a fund has held a particular security is not generally a
consideration in investment decisions. A change in the securities held by a
fund is known as "portfolio turnover." As a result of each fund's investment
policies, under certain market conditions its portfolio turnover rate may be
higher than that of other mutual funds. Portfolio turnover generally involves
some expense, including brokerage commissions or dealer markups and other
transaction costs on the sale of securities and reinvestment in other
securities. These transactions may result in realization of taxable capital
gains. Portfolio turnover rates for the funds are shown in the their respective
"Financial highlights".
Investment restrictions
Both funds have adopted the following investment restrictions which may not be
changed without the affirmative vote of a "majority of the outstanding voting
securities" of the affected fund (which is defined in the Investment Company
Act of 1940 to mean the affirmative vote of the lesser of (1) more than 50% of
the outstanding shares of the fund, or (2) 67% or more of the shares present at
a meeting if more than 50% of the outstanding shares of the fund are
represented at the meeting in person or by proxy.) Each fund may not:
1. Borrow money or issue senior securities (as defined in the Investment
Company Act of 1940), except that the fund may borrow amounts not exceeding 15%
of the value (taken at the lower of cost or current value) of its total assets
(not including the amount borrowed) at the time the borrowing is made for
temporary purposes (including repurchasing its shares while effecting an
orderly liquidation of portfolio securities) or for emergency purposes.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets in excess
of 15% of its total assets (taken at current value) and then only to secure
borrowings permitted by restriction 1 above. Collateral arrangements with
respect to margin for futures contracts and options are not deemed to be
pledges or other encumbrances for purposes of this restriction.
3. Purchase securities on margin, except such short term credits as may be
necessary for the clearance of purchases and sales of securities, and except
that it may make margin payments in connection with transactions in futures
contracts and options.
4. Make short sales of securities or maintain a short position for the
account of the fund unless at all times when a short position is open it owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and in equal amount to, the securities sold short.
5. 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 the federal securities laws.
6. 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 representing interests in real estate.
7. Purchase or sell commodities or commodity contracts, except that it may
purchase or sell financial futures contracts and related options, and futures,
forward contracts and options on foreign currencies.
8. Make loans, except by purchase of debt obligations in which the fund may
invest consistent with its investment policies, by entering into repurchase
agreements with respect to not more than 25% of its total assets (taken at
current value), or through the lending of its portfolio securities with respect
to not more than 25% of its total assets.
[bullet]
27
<PAGE>
9. Invest in securities of any issuer, if, to the knowledge of the fund,
officers and Trustees of the fund and officers and directors of Putnam
Management who beneficially own more than 0.5% of the securities of that issuer
together own more than 5% of such securities.
10. Invest in 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 securities of the U.S. Government or its agencies or
instrumentalities or, with respect to 25% of the fund's total assets, to
securities issued by, or backed by the credit of, any foreign government, its
agencies and instrumentalities.
11. Acquire more than 10% of the voting securities of any issuer.
12. Invest more than 25% of the value of its total assets in any one
industry. (Securities of the U.S. Government, its agencies or
instrumentalities, or of any foreign government, its agencies or
instrumentalities, securities of supranational entities, and securities backed
by the credit of a governmental entity are not considered to represent
industries).
13. Invest in the securities of registered open-end investment companies,
except as they may be acquired as part of a reorganization or consolidation or
acquisition of assets or by purchases in the open market involving only
customary brokers' commissions.
14. Purchase securities restricted as to resale if, as a result, such
investments would exceed 15% of the value of the fund's net assets, excluding
restricted securities that have been determined by the Trustees of the fund (or
the person designated by them to make such determination) to be readily
marketable.
15. Buy or sell oil, gas, or other mineral leases, rights or royalty
contracts, although it may purchase securities of issuers which deal in,
represent interests in or are secured by interests in such leases, rights or
contracts.
16. Make investments for the purpose of gaining control of a company's
management.
All percentage limitations on investments will apply at the time of investment
and shall not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of such investment.
Except for the investment restrictions listed above, the other investment
policies described in this Prospectus/Proxy Statement are not fundamental and
may be changed by approval of the affected fund's Trustees.
Management
Each fund's Trustees are responsible for generally overseeing the conduct of
fund business. The funds have the same Trustees. Information concerning the
age, principal occupations, and professional affiliations of the Trustees is
contained on pages 35-38 of this Prospectus/Proxy Statement. Information
relating to the compensation of Trustees is contained on pages 40-41 of this
Prospectus/Proxy Statement.
Subject to such policies as the Trustees may determine, Putnam Management
furnishes a continuing investment program for each fund and makes investment
decisions on its behalf. Subject to the control of the Trustees, Putnam
Management also manages each fund's other affairs and business. Each fund pays
Putnam Management management fees at the following identical rates: 0.75% of
the first $500 million of average weekly net assets, 0.65% of the next $500
million, 0.60% of the next $500 million, and 0.55% of any amount over $1.5
billion. Putnam Management is a subsidiary of Putnam Investments, Inc., which
is wholly owned by Marsh & McLennan Companies, Inc., a publicly-owned holding
company whose principal businesses are international insurance and reinsurance
brokerage, employee benefit consulting and investment management.
Except as otherwise noted, the following officers of Putnam Management have had
primary responsibility for the day-to-day management of the funds' portfolios
since the years stated below:
[bullet]
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<PAGE>
<TABLE>
<CAPTION>
Business Experience
Year (at least 5 years)
------ ------------------------------------------------------------------------------------
<S> <C> <C>
Gail S. Attridge 1997 Employed as an investment professional by Putnam Management since 1993. Prior to
Senior Vice President November 1993, Ms. Attridge was an Analyst at Keystone Custody International.
D. William Kohli 1994 Employed as an investment professional by Putnam Management since 1994. Prior to
Managing Director 1994, Mr. Kohli was employed by Franklin Advisors/Templeton Investments Counsel as
Executive Vice President and Co-Director of Global Bond Management from 1993 to
1994, and as Senior Portfolio Manager from 1988 to 1993.
Jennifer E. Leichter* 1990 Employed as an investment professional by Putnam Management since 1987.
Managing Director
Kenneth J. Taubes 1997 Employed as an investment professional by Putnam Management since 1991.
Senior Vice President
</TABLE>
- -------
*Master Fund only.
The funds pay all expenses not assumed by Putnam Management, including
Trustees' fees, auditing, legal, custodial, investor servicing and shareholder
reporting expenses. The funds also reimburse Putnam Management for the
compensation and related expenses of certain fund officers and their staff who
provide administrative services. The total reimbursement is determined annually
by the Trustees.
Putnam Management places all orders for the purchase and sale of fund
securities. In selecting broker-dealers, Putnam Management may consider research
and brokerage services furnished to it and its affiliates. Subject to seeking
the most favorable price and execution available, Putnam Management may, if
permitted by law, consider the sale of shares of the other Putnam funds as a
factor in the selection of broker-dealers.
Putnam Fiduciary Trust Company, One Post Office Square, Boston, Massachusetts
02109, is the custodian of the funds' securities. Putnam Investor Services,
P.O. Box 41203, Providence, Rhode Island 02940-1203, a division of Putnam
Fiduciary Trust Company, is investor servicing, transfer and dividend
disbursing agent for the funds.
Description of fund shares
General. The Trustees of each fund have authority to issue an unlimited number
of shares of beneficial interest without par value. Except for the Master Fund
shares to be issued in the transaction, neither fund has a present intention of
offering additional shares, other than under its dividend reinvestment plan.
See "Dividend Reinvestment Plan" below. Other offerings of a fund's shares
require approval of the Trustees. Any additional offering will be subject to
the requirements of the Investment Company Act of 1940 that shares may not be
sold at a price below the then current net asset value, exclusive of
underwriting discounts and commissions, except in connection with an offering
to existing shareholders or with the consent of the holders of a majority of a
fund's outstanding shares.
Set forth below is information about each fund's securities as of June 30, 1997
(except where otherwise noted):
Master Fund
Title of Class Amount Authorized Amount Held by Fund Amount Outstanding
- --------------------------------------------------------------------------------
Common Shares Unlimited 0 38,435,337.997 shares
Government Fund
Title of Class Amount Authorized Amount Held by Fund Amount Outstanding
- --------------------------------------------------------------------------------
Common Shares Unlimited 0 64,333,052.213 shares
Repurchase of shares. Since each fund is a closed-end investment company,
shareholders of each fund do not, and will not, have the right to redeem their
shares. A fund, however, may repurchase its shares from time to time in
open-market or private transactions when it can do so at prices below the
current net asset value per share
[bullet]
29
<PAGE>
and on terms that represent a favorable investment opportunity. The funds
currently are authorized to make periodic repurchases of shares in open market
transactions at times when discount levels make such purchases an attractive
investment. Such purchases may have the effect of temporarily reducing discount
levels, but are not believed to influence discounts materially over the longer
term.
Shares of the funds trade in the open market at a price which will be a
function of several factors, including yield and net asset value of the shares
and the extent of market activity. Shares of closed-end investment companies
frequently trade at a discount from net asset value, but in some cases trade at
a premium. When a fund repurchases its shares at a price below their net asset
value, the net asset value of those shares that remain outstanding will be
increased, but this does not necessarily mean that the market price of those
outstanding shares will be affected either positively or negatively.
Determination of net asset value. Each fund calculates the net asset value of a
share at least weekly by dividing the total value of its assets, less
liabilities, by the number of its shares outstanding. Shares are valued as of
the close of regular trading on the New York Stock Exchange each day the
exchange is open.
Securities for which market quotations are readily available are valued at
market values. Short-term investments that have remaining maturities of 60 days
or less are valued at amortized cost, which approximates market value. All other
securities and assets are valued at their fair value following procedures
approved by the Trustees.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, and certain
foreign securities. These investments are valued at fair value on the basis of
valuations furnished by pricing services, 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.
Securities quoted in foreign currencies are translated into U.S. dollars at
current exchange rates or at such other rates as the Trustees may determine in
computing net asset value. As a result, fluctuations in the value of such
currencies in relation to the U.S. dollar will affect the net asset value of
fund shares even though there has not been any change in the values of such
securities as quoted in such foreign currencies.
Dividend Reinvestment Plan. Each fund has adopted a dividend reinvestment plan
(each, a "Plan") pursuant to which each registered shareholder may have all
income dividends and distributions of capital gains automatically reinvested by
BankBoston (the "Plan Agent"), as agent for shareholders, in additional shares
of the fund. Shareholders who do not participate in the Plan receive all
distributions in cash paid by check mailed directly to the shareholder by the
Plan Agent as dividend disbursing agent. Shareholders whose shares are held in
the name of a broker or nominee should contact the broker or nominee to
determine whether and how they may participate in a Plan. For the Master Fund,
shareholders must make an election to participate in the Plan. For the
Government Fund, shareholders are automatically enrolled in the Plan and must
elect not to participate in the Plan.
If the Trustees of a fund declare a dividend or determine to make a capital
gain distribution payable either in shares of the fund or in cash,
non-participants in that fund's Plan will receive cash and participants in the
Plan will receive the equivalent in shares of the fund. If the market price of
the shares on the payment date for the dividend or distribution is equal to or
exceeds their net asset value as determined on the payment date, participants
will be issued shares of the relevant fund at a value equal to the higher of
net asset value or 95% of the market price. This discount reflects savings in
underwriting and other costs that the fund would otherwise be required to incur
to raise additional capital. If net asset value exceeds the market price of the
fund's shares at such time, or if the fund declares a dividend or other
distribution payable only in cash, the Plan Agent will, as agent for Plan
participants, buy fund shares in the open market, on the New York Stock
Exchange or elsewhere, for the participants' accounts. If, before the Plan
Agent has completed its purchases, the market price exceeds the net asset value
of the fund's shares, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the fund's shares, resulting in the
acquisition of fewer shares than if the dividend or distribution had been paid
in shares issued by the fund.
[bullet]
30
<PAGE>
Participants in a Plan may withdraw from the Plan upon written notice to the
Plan Agent. When a participant withdraws from a Plan or upon termination of a
Plan as provided below, certificates for whole shares credited to his or her
account under the Plan will be issued and a cash payment will be made for any
fraction of a share credited to such account.
The Plan Agent will maintain all shareholders' accounts in a Plan and will
furnish written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each participant in a Plan will be held by the Plan Agent in non-certificated
form in the name of the participant, and each shareholder's proxy will include
those shares purchased pursuant to the Plan.
In the case of shareholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Plan Agent will administer
a Plan on the basis of the number of shares certified from time to time by the
record shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by a
fund as a result of dividends or capital gain distributions payable either in
shares or in cash. However, each participant will bear a proportionate share of
brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of dividends or capital gain
distributions. In each case, the cost per share of shares purchased for each
participant's account will be the average cost, including brokerage
commissions, of any shares purchased in the open market plus the cost of any
shares issued by a fund.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income taxes that may be payable (or required to be
withheld) on dividends or distributions. See "Taxation."
Experience under a Plan may indicate that changes are desirable. Accordingly,
each fund reserves the right to amend or terminate its Plan. There is no direct
service charge to participants in a Plan; however, each fund reserves the right
to amend the Plan to include a service charge payable by the participants.
It may be necessary to suspend operation of the Government Fund's Plan for one
or two dividend payments immediately prior to the combination so that all
purchase activity under the Plan is settled in advance of the effective date of
the transaction. In that event all shareholders, including those in the Plan,
will receive those dividends in cash.
Dividends and distributions. Each fund pays monthly distributions from net
investment income and any net realized short term capital gains (including
gains from options and futures transactions). Net realized long term capital
gains, if any, will be distributed at least annually.
Based on a policy adopted by the Trustees in May 1997, the Master Fund sets its
monthly dividend at the end of each year based on current and retained earnings
of the fund. These amounts include not only current net investment income, but
also realized capital gain and undistributed income and gain from prior
periods. Expectations of future capital gains will not be taken into account.
Under normal market conditions, the Master Fund's dividend will be adjusted
once a year. The dividend will be set at a level which is intended to avoid a
return of capital to shareholders, although subsequent market events could
result in returns of capital. The Government Fund's dividend rate is based on
Putnam Management's projections of net investment income and net realized
short-term capital gains that the fund is likely to earn over the long term.
Such distributions may at times exceed the current earnings of the Government
Fund, resulting in a return of capital to shareholders.
Any amount retained by a fund in excess of earnings would be available to
stabilize future distributions. As a result, the distributions paid by a fund
for any particular period may be more or less than the amount of net investment
income and net realized short term capital gains actually earned by the fund
during such period. Distributions in excess of current and retained earnings
may result in a return of capital to shareholders.
For information concerning the tax treatment of such dividends and
distributions to shareholders, see the discussion under "Taxation."
[bullet]
31
<PAGE>
Declarations of Trust. Each fund's Agreement and Declaration of Trust includes
provisions that could have the effect of limiting the ability of other entities
or persons to acquire control of the fund, or to cause it to engage in certain
transactions or to modify its structure. The affirmative vote of at least
two-thirds of the outstanding shares of a fund is required to authorize any of
the following actions: (1) merger or consolidation of the fund,
(2) sale of all or substantially all of the assets of the fund, (3) liquidation
or dissolution of the fund, or (4) amendment of the Agreement and Declaration
of Trust to reduce the two-thirds vote required to authorize the actions in (1)
through (3) above, unless with respect to any of the foregoing such action has
been authorized by the affirmative vote of two-thirds of the total number of
Trustees, in which case the affirmative vote of a majority of the outstanding
shares is required.
The Trustees have determined that the two-thirds voting requirements described
above, which are greater than the minimum requirements under the Investment
Company Act of 1940, are in the best interests of each fund and its
shareholders generally. Reference is made to the Agreement and Declaration of
Trust of each fund, on file with the Securities and Exchange Commission, for
the full text of these provisions. These provisions could have the effect of
depriving shareholders of an opportunity to sell their shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of a fund in a tender offer or similar transaction.
For each fund, if the fund's shares have traded on the principal securities
exchange where listed at an average discount from net asset value of more than
10%, determined on the basis of the discount as of the end of the last trading
day in each week during the 12 calendar weeks preceding the beginning of such
fiscal year, the fund will submit to its shareholders at the next succeeding
annual meeting of shareholders a proposal to convert the fund to an open-end
investment company. Conversion of a fund to an open-end investment company
would require an amendment to the Agreement and Declaration of Trust. Such an
amendment would require the affirmative vote of the holders of a majority of
the shares entitled to be voted on the matter. Shareholders of an open-end
investment company may require the company to redeem their shares at any time
(except in certain circumstances as authorized by or under the Investment
Company Act of 1940) at their net asset value, less such redemption charge, if
any, as might be in effect at the time of redemption. If a fund converted to an
open-end company, it could be required to liquidate portfolio securities to
meet requests for redemption, and its shares would no longer be listed on the
New York Stock Exchange. The Trustees may at any time propose conversion of a
fund to an open-end company depending upon their judgment as to the
advisability of such action in light of circumstances then prevailing.
For the past two fiscal years, the Master Fund's shares traded at an average
discount of greater than 10% for the twelve-week period ended September 30 in
each year, requiring that the Master Fund submit a proposal to shareholders to
convert the Master Fund to an open-end fund. At the 1996 and 1997 annual
meetings of shareholders, the Master Fund's shareholders voted to retain
closed-end status. For the past two fiscal years, the Government Fund's shares
have traded at an average discount of greater than 10% for the twelve-week
period ended November 30 in each year, requiring submission to shareholders of
a conversion proposal. At the 1996 annual meeting of shareholders, the
Government Fund's shareholders voted to retain closed-end status. The
Government Fund's conversion proposal for the 1997 annual meeting is contained
in Proposal 4 of this Prospectus/Proxy Statement on page 42.
Taxation. Each fund intends to qualify each year as a "regulated investment
company" for federal income tax purposes and to meet all other requirements
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. Each fund will distribute substantially all of its
ordinary income and capital gain net income on a current basis.
All fund distributions will be taxable to shareholders as ordinary income
except that any distributions of net long term capital gains will be taxable as
such, regardless of how long a shareholder has held the shares. Distributions
will be taxable as described above whether received in cash or in shares under
a dividend reinvestment plan. With respect to distributions received in cash or
reinvested in shares purchased on the open market, the amount of the
distribution for tax purposes will be the amount of cash distributed or
allocated to the shareholder. With respect to distributions made in shares
issued by a fund, the amount of the distribution will be the fair market
[bullet]
32
<PAGE>
value of the shares on the payment date. In years when a fund distributes
amounts in excess of its earnings and profits, distributions to shareholders
may be treated in part as a return of capital.
Fund investments 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
those securities would be decreased.
If at the end of a fund's fiscal year more than 50% of the value of the fund's
total assets represents securities of foreign corporations, the fund intends to
make an election permitted by the Internal Revenue Code to treat any foreign
taxes it paid as paid by its shareholders. In this case, shareholders who are
U.S. citizens, U.S. corporations and, in some cases, U.S. residents generally
will be required to include in U.S. taxable income their pro rata share of such
taxes, but may then generally be entitled to claim a foreign tax credit or
deduction (but not both) for their share of such taxes.
Fund transactions in foreign currencies and hedging activities may give rise to
ordinary income or loss to the extent such income or loss results from
fluctuations in value of the foreign currency concerned. In addition, such
activities will likely produce a difference between book income and taxable
income. This difference may cause a portion of a fund's income distributions to
constitute a return of capital for tax purposes or require the fund to make
distributions exceeding book income to qualify as a regulated investment
company for tax purposes.
Investment in an entity that qualifies as a "passive foreign investment
company" under the Code could subject a fund to a U.S. federal income tax or
other charge on certain "excess distributions" with respect to the investment,
and on the proceeds from disposition of the investment.
Early in each year Putnam Investor Services will notify fund shareholders of
the amount and tax status of distributions paid by each fund for the preceding
year.
The foregoing is a summary of certain federal income tax consequences of
investing in the fund. Shareholders should consult their tax advisers to
determine the precise effect of an investment in either fund on their
particular tax situation (including possible liability for state and local
taxes). Certain accounting and tax principles pertaining to transactions in
options, futures and forward contracts are described in the SAI.
Trading information
The following chart shows quarterly per share trading information for the past
two fiscal years and the current fiscal year of the funds, as listed on the
NYSE:
<TABLE>
<CAPTION>
(Unaudited)
Master Fund
Closing
Quarter High Low Market Closing Discount
Ended Price ($) Price ($) Price ($) NAV ($) to NAV (%)
- -------------------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
September 29, 1995 7 1/2 7 1/4 7 3/4 8.38 -11.99
December 29, 1995 7 3/4 7 3/8 7 1/2 8.60 -12.79
March 29, 1996 7 7/8 7 1/4 7 3/8 8.46 -12.83
June 28, 1996 7 1/2 7 1/4 7 3/8 8.46 -12.83
September 30, 1996 7 5/8 7 1/4 7 1/2 8.58 -12.58
December 31, 1996 7 3/4 7 1/2 7 1/2 8.68 -13.59
March 31, 1997 7 7/8 7 1/2 7 1/2 8.47 -11.45
June 30, 1997 8 1/8 7 3/8 7 29/32 8.62 -8.28
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
Government Fund
Closing
Quarter High Low Market Closing Discount
Ended Price ($) Price ($) Price ($) NAV ($) to NAV (%)
- ------------------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
November 30, 1995 7 3/4 7 1/2 7 3/4 8.70 -10.91
February 28, 1996 8 7 1/2 7 7/8 8.37 -5.91
May 31, 1996 7 7/8 7 1/4 7 3/8 8.32 -11.36
August 30, 1996 7 5/8 7 1/8 7 1/2 8.33 -9.96
November 29, 1996 7 5/8 7 3/8 7 5/8 8.65 -11.85
February 28, 1997 7 5/8 7 3/8 7 3/8 8.37 -11.89
May 31, 1997 7 1/2 7 1/8 7 1/2 8.26 -9.20
</TABLE>
On July 11, 1997 the market price, net asset value per share and discount to
net asset value were $8.00, $8.70 and -8.05%, respectively, for the Master Fund
and $7.44, $8.35 and -10.93%, respectively, for the Government Fund. As shown
in the tables above, the shares of both funds have recently traded for an
amount less than net asset value. The Trustees of both funds have continually
explored various ways of increasing investor interest in the funds which may
help over time to reduce discounts. Recent efforts in this regard include a
change in dividend policy of the Master Fund designed to enhance the stability
of the Master Fund's dividends and a policy for both funds permitting periodic
repurchases of shares in the market when discount levels make such purchases an
attractive investment. Since these policies have only been recently
implemented, it is not yet clear whether they have had a significant effect for
either fund.
Share ownership
At June 30, 1997, the officers and Trustees of each fund as a group owned less
than 1% of the outstanding shares of each fund, and, except as noted below, to
the knowledge of each fund no person owned of record or beneficially 5% or more
of the shares of that fund:
<TABLE>
<S> <C> <C>
Master Fund Shareholder name and address Percentage owned
----------------------------- ----------------
Cede & Co. 88.59% (record)
7 Hanover Square
New York, NY 10004
Government Fund Shareholder name and address Percentage owned
----------------------------- ----------------
Cede & Co. 89.00% (record)
7 Hanover Square
New York, NY 10004
</TABLE>
If the transaction were consummated, Cede & Co. would hold of record
approximately 88% of the shares of the Master Fund.
Effect of conversion proposal on transaction. Because the transaction
contemplates that both funds are closed-end, the approval of Proposal 4 on
whether to open-end the Government Fund will result in the abandonment of the
transaction. Therefore, shareholders should carefully consider whether they
should vote in favor of both proposals.
Required vote. Approval of the proposed transaction will require the "yes" vote
of a majority of the Government Fund's outstanding shares.
The Trustees of the Government Fund, including the independent trustees,
unanimously recommend approval of the Agreement and Plan of Reorganization, and
the transactions contemplated thereby.
[bullet]
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<PAGE>
2. ELECTION OF TRUSTEES
- - Who are the nominees for Trustees?
The Nominating Committee of the Trustees recommends that the number of Trustees
be fixed at thirteen and that you vote for the election of the nominees
described below. Each nominee is currently a Trustee of your fund and of the
other Putnam funds. The Nominating Committee of the Trustees consists solely of
Trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940) of your fund or of Putnam Investment Management, Inc., your fund's
investment manager ("Putnam Management").
- Jameson Adkins Baxter
Ms. Baxter, age 53, is the President of Baxter Associates,
[photo of Jameson Inc., a management and financial consulting firm which she
Adkins Baxter] founded in 1986. During that time, she was also a Vice
President and Principal of the Regency Group, Inc., and a
Consultant to First Boston Corporation, both of which are
investment banking firms. From 1965 to 1986, Ms. Baxter held
various positions in investment banking and corporate
finance at First Boston.
Ms. Baxter currently also serves as a Director of Banta Corporation, Avondale
Financial Corp., and ASHTA Chemicals, Inc. She is also the Chairman Emeritus of
the Board of Trustees of Mount Holyoke College, having previously served as
Chairman for five years and as a Board member for thirteen years; an Honorary
Trustee and past President of the Board of Trustees of the Emma Willard School;
and Chair of the Board of Governors of Good Shepherd Hospital. Ms. Baxter is a
graduate of Mount Holyoke College.
- - Hans H. Estin
Mr. Estin, age 68, is a Chartered Financial Analyst and the
Vice Chairman of North American Management Corp., a
registered investment adviser serving individual clients and
their families. Mr. Estin currently also serves as a [photo of Hans H.
Corporation Member of The Schepens Eye Research Institute; Estin]
and a Trustee of New England Aquarium. He previously served
as the Chairman of the Board of Trustees of Boston
University and is currently active in various other civic associations,
including the Boys & Girls Clubs of Boston, Inc. Mr. Estin is a graduate of
Harvard College and holds honorary doctorates from Merrimack College and Boston
University.
- -John A. Hill
Mr. Hill, age 55, is the Chairman and Managing Director of First
Reserve Corporation, a registered investment adviser investing in
companies in the world-wide energy industry on behalf of
institutional investors.
[photo of
John A. Prior to acquiring First Reserve in 1983, Mr. Hill held executive
Hill] positions with several investment advisory firms and held various
positions with the Federal government, including Associate Director
of the Office of Management and Budget and Deputy Administrator of
the Federal Energy Administration.
Mr. Hill currently also serves as a Director of Snyder Oil Corporation, an
exploration and production company which he founded, Maverick Tube Corporation,
a manufacturer of structural steel, pipe and well casings, TransMontaingne Oil
Company, a refined oil product pipeline and distribution company, Weatherford
Enterra, Inc., an oil field service company, various private companies
controlled by First Reserve Corporation, and various First Reserve funds. He is
also a Member of the Board of Advisors of fund Directions. He is currently
active in various business associations, including the Economic Club of New
York, and lectures on energy issues in the United States and Europe. Mr. Hill
is a graduate of Southern Methodist University.
- -Ronald J. Jackson
Mr. Jackson, age 53, was Chairman of the Board, President
and Chief Executive Officer of Fisher-Price, Inc., a major [photo of
toy manufacturer, from 1990 to 1993. He previously served as Ronald J.
President and Chief Executive Officer of Stride-Rite, Jackson]
Inc., a manufacturer and distributor of footwear, from 1989
to 1990, and as President and Chief Executive Officer of Kenner Parker Toys,
Inc., a major toy and game manufacturer, from 1985 to 1987. Prior to that, he
held various financial and marketing positions at General Mills, Inc. from 1966
to 1985, including
[bullet]
35
<PAGE>
Nominees for Trustees
Vice President, Controller and Vice President of Marketing for Parker Brothers,
a toy and game company, and President of Talbots, a retailer and direct
marketer of women's apparel.
Mr. Jackson currently serves as a Director of Safety 1st, Inc., a company which
markets a wide range of child care and safety products. He also serves as a
Trustee of Salem Hospital and the Peabody Essex Museum. Mr. Jackson is a
graduate of Michigan State University Business School.
- Elizabeth T. Kennan
[photo of Ms. Kennan, age 59, is President Emeritus and Professor of Mount
Elizabeth T. Holyoke College. From 1978 through June 1995, she was President of
Kennan] Mount Holyoke College. From 1966 to 1978, she was on the faculty of
Catholic University, where she taught history and published
numerous articles.
Ms. Kennan currently also serves as a Director of NYNEX
Corporation, a telecommunications company, Northeast Utilities, the
Kentucky Home Life Insurance Companies, and Talbots. She also serves as a Member
of The Folger Shakespeare Library Committee. She is currently active in various
educational and civic associations. Ms. Kennan is a graduate of Mount Holyoke
College, the University of Washington and St. Hilda College at Oxford University
and holds several honorary doctorates.
- Lawrence J. Lasser*
Mr. Lasser, age 54, is the Vice President of your fund and [photo of
the other Putnam funds. He has been the President, Chief Lawrence J.
Executive Officer and a Director of Putnam Investments, Inc. Lasser]
and Putnam Management since 1985, having begun his career
there in 1969.
Mr. Lasser currently also serves as a Director of Marsh & McLennan Companies,
Inc., the parent company of Putnam Management, and the United Way of
Massachusetts Bay. He is a Member of the Board of Overseers of the Museum of
Fine Arts in Boston, The Council on Foreign Relations, and a Member of the
Board of Governors and Executive Committee at the Investment Company Institute.
He is also a Trustee of the Beth Israel/Deaconess Medical Center in Boston. Mr.
Lasser is a graduate of Antioch College and Harvard Business School.
- Robert E. Patterson
Mr. Patterson, age 52, is the Executive Vice President and Director
[photo of of Acquisitions of Cabot Partners Limited Partnership, a registered
Robert E. investment adviser which manages real estate investments for
Patterson] institutional investors. Prior to 1990, he was the Executive Vice
President of Cabot, Cabot & Forbes Realty Advisors, Inc., the
predecessor company of Cabot Partners. Prior to that, he was a
Senior Vice President of the Beal Companies, a real estate
management, investment and development company. He has also worked
as an attorney and held various positions in state government,
including the founding Executive Director of the Massachusetts
Industrial Finance Agency.
Mr. Patterson currently also serves as Chairman of the Joslin Diabetes Center
and as a Director of Brandywine Trust Company. Mr. Patterson is a graduate of
Harvard College and Harvard Law School.
- Donald S. Perkins*
Mr. Perkins, age 70, is the retired Chairman of the Board of [photo of
Jewel Companies, Inc., a diversified retailer, where among Donald S.
other roles he served as President, Chief Executive Officer Perkins]
and Chairman of the Board from 1965 to 1980. He currently
also serves as a Director of various other public
corporations, including AON Corp., an insurance company, Cummins Engine Company,
Inc., an engine and power generator equipment manufacturer and assembler,
Current Assets L.L.C., a corporation providing financial staffing services,
LaSalle Street fund, Inc. and LaSalle U.S. Realty Income and Growth fund, Inc.,
real estate investment trusts, Lucent Technologies Inc., Ryerson Tull, Inc.,
America's largest steel service corporation, Springs Industries, Inc., a textile
manufacturer, and Time Warner, Inc., one of the nation's largest media
conglomerates. He previously served as a Director of several other major public
corporations, including Corning Glass Works, Eastman Kodak Company, Firestone
Tire & Rubber Company and Kmart Corporation.
[bullet]
36
<PAGE>
Nominees for Trustees
Mr. Perkins currently also serves as a Trustee and Vice Chairman of
Northwestern University and as a Trustee of the Hospital Research and Education
Trust. He is currently active in various civic and business associations,
including the Business Council and the Civic Committee of the Commercial Club
of Chicago, of which he is the founding Chairman. Mr. Perkins is a graduate of
Yale University and Harvard Business School and holds an honorary doctorate
from Loyola University of Chicago.
- William F. Pounds
[photo of Dr. Pounds, age 69, is the Vice Chairman of your fund and of the
William F. other Putnam funds. He has been a Professor of Management at the
Pounds] Alfred P. Sloan School of Management at the Massachusetts Institute
of Technology since 1961 and served as Dean of that School from
1966 to 1980. He previously served as Senior Advisor to the
Rockefeller Family and Associates and was a past Chairman of
Rockefeller & Co., Inc., a registered investment adviser which
manages Rockefeller family assets, and Rockefeller Trust Company.
Dr. Pounds currently also serves as a Director of IDEXX Laboratories, Inc.,
PerSeptive Biosystems, Inc., Management Sciences For Health, Inc. and Sun
Company, Inc. He is also a Trustee of the Museum of Fine Arts in Boston; an
Overseer of WGBH Educational Foundation, and a Fellow of The American Academy
of Arts and Sciences. He previously served as a Director of Fisher-Price, Inc.
and General Mills, Inc. Dr. Pounds is a graduate of Carnegie-Mellon University.
- George Putnam*
Mr. Putnam, age 70, is the Chairman and President of your
fund and of the other Putnam funds. He is the Chairman and a [photo of George
Director of Putnam Management and Putnam Mutual Funds Corp. Putnam]
and a Director of Marsh & McLennan, their parent company.
Mr. Putnam is the son of the founder of the Putnam funds and
Putnam Management and has been employed in various
capacities by Putnam Management since 1951,
including Chief Executive Officer from 1961 to 1973. He is a former Overseer
and Treasurer of Harvard University; a past Chairman of the Harvard Management
Company; and a Trustee Emeritus of Wellesley College and Bradford College.
Mr. Putnam currently also serves as a Director of Freeport-McMoRan, Inc.,
Freeport Copper and Gold, Inc., McMoRan Oil and Gas, Inc., mining and natural
resources companies and Houghton Mifflin Company, a major publishing company.
He is also a Trustee of Massachusetts General Hospital, McLean Hospital,
Vincent Memorial Hospital, WGBH Educational Foundation and the Museum of Fine
Arts and the Museum of Science in Boston; the New England Aquarium; an Overseer
of Northeastern University; and a Fellow of The American Academy of Arts and
Sciences. Mr. Putnam is a graduate of Harvard College and Harvard Business
School and holds honorary doctorates from Bates College and Harvard University.
- George Putnam, III*
[photo of Mr. Putnam, age 45, is the President of New Generation Research,
George Inc., a publisher of financial advisory and other research services
Putnam relating to bankrupt and distressed companies, and New Generation
III] Advisers, Inc., a registered investment adviser which provides
advice to private funds specializing in investments in such
companies. Prior to founding New Generation in 1985, Mr. Putnam was
an attorney with the Philadelphia law firm Dechert Price & Rhoads.
Mr. Putnam currently also serves as a Director of the Massachusetts
Audubon Society and The Boston Family Office, L.L.C., a registered
investment advisor that provides financial services to individuals
and families. He is also a Trustee of the Sea Education Association
and St. Mark's School and an Overseer of the New England Medical
Center. Mr. Putnam is a graduate of Harvard College, Harvard
Business School and Harvard Law School.
[bullet]
37
<PAGE>
Nominees for Trustees
- A.J.C. Smith*
Mr. Smith, age 63, is the Chairman and Chief Executive
Officer of Marsh & McLennan Companies, Inc. He has been [photo of A.J.C. Smith]
employed by Marsh & McLennan and related companies in
various capacities since 1961. Mr. Smith is a Director of
the Trident Corp., and he also serves as a Trustee of the
Carnegie Hall Society, the Central Park Conservancy, the
Educational Broadcasting Corporation, the Economic Club of New York, the U.S.
Chamber of Commerce, and is a Founder of the Museum of Scotland Society. He was
educated in Scotland and is a Fellow of the Faculty of Actuaries in Edinburgh, a
Fellow of the Canadian Institute of Actuaries, a Fellow of the Conference of
Actuaries, an Associate of the Society of Actuaries, a Member of the American
Academy of Actuaries, the International Actuarial Association and the
International Association of Consulting Actuaries.
- - W. Nicholas Thorndike**
[photo of Mr. Thorndike, age 64, serves as a Director of various corporations
W. Nicholas and charitable organizations, including Data General Corporation,
Thorndike] a computer and high technology company, Bradley Real Estate, Inc.,
a real estate investment firm, Providence Journal Co., a newspaper
publisher, and Courier Corporation, a book binding and printing
company. He is also a Trustee of Eastern Utilities Associates,
Massachusetts General Hospital, where he previously served as
chairman and president, and Northeastern University.
Prior to December 1988, he was the Chairman of the Board and
Managing Partner of Wellington Management Company/Thorndike, Doran, Paine &
Lewis, a registered investment adviser which manages mutual funds and
institutional assets. He also previously served as a Trustee of the Wellington
Group of funds (now The Vanguard Group) and was the Chairman and a Director of
Ivest Fund, Inc. Mr. Thorndike is a graduate of Harvard College.
- -------
*Nominees who are or may be deemed to be "interested persons" (as defined in
the Investment Company Act of 1940) of your fund, Putnam Management, and Putnam
Mutual Funds Corp. ("Putnam Mutual Funds"), the principal underwriter for all
the open-end Putnam funds and an affiliate of Putnam Management. Messrs.
Putnam, Lasser, and Smith are deemed "interested persons" by virtue of their
positions as officers or shareholders of your fund, or directors of Putnam
Management, Putnam Mutual Funds, or Marsh & McLennan Companies, Inc., the
parent company of Putnam Management and Putnam Mutual Funds. Mr. George Putnam,
III, Mr. Putnam's son, is also an "interested person" of your fund, Putnam
Management, and Putnam Mutual Funds. Mr. Perkins may be deemed to be an
"interested person" of your fund because of his service as a director of a
certain publicly held company that includes registered broker-dealer firms
among its subsidiaries. Neither your fund nor any of the other Putnam funds
currently engages in any transactions with such firms except that certain of
such firms act as dealers in the retail sale of shares of certain Putnam funds
in the ordinary course of their business. The balance of the nominees are not
"interested persons."
**In February 1994 Mr. Thorndike accepted appointment as a successor trustee of
certain private trusts in which he has no beneficial interest. At that time he
also became Chairman of the Board of two privately owned corporations
controlled by such trusts, serving in that capacity until October 1994. These
corporations filed voluntary petitions for relief under Chapter 11 of the U.S.
Bankruptcy Code in August 1994.
Except as indicated above, the principal occupations and business experience of
the nominees for the last five years have been with the employers indicated,
although in some cases they have held different positions with those employers.
Except for Mr. Jackson, all the nominees were elected by the shareholders in
July 1996. Mr. Jackson was elected by the other Trustees in May 1996. The 13
nominees for election as Trustees at the shareholder meeting of your fund who
receive the greatest number of votes will be elected Trustees of your fund. The
Trustees serve until their successors are elected and qualified. Each of the
nominees has agreed to serve as a Trustee if elected. If any of the nominees is
unavailable for election at the time of the meeting, which is not anticipated,
the Trustees may vote for other nominees at their discretion, or the Trustees
may recommend that the shareholders fix the number of Trustees at less than 13
for your fund.
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38
<PAGE>
- - What are the Trustees' responsibilities?
Your fund's Trustees are responsible for the general oversight of your fund's
business and for assuring that your fund is managed in the best interests of
its shareholders. The Trustees periodically review your fund's investment
performance as well as the quality of other services provided to your fund and
its shareholders by Putnam Management and its affiliates, including
administration, custody, distribution and investor servicing. At least
annually, the Trustees review the fees paid to Putnam Management and its
affiliates for these services and the overall level of your fund's operating
expenses. In carrying out these responsibilities, the Trustees are assisted by
an independent administrative staff and by your fund's auditors and legal
counsel, which are selected by the Trustees and are independent of Putnam
Management and its affiliates.
- - Do the Trustees have a stake in your fund?
The Trustees believe it is important that each Trustee have a significant
investment in the Putnam funds. The Trustees allocate their investments among
the more than 96 Putnam funds based on their own investment needs. The
Trustees' aggregate investments in the Putnam funds total over $56 million. The
table below lists each Trustee's current investments in the fund and in the
Putnam funds as a group based on beneficial ownership. Except as otherwise
noted, each Trustee has sole voting power and sole investment power with
respect to his or her shares.
Share Ownership by Trustees
<TABLE>
<CAPTION>
Year first Number of
elected as Number of shares of
Trustee of shares of the all Putnam
the Putnam fund owned funds owned
Trustees funds as of 5/15/97 as of 5/15/97(1)
- ----------------------- ------------ --------------- ---------------
<S> <C> <C> <C>
Jameson A. Baxter 1994 120 48,336
Hans H. Estin 1972 649 29,539
John A. Hill 1985 100 142,061
Ronald J. Jackson 1996 200(2) 124,601
Elizabeth T. Kennan 1992 227(3) 26,197
Lawrence J. Lasser 1992 100 567,522
Robert E. Patterson 1984 300 63,328
Donald S. Perkins 1982 4,448 168,837
William F. Pounds 1971 500 324,764
George Putnam 1957 1,000 1,772,505
George Putnam, III 1984 500 309,877
A.J.C. Smith 1986 200(4) 51,567
W. Nicholas Thorndike 1992 158 81,992
- ---------------------- ---- -------- ----------
</TABLE>
(1)These holdings do not include shares of Putnam money market funds.
(2)Mr. Jackson has shared investment power and shared voting power with respect
to such shares.
(3)Ms. Kennan is the custodian of a trust which owns 127 of these shares and in
which she has no economic interest.
(4)Mr. Smith has shared investment power and shared voting power with respect
to such shares.
As of May 15, 1997, the Trustees and officers of the fund owned a total of
8,502 shares of the fund, comprising less than 1% of its outstanding shares on
that date.
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39
<PAGE>
- - What are some of the ways in which the Trustees represent shareholder
interests?
The Trustees believe that, as substantial investors in the Putnam funds, their
interests are closely aligned with those of individual shareholders. Among
other ways, the Trustees seek to represent shareholder interests:
[bullet] by carefully reviewing your fund's investment performance on an
individual basis with your fund's managers;
[bullet] by also carefully reviewing the quality of the various other services
provided to the funds and their shareholders by Putnam Management and
its affiliates;
[bullet] by discussing with senior management of Putnam Management steps being
taken to address any performance deficiencies;
[bullet] by reviewing the fees paid to Putnam Management to ensure that such
fees remain reasonable and competitive with those of other mutual
funds, while at the same time providing Putnam Management sufficient
resources to continue to provide high quality services in the future;
[bullet] by monitoring potential conflicts between the funds and Putnam
Management and its affiliates to ensure that the funds continue to be
managed in the best interests of their shareholders; and
[bullet] by also monitoring potential conflicts among funds to ensure that
shareholders continue to realize the benefits of participation in a
large and diverse family of funds.
- - How often do the Trustees meet?
The Trustees meet each month (except August) over a two-day period to review
the operations of your fund and of the other Putnam funds. A portion of these
meetings is devoted to meeting of various Committees of the board which focus
on particular matters. These currently include: the Committee of Independent
Trustees, which conducts an annual review of all contractual arrangements with
Putnam Management and its affiliates; the Contract Committee, which reviews
such matters on an interim basis during the course of the year; the
Communication and Service Committee, which reviews the quality of services
provided by your fund's investor servicing agent, custodian and distributor;
the Pricing, Brokerage and Special Investments Committee, which reviews matters
relating to valuation of securities, best execution, brokerage costs and
allocations and new investment techniques; the Audit Committee, which reviews
accounting policies and the adequacy of internal controls and supervises the
engagement of the funds' auditors; the Compensation, Administration and Legal
Affairs Committee, which reviews the compensation of the Trustees and their
administrative staff and supervises the engagement of the funds' independent
counsel; the Nominating Committee, which is responsible for selecting nominees
for election as Trustees, and the Closed-end fund Committee, which is
responsible for reviewing special issues applicable to closed-end funds such as
your fund.
Each Trustee generally attends at least two formal committee meetings during
each regular meeting of the Trustees. During 1996, the average Trustee
participated in approximately 40 committee and board meetings. In addition, the
Trustees meet in small groups with Chief Investment Officers and Portfolio
Managers to review recent performance and the current investment climate for
selected funds. These meetings ensure that each fund's performance is reviewed
in detail at least twice a year. The Committee of Independent Trustees and the
Contract Committee typically meet on several additional occasions during the
year to carry out their responsibilities. Other Committees, including an
Executive Committee, may also meet on special occasions as the need arises.
- - What are the Trustees paid for their services?
Each Trustee receives a fee for his or her services. Each Trustee also receives
fees for serving as Trustee of the 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 Compensation Committee,
which consists solely of Trustees not affiliated with Putnam Management,
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 fees paid to each Trustee by the fund
for fiscal 1996 and the fees paid to each Trustee by all of the Putnam funds
during calendar year 1996.
[bullet]
40
<PAGE>
Compensation Table
<TABLE>
<CAPTION>
Estimated
Pension or annual
retirement benefits
benefits from all Total
Aggregate accrued as Putnam compensation
compensation part of funds from all
from the fund upon Putnam
Trustees fund(1) expenses(2) retirement(3) funds(4)
- ------------------------- -------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Jameson A. Baxter $1,427 $0 $85,646 $172,291(5)
Hans H. Estin 1,421 0 85,646 171,291
John A. Hill (5) 1,417 0 85,646 170,791
Ronald J. Jackson(5)(6) 694 0 85,646 94,807
Elizabeth T. Kennan 1,424 0 85,646 171,291
Lawrence J. Lasser 1,419 0 85,646 169,791
Robert E. Patterson 1,492 0 85,646 182,291
Donald S. Perkins 1,422 0 85,646 170,291
William F. Pounds(7) 1,533 0 98,146 197,291
George Putnam 1,424 0 85,646 171,291
George Putnam, III 1,424 0 85,646 171,291
A.J.C. Smith 1,415 0 85,646 169,791
W. Nicholas Thorndike 1,486 0 85,646 181,291
- ------------------------ ------- --- -------- ---------
</TABLE>
(1)Includes an annual retainer and an attendance fee for each meeting
attended.
(2)The Trustees approved a Retirement Plan for Trustees of the Putnam funds on
October 1, 1996. Prior to that date, voluntary retirement benefits were paid to
certain retired Trustees.
3)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 1996.
(4)As of December 31, 1996, there were 96 funds in the Putnam family.
(5)Includes compensation deferred pursuant to a Trustee Compensation Deferral
Plan. The total amounts of deferred compensation payable by the fund to Mr.
Hill and Mr. Jackson as of November 30, 1996 were $2,411 and $700,
respectively, including income earned on such amounts.
(6)Elected as a Trustee in May 1996.
(7)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 to receive had he or she
retired immediately prior to such termination or amendment.
For additional information about the Government Fund, including further
information about its Trustees and officers, please see "Government Fund
Information," on page 49.
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41
<PAGE>
Putnam Investments
Putnam Investment Management, Inc. and its affiliates and Putnam Fiduciary
Trust Company, your fund's investor servicing agent and custodian, are wholly
owned by Putnam Investments, Inc., One Post Office Square, Boston,
Massachusetts 02109, a holding company that is in turn wholly owned by Marsh &
McLennan Companies, Inc., which has executive offices at 1166 Avenue of the
Americas, New York, New York 10036. Marsh & McLennan Companies, Inc. and its
operating subsidiaries are professional services firms with insurance and
reinsurance brokerage, consulting, and investment management businesses.
The Trustees recommend that you vote "FOR" all Nominees.
3. RATIFICATION OF INDEPENDENT AUDITORS
Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts, independent
accountants, has been selected by the Trustees as the independent auditor of
the Government Fund for the current fiscal year. Among the country's preeminent
accounting firms, this firm also serves as the auditor for approximately half
of the other funds in the Putnam family. It was selected primarily on the basis
of its expertise as auditors of investment companies, the quality of its audit
services, and the competitiveness of its fees.
A majority of the votes on the matter is necessary to ratify the selection of
auditors. A representative of the independent auditors is expected to be
present at the meeting to make statements and to respond to appropriate
questions.
The Trustees recommend that you vote "FOR" ratification of the selection of the
independent auditors.
4. APPROVAL OR DISAPPROVAL OF THE CONVERSION OF YOUR FUND FROM CLOSED-END TO
OPEN-END STATUS AND CERTAIN RELATED AMENDMENTS TO YOUR FUND'S AGREEMENT AND
DECLARATION OF TRUST
What is being considered under this item?
Shareholders will have the opportunity to vote at the meeting on the question
of whether the Government Fund should be converted from a closed-end fund to an
open-end fund. The Trustees, as discussed in more detail below, unanimously
recommend that shareholders vote against converting your fund to an open-end
fund. This recommendation is based on the Trustees' view that, as a closed-end
fund, your fund is afforded significant investment advantages.
If approved, the conversion would result in the "delisting" of your fund's
shares from the New York Stock Exchange where they currently may be bought or
sold at prevailing market prices. The shares would then become redeemable
directly from your fund at net asset value, eliminating any discount of market
price to net asset value. Other differences between closed-end and open-end
investment companies are described below.
A conversion from closed-end to open-end status would also require a number of
changes in the Agreement and Declaration of Trust (the "Declaration of Trust")
under which your fund was established. Accordingly, approval of this proposal
would also authorize your fund's Trustees to make such amendments as they may
deem necessary to operate your fund in open-end form if this proposal is
approved. These changes are described in greater detail below.
Why is this question being submitted to shareholders now?
Your fund's governing legal documents require that shareholders of your fund be
given the opportunity to vote on a proposal to convert your fund from
closed-end to open-end status if the fund's shares have traded at an average
discount of more than 10% from their net asset value during the last twelve
calendar weeks of the preceding fiscal year (measured as of the last trading
day in each such week). For the twelve-week period ended November 30, 1996,
your fund's shares traded at an average discount of 11.69%, requiring that this
proposal be submitted to shareholders. A similar vote was held at the 1996
annual meeting of shareholders. At that meeting shareholders voted to retain
closed-end status as follows:
[bullet]
42
<PAGE>
Percentage of Voted Shares
----------------------------
For Open-ending 25.8%
Against Open-ending 66.9%
Abstain 7.3%
What is the recommendation of the Trustees?
The Trustees regularly review the overall performance and trading information
for Putnam's closed-end funds. At meetings held in February, April and May
1997, the Trustees of your fund carefully evaluated the fund's investment
performance and the trading history of its shares since its inception in June
1988, and information about the possible advantages and disadvantages of such a
conversion. For the reasons described below, the Trustees of your fund have
unanimously concluded that the conversion of your fund to open-end status would
not be in the best long-term interests of shareholders. Accordingly, the
Trustees of your fund unanimously recommend that shareholders vote "AGAINST"
this proposal.
Why are the Trustees recommending a vote against a conversion?
The Trustees of your fund are recommending a vote against converting your fund
to open-end status for the following reasons:
[bullet] The Trustees believe that your fund's closed-end status provides
significant investment benefits not available to open-end fund
investors. Because your fund's shares are not redeemable, your fund is
not required to maintain short-term, lower-yielding investments in
anticipation of possible redemptions, but can be fully invested in
higher-yielding securities in pursuit of the fund's investment
objective. Furthermore, as a closed-end fund, your fund does not
experience the cash flows associated with sales and redemptions of
open-end fund shares. As a result, your fund's portfolio manager does
not have to invest additional cash from new sales at times when market
conditions are unfavorable or sell securities to meet redemptions at
inopportune times.
[bullet] The Trustees believe that your fund has achieved favorable investment
results for its shareholders over its life as a closed-end fund,
which demonstrates the benefits of the closed-end structure. See "How
has the Government Fund performed?" below. The Trustees believe that,
in deciding whether to make major structural changes, the long-term
performance of your fund is an important factor to consider.
[bullet] The Trustees believe that your fund's operating expenses are likely
to increase if your fund is converted to open-end status. First, as
an open-end fund, your fund would be required, as a practical matter,
to make a continuous public offering of its shares in order to offset
redemptions and maintain the economies of scale available at its
current size. The Trustees expect that in order to market your fund's
shares effectively and to conform generally to sales practices of
competing dealer-sold funds, following a conversion to open-end
status, the Trustees would likely recommend that shareholders approve
the adoption of a distribution plan under Rule 12b-1. Such a plan
would permit your fund to pay annual distribution fees of up to 0.35%
of your fund's net assets. If such distribution plan were approved,
the Trustees would expect to authorize the payment of distribution
fees at the annual rate of 0.25% of net assets, as is the case with
similar open-end Putnam funds. In addition, all shareholders would
bear the brokerage and other transactional costs associated with
purchases and sales of securities in response to the sale or
redemption of shares if your fund were converted to open-end status
(except to the extent that the Trustees decide to impose a temporary
redemption fee, as described below).
Second, in addition to the likelihood of increased fees, it is also
possible that the fund might shrink following conversion to open-end
status, resulting in increased expense ratios. Open-end funds, since
they continually issue new shares, have the ability to increase in
size. This growth could result in efficiencies in spreading fixed
costs over a larger pool of assets. However, since they continually
redeem shares, open-end funds can also shrink. Putnam Management has
advised the Trustees that it is likely that your fund might experience
significant redemptions following any conversion, thereby shrinking in
size. Depending on the
[bullet]
43
<PAGE>
number and size of the redemptions and sales of new shares, increased
expense ratios could result for either temporary or indefinite periods.
[bullet] Although converting to open-end status would provide a potential
short-term gain as a result of the elimination of the discount, it
would not further the fund's investment objective of seeking high
current income. Indeed, in light of the loss of the advantages of
closed-end status and the increase of expenses likely following a
conversion, conversion could result in a lower yield for the
shareholders. This result appears to be inconsistent with the fund's
investment objective.
[bullet] Putnam Management has advised the Trustees that in its opinion
discount levels in recent years have been influenced by general
market conditions favoring equity securities over fixed income
securities. Most similar closed-end fund shares have traded at a
discount for the past two or three years. The fact that your fund's
shares trade at a discount is not the result of a specific problem
relating to your fund but a more general industry wide phenomenon.
[bullet] The need to sell securities to meet redemptions may have adverse tax
consequences to shareholders remaining in your fund. If your fund
sells securities to meet redemptions and realizes a gain for tax
purposes, your fund will be required to allocate the tax gain to all
shareholders, not simply to those redeeming.
The Trustees regularly review information regarding trading activity in the
fund's shares, including discount levels. The Trustees continue to explore
various ways of increasing investor interest in the fund which may help over
time to reduce discounts. In this regard, the Trustees have authorized the
repurchase of fund shares in open market transactions at times when discount
levels make such purchases an attractive investment for the fund. Such
purchases may also have the effect of temporarily reducing discount levels, but
are not believed to influence discounts materially over the longer term.
The Trustees believe that most shareholders of your fund purchased their shares
with a long-term investment perspective that recognizes the special advantages
of the closed-end structure as well as the disadvantages of potential
discounts. In addition, many shareholders have purchased their shares at a
discount and thus have not been significantly affected by the current discount
level. Consequently, the Trustees do not believe that recent discount levels
should be viewed as grounds for depriving shareholders of the advantages of the
closed-end structure.
In light of the reasons set forth above the Trustees do not believe that the
current discount justifies the fundamental changes which would result from a
conversion to open-end status, and believe that the reorganization proposal
described above presents a better alternative at this time for shareholders.
Accordingly, the Trustees unanimously recommend that shareholders vote against
this proposal.
How has the Government Fund performed?
The following table summarizes the annualized total return of the Government
Fund for the periods shown based on the net asset value and the market value of
its shares:
Total Return (Annualized) Through June 30, 1997
<TABLE>
<CAPTION>
Since
inception
1 year 3 years 5 years (June 27, 1988)
-------- --------- --------- -----------------
<S> <C> <C> <C> <C>
Net Asset Value 7.34% 8.18% 6.93% 8.46%
Market Value 7.26% 7.31% 5.07% 6.12%
</TABLE>
*Market value performance from inception, unlike net asset value performance,
reflects the cost of the dealer commission upon initial sale.
Of course, relative performance is also important. In addition to reviewing the
fund's overall performance, the Trustees regularly review the fund's
performance compared to that of a group of comparable funds. The current group
used by the Trustees is comprised of global fixed income and government
open-end funds, with each category weighted equally. Using this comparison, the
fund was ranked in the following percentiles for the periods ending May 31,
1997:
[bullet]
44
<PAGE>
Since
inception
1 year 3 years 5 years (June 27, 1988)
-------- --------- --------- -----------------
Percentile* 46% 42% 28% 12%
*Percentile reflects relative standing with 1% being the highest relative
performance and 100% being the lowest. The rankings set forth above are based
on total return, reflecting changes in net asset value adjusted for
reinvestment of capital gains and income dividends. They do not reflect changes
in market price of shares in the case of closed-end funds or, for any fund, the
deduction of sales charges. Past performance is no guarantee of future
performance.
- - What are the principal differences between a closed-end and open-end fund?
In evaluating this proposal, shareholders may wish to consider the following
differences between closed-end and open-end funds:
[bullet] Changes in capital. Closed-end funds raise their capital through an
initial public offering and generally do not raise additional capital
after that time. Closed-end funds therefore have limited opportunities
to gain additional economies of scale through growth of assets. At the
same time, because shares of closed-end funds cannot be redeemed, the
risk of higher expense ratios resulting from a decline in assets is
also limited.
Open-end funds, in contrast, generally engage in a continuous public
offering of their shares, which provides the opportunity for growth of
assets and reduced expense ratios. However, because shares of open-end
funds are generally redeemable at any time, such funds face the risk
of higher expense ratios if significant redemptions are not offset by
sales of new shares.
[bullet] Sale of shares. Shares of open-end funds may be redeemed at any time
at their net asset value (subject only to the right of the fund to
withhold payment for up to seven days or, with the permission of the
SEC, to suspend redemptions under emergency conditions). In contrast,
shares of closed-end funds are not redeemable and can generally be
bought and sold at current market prices only on the exchange on
which such funds are listed. Thus, converting your fund from
closed-end to open-end status would eliminate the current discount
between market price and net asset value, but would also eliminate
the possibility that your fund's shares might trade at a premium in
the future. Shareholders who wish to dispose of shares would receive
a higher price at net asset value than if shares remained at a
discount.
[bullet] Regulatory requirements. Both closed-end and open-end funds are
registered with the SEC under the Investment Company Act of 1940 and,
with certain differences relating largely to the sale and redemption
of shares, are generally subject to the same regulatory requirements
of that Act. Your fund's shares are listed for trading on the New
York Stock Exchange. That listing would be terminated in the event of
a conversion to open-end status. Since open-end funds generally
engage in a continuous public offering of their shares they are
required to maintain current registrations under federal and state
securities laws, which involves additional costs.
[bullet] Annual shareholder meetings. Your fund is currently required by the
rules of the New York Stock Exchange to hold annual meetings of
shareholders for the purpose of electing Trustees and ratifying the
selection of auditors. As noted above, conversion of your fund to
open-end status would result in termination of the fund's listing on
the New York Stock Exchange with the result that your fund would no
longer be required to hold annual meetings. In such event, your fund
expects that meetings would be held only on an as-needed basis.
[bullet] Investment flexibility. As noted above, the cash flows associated
with sales and redemptions of open-end fund shares, as well as the
need to maintain cash reserves in anticipation of possible
redemptions, might tend to reduce the investment flexibility of
open-end funds.
[bullet] Shareholder privileges. Shareholders of your fund currently have the
option of participating in the fund's Dividend Reinvestment Plan,
under which cash distributions paid by your fund are generally
reinvested
[bullet]
45
<PAGE>
through the purchase of additional fund shares at market prices, which
currently reflect a discount from net asset value. (At times when your
fund's shares are trading at a premium over their net asset value,
such reinvestments are made at the higher of net asset value or 95% of
market value.) If the fund were to convert to open-end status,
shareholders would no longer be able to reinvest dividends at a price
below net asset value per share. Shareholders of open-end Putnam funds
have the option to reinvest their distributions in additional shares
at net asset value at all times.
Shareholders of open-end funds in the Putnam family of funds currently
have the privilege of exchanging their investment at net asset value
and without sales charges for shares of more than 78 open-end funds in
the Putnam group. Shareholders of your fund currently do not have that
privilege.
- - What other possible consequences might result from conversion of your fund to
open-end status?
In addition to those matters described above, shareholders should consider the
following possible consequences of conversion of your fund to open-end status:
[bullet] Significant redemptions following a conversion would require your
fund to sell portfolio securities. These transactions would involve
brokerage and other transaction costs and could result in the
recognition of capital gains for federal income tax purposes. Such
costs and liabilities would be borne by all shareholders and not just
those redeeming shares (except to the extent that the Trustees decide
to impose a temporary redemption fee, as described below).
[bullet] Certain legal, accounting and other costs would be incurred in
connection with the conversion of your fund to open-end status.
Although it is difficult to estimate these costs with precision,
these costs are estimated to be at least $100,000. Based on your
fund's current size it is not anticipated that these costs would
materially increase your fund's expense ratio.
[bullet] The Trustees reserve the right to impose a temporary redemption fee
of up to 2.00% of the value of shares redeemed for a period of up to
one year following the fund's conversion to an open-end investment
company. The Trustees may impose this fee if they believe that
immediately following a conversion to open-end status there would
likely be significant redemptions of shares that would disrupt
long-term portfolio management of the fund and dilute the interests
of the remaining shareholders. Imposition of a redemption fee may
deter certain redemptions and would compensate remaining long-term
shareholders for the costs of the liquidation of a significant
percentage of the fund's portfolio.
The fund will notify shareholders in writing prior to the imposition
of any temporary redemption fee.
- - What changes would be made in your fund's Declaration of Trust if
shareholders vote to convert the fund to open-end status?
Conversion of your fund from a closed-end to an open-end fund would require
certain changes to your fund's Declaration of Trust and, therefore, a vote in
favor of such conversion would also authorize the Trustees to amend your fund's
Declaration of Trust to reflect such changes.
These changes would bring your fund's Declaration of Trust more in line with
most other Putnam open-end funds.
The Declaration of Trust would be amended to require your fund to purchase all
shares offered to it for redemption at a price equal to the net asset value of
the shares next determined, less any redemption charge fixed by the Trustees.
In addition, the fund would be authorized, at its option, to redeem shares held
in a shareholder's account at net asset value if at any time a shareholder
owned shares in an amount either less than or greater than, as the case may be,
an amount determined by the Trustees. Notwithstanding this provision, all
shares would be redeemable at a shareholder's option.
The Declaration of Trust would also be amended to eliminate certain provisions
that relate specifically to the fund's closed-end status, such as the
conversion provision that has necessitated this proposal.
[bullet]
46
<PAGE>
Finally, the Trustees would also make certain necessary technical and
non-material changes to the Declaration of Trust and conforming changes to your
fund's Bylaws if the shareholders vote in favor of the conversion.
- - What percentage of shareholders' votes are required to approve the
conversion?
Approval of the conversion of your fund to open-end status and of the related
amendments to your fund's Declaration of Trust will require the "yes" vote of a
majority of your fund's outstanding shares entitled to vote.
If such conversion is approved, the conversion would become effective following
compliance with all necessary regulatory requirements under federal and state
law. Your fund would seek to complete this process as soon as reasonably
practicable.
- - If the conversion is not approved, will the fund continue in its current
form?
Yes. In the event that shareholders do not approve the conversion of your fund
to open-end status, your fund would continue to operate as a closed-end fund,
subject to possible implementation of the combination proposed in Proposal 1.
Shareholders would be given the opportunity to vote on a proposed conversion to
open-end status in future years if your fund's shares again trade at discounts
sufficient to meet the requirement of the Declaration of Trust described above.
- - If the conversion proposal is approved, how will it effect the transaction
proposed by Proposal 1?
Because the combination proposed by Proposal 1 of this Prospectus/Proxy
Statement contemplates a combination of two closed-end funds, the approval of
Proposal 4 will result in the abandonment of that transaction. Therefore,
shareholders should carefully consider whether they should vote in favor of
both proposals.
The Trustees believe that the continued operation of your fund as a closed-end
fund is in the best long-term interests of shareholders, and unanimously
recommend a vote against the conversion of your fund to open-end status at this
time.
The Trustees recommend that you vote "AGAINST" Proposal 4.
Further Information About Voting and the Meeting
Required Votes. Proposal 1 (reorganization proposal) and Proposal 4 (conversion
proposal) each require the affirmative vote of a majority of the outstanding
shares of the Government Fund. For the election of Trustees for Proposal 2, the
13 nominees who receive the greatest number of votes will be elected as
Trustees. Proposal 3 (ratification of auditors) requires the affirmative vote
of a majority of the shares present at the meeting and entitled to vote on the
matter.
Quorum and Methods of Tabulation. A majority of the shares entitled to vote--
present in person or represented by proxy--constitutes a quorum for the
transaction of business with respect to any proposal at the meeting (unless
otherwise noted in the proxy statement). Shares represented by proxies that
reflect abstentions and "broker non-votes" (i.e., shares held by brokers or
nominees as to which (i) instructions have not been received from the
beneficial owners or the persons entitled to vote and (ii) the broker or
nominee does not have the discretionary voting power on a particular matter)
will be counted as shares that are present and entitled to vote on the matter
for purposes of determining the presence of a quorum. Votes cast by proxy or in
person at the meeting will be counted by persons appointed by your fund as
tellers for the meeting.
The tellers will count the total number of votes cast "for" approval of the
proposals for purposes of determining whether sufficient affirmative votes have
been cast. With respect to the election of Trustees and selection of auditors,
neither abstentions nor broker non-votes have any effect on the outcome of the
proposal. With respect to any other proposals, abstentions and broker non-votes
have the effect of a negative vote on the proposal.
Other business. The Trustees know of no other business to be brought before the
meeting. However, if any other matters properly come before the meeting, it is
their intention that proxies that do not contain specific restrictions to the
contrary will be voted on such matters in accordance with the judgment of the
persons named as proxies in the enclosed form of proxy.
[bullet]
47
<PAGE>
Simultaneous meetings. The meeting of shareholders of your fund is called to be
held at the same time as the meetings of shareholders of certain of the other
Putnam funds. It is anticipated that all meetings will be held simultaneously.
If any shareholder at the meeting objects to the holding of a simultaneous
meeting and moves for an adjournment of the meeting to a time promptly after
the simultaneous meetings, the persons named as proxies will vote in favor of
such adjournment.
Solicitation of proxies. In addition to soliciting proxies by mail, Trustees of
your fund and employees of Putnam Management, and Putnam Fiduciary Trust
Company, may solicit proxies in person or by telephone. Your fund may also
arrange to have votes recorded by telephone. The telephone voting procedure is
designed to authenticate shareholders' identities, to allow shareholders to
authorize the voting of their shares in accordance with their instructions and
to confirm that their instructions have been properly recorded. Your fund has
been advised by counsel that these procedures are consistent with the
requirements of applicable law. If these procedures were subject to a
successful legal challenge, such votes would not be counted at the meeting.
Your fund is unaware of any such challenge at this time. Shareholders would be
called at the phone number Putnam Investments has in its records for their
accounts, and would be asked for their Social Security number or other
identifying information. The shareholders would then be given an opportunity to
authorize proxies to vote their shares at the meeting in accordance with their
instructions. To ensure that the shareholders' instructions have been recorded
correctly, they will also receive a confirmation of their instructions in the
mail. A special toll-free number will be available in case the information
contained in the confirmation is incorrect.
Your fund's Trustees have adopted a general policy of maintaining
confidentiality in the voting of proxies. Consistent with this policy, your
fund may solicit proxies from shareholders who have not voted their shares or
who have abstained from voting.
Persons holding shares as nominees will upon request be reimbursed for their
reasonable expenses in soliciting instructions from their principals. Your fund
has retained at its expense D.F. King & Co., Inc., 77 Water Street, New York,
NY 10005, to aid in the solicitation of instructions for registered and nominee
accounts, for a fee not to exceed $7,500 plus reasonable out-of-pocket expenses
for mailing and phone costs.
Revocation of proxies. Proxies, including proxies given by telephone, may be
revoked at any time before they are voted by a written revocation received by
the Clerk of your fund, by properly executing a later-dated proxy or by
attending the meeting and voting in person.
Date for receipt of shareholders' proposals for the next annual meeting. It is
anticipated that your fund's next annual meeting (if required) of shareholders
will be held in October 1998. Shareholder proposals must be received by your
fund before March 4, 1998, to be included in your fund's proxy statement for the
next annual meeting.
Adjournment. If sufficient votes in favor of any of the proposals set forth in
the Notice of the Meeting are not received by the time scheduled for the
meeting, the persons named as proxies may, at their discretion, propose
adjournments of the meeting for a period or periods of not more than 60 days in
the aggregate to permit further solicitation of proxies with respect to those
proposals. Any adjournment will require the affirmative vote of a majority of
the votes cast on the question in person or by proxy at the session of the
meeting to be adjourned. The persons named as proxies will vote in favor of
adjournment those proxies which they are entitled to vote in favor of such
proposals. They will vote against adjournment those proxies required to be
voted against such proposals. Your fund pays the costs of any additional
solicitation and of any adjourned session. Any proposals for which sufficient
favorable votes have been received by the time of the meeting may be acted upon
and considered final regardless of whether the meeting is adjourned to permit
additional solicitation with respect to any other proposal.
The votes of the shareholders of the Master Fund are not being solicited, since
their approval or consent is not necessary for this transaction. As of May 15,
1997, the officers and Trustees of the Master Fund as a group beneficially
owned less than 1% of the outstanding shares of the Master Fund and to the best
of the knowledge of the Master Fund, no person beneficially owned 5% or more of
the outstanding shares of the Master Fund.
[bullet]
48
<PAGE>
Financial information. Your fund will furnish to you upon request, without
charge, a copy of the fund's annual report for its most recent fiscal year, and
a copy of its semiannual report for any subsequent semiannual period. Such
requests may be directed to Putnam Investor Services, P.O. Box 41203,
Providence, RI 02940-1203 or 1-800-225-1581.
Government Fund Information
Limitation of Trustee liability. The Agreement and Declaration of Trust of your
fund provides that the fund 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 fund, except if it is
determined in the manner specified in the Agreement and Declaration of Trust
that they have not acted in good faith in the reasonable belief that their
actions were in the best interests of the fund or that such indemnification
would relieve any officer or Trustee of any liability to the fund or its
shareholders arising by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of his or her duties. Your fund, at its
expense, provides liability insurance for the benefit of its Trustees and
officers.
Audit and Nominating Committees. The voting members of the Audit Committee of
your fund include only Trustees who are not "interested persons" of the fund by
reason of any affiliation with Putnam Investments and its affiliates. The Audit
Committee currently consists of Messrs. Estin (Chairman), Jackson, Perkins
(without vote), Putnam, III (without vote), Smith (without vote), and Ms.
Kennan. The Nominating Committee consists only of Trustees who are not
"interested persons" of your fund or Putnam Management. The Nominating
Committee currently consists of Dr. Pounds and Ms. Kennan (Co-chairpersons),
Ms. Baxter, and Messrs. Estin, Hill, Jackson, Patterson, and Thorndike.
Officers and other information. In addition to George Putnam and Lawrence J.
Lasser, the officers of your fund are as follows:
<TABLE>
<CAPTION>
Year first
elected to
Name (age) Office Office
- ---------------------------- ----------------------------------- ------------
<S> <C> <C>
Charles E. Porter (58) Executive Vice President 1989
Patricia C. Flaherty (50) Senior Vice President 1993
John D. Hughes (62) Senior Vice President & Treasurer 1988
Gordon H. Silver (50) Vice President 1990
Gail S. Attridge* (35) Vice President 1997
David L. Waldman (31) Vice President 1997
D. William Kohli* (36) Vice President 1994
Kenneth J. Taubes* (39) Vice President 1997
John R. Verani (58) Vice President 1988
Paul M. O'Neil (43) Vice President 1992
Gary N. Coburn (51) Vice President 1988
William J. Curtin (37) Vice President 1996
William N. Shiebler (55) Vice President 1991
Beverly Marcus (53) Clerk 1988
- --------------------------- --------------------------------- ----
</TABLE>
*Portfolio manager
**President of Putnam Mutual Funds
All of the officers of your fund are employees of Putnam Management or its
affiliates. Because of their positions with Putnam Management or its affiliates
or their ownership of stock of Marsh & McLennan Companies, Inc., Messrs.
Putnam, George Putnam, III, Lasser and Smith (nominees for Trustees of your
fund), as well as the officers of your fund, will benefit from the management
fees, distribution fees, underwriting commissions, custodian fees, and investor
servicing fees paid or allowed by the fund.
[bullet]
49
<PAGE>
Assets and shares outstanding of your fund as of June 30, 1997
- --------------------------------------------------------------
Net assets $532,923,669
Shares outstanding
and authorized to vote 64,333,052.213 shares
5% beneficial ownership of your fund as of June 30, 1997
- --------------------------------------------------------------
Persons beneficially owning
more than 5% of the fund's shares None
[bullet]
50
<PAGE>
Appendix A
Agreement and Plan of Reorganization
This Agreement and Plan of Reorganization (the "Agreement") is made as of July
23, 1997 in Boston, Massachusetts, by and among Putnam Master Intermediate
Income Trust, a Massachusetts business trust (the "Master Fund"), and Putnam
Intermediate Government Income Trust, a Massachusetts business trust (the
"Government Fund").
Plan of Reorganization
(a) The Government Fund will sell, assign, convey, transfer and deliver
to the Master Fund on the Exchange Date (as defined in Section 6)
all of its cash, properties and other assets existing at the
Valuation Time (as defined in Section 3(c)). In consideration
therefor, the Master Fund shall, on the Exchange Date, assume all of
the liabilities of the Government Fund existing at the Valuation
Time and deliver to the Government Fund a number of full and
fractional shares of beneficial interest of the Master Fund (the
"Master Shares") having an aggregate net asset value equal to the
value of the assets of the Government Fund transferred to the Master
Fund on such date less the value of the liabilities of the
Government Fund assumed by the Master Fund on such date. It is
intended that the reorganization described in this Plan shall be a
reorganization within the meaning of Section 368(a)(1)(D) of the
Internal Revenue Code of 1986, as amended (the "Code").
(b) Upon consummation of the transactions described in paragraph (a) of
this Agreement, the Government Fund shall distribute Master Shares
in complete liquidation to its shareholders of record as of the
Exchange Date, each shareholder being entitled to receive that
proportion of such Master Shares which the number of shares of
beneficial interest of the Government Fund held by such shareholder
bears to the number of shares of the Government Fund outstanding on
such date. Certificates representing the Master Shares will be
issued only if the shareholder so requests.
Agreement
The Master Fund and the Government Fund agree as follows:
1. Representations and Warranties of the Master Fund. The Master Fund
represents and warrants to and agrees with the Government Fund that:
(a) The Master Fund is a business trust duly established and validly
existing under the laws of The Commonwealth of Massachusetts, and
has power to own all of its cash, properties and other assets and to
carry out its obligations under this Agreement. The Master Fund is
not required to qualify as a foreign association in any
jurisdiction. The Master Fund has all necessary federal, state and
local authorizations to carry on its business as now being conducted
and to carry out this Agreement.
(b) The Master Fund is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as a closed-end management
investment company, and such registration has not been revoked or
rescinded and is in full force and effect.
(c) The following financial statements of the Master Fund have been
furnished to the Government Fund (the "Master Fund Financial
Statements"): (i) a statement of assets and liabilities, statement
of operations, statement of changes in net assets and schedule of
investments (indicating their market values) of the Master Fund for
the fiscal year ended September 30, 1996, such statements and
schedule having been audited by Coopers & Lybrand L.L.P.,
independent accountants; and (ii) a statement of assets and
liabilities, statement of operations, statement of changes in net
assets and schedule of investments (indicating their market values)
of the Master Fund for the six months ended March 31, 1997, such
statements and schedule being unaudited (the "Master Fund Unaudited
Financial Statements"). The Master Fund Financial Statements fairly
present the financial position of the Master Fund as of the
respective dates thereof, and said statements of operations and
changes in net assets fairly reflect the results of its operations
and changes in net assets for the respective periods covered thereby
in conformity with generally accepted accounting principles;
provided, however, that the Master Fund Unaudited Financial
Statements lack footnotes and other presentation items and may be
subject to normal recurring adjustments that would be made in the
course of an audit and that would not be material.
[bullet]
51
<PAGE>
(d) There are no material legal, administrative or other proceedings
pending or, to the knowledge of the Master Fund, threatened against
the Master Fund which assert liability on the part of the Master
Fund.
(e) The Master Fund has no known liabilities of a material nature,
contingent or otherwise, other than (i) those shown as belonging to
it on its statement of assets and liabilities as of March 31, 1997,
or (ii) liabilities incurred in the ordinary course of the Master
Fund's business as an investment company since March 31, 1997.
(f) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Master Fund of the transactions contemplated by this Agreement,
except such as may be required under the Securities Act of 1933, as
amended (the "1933 Act"), the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the 1940 Act, state securities or blue sky
laws (which term as used herein shall include the laws of the
District of Columbia and of Puerto Rico) or the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "H-S-R Act").
(g) The registration statement (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission") by the
Master Fund on Form N-14 relating to the Master Shares issuable
hereunder, and the proxy statement of the Government Fund included
therein (the "Proxy Statement"), (i) on the effective date of the
Registration Statement, will comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act and
the rules and regulations thereunder, and (ii) on the effective date
of the Registration Statement, and at the time of the shareholders'
meeting referred to in Section 7(a) and at the Exchange Date, will
not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that none
of the representations and warranties in this subsection shall apply
to statements in or omissions from the Registration Statement or the
Proxy Statement made in reliance upon and in conformity with
information furnished by the Government Fund for use in the
Registration Statement or the Proxy Statement. The Master Fund makes
no representation or warranty as to any other information in the
Registration Statement or Proxy Statement that does not specifically
relate to the Master Fund.
(h) There are no material contracts outstanding to which the Master Fund
is a party, other than as disclosed in the Registration Statement or
the Proxy Statement.
(i) All of the issued and outstanding shares of beneficial interest of
the Master Fund have been offered for sale and sold in conformity
with all applicable federal securities laws.
(j) The Master Fund is and will at all times through the Exchange Date
qualify for taxation as a "regulated investment company" under
Sections 851 and 852 of the Code.
(k) The issuance of the Master Shares pursuant to this Agreement will be
in compliance with all applicable federal securities laws.
(l) The Master Shares to be issued to the Government Fund have been duly
authorized and, when issued and delivered pursuant to this
Agreement, will be legally and validly issued and will be fully paid
and nonassessable by the Master Fund, and no shareholder of the
Master Fund will have any preemptive right of subscription or
purchase in respect thereof.
2. Representations and Warranties of the Government Fund. The Government Fund
represents and warrants to and agrees with the Master Fund that:
(a) The Government Fund is a business trust duly established and validly
existing under the laws of The Commonwealth of Massachusetts, and
has power to carry on its business as it is now being conducted and
to carry out this Agreement. The Government Fund is not required to
qualify as a foreign association in any jurisdiction. The Government
Fund has all necessary federal, state and local authorizations to
own all of its cash, properties and other assets and to carry on its
business as now being conducted and to carry out this Agreement.
[bullet]
52
<PAGE>
(b) The Government Fund is registered under the 1940 Act as a closed-end
management investment company, and such registration has not been
revoked or rescinded and is in full force and effect.
(c) A statement of assets and liabilities, statement of operations, and
statement of changes in net assets and schedule of investments
(indicating their market values) of the Government Fund for the
fiscal year ended November 30, 1996, such statements and schedule
having been audited by Price Waterhouse LLP, independent
accountants, have been furnished to the Master Fund. Such statements
of assets and liabilities and schedule fairly present the financial
position of the Government Fund as of November 30, 1996, and said
statements of operations and changes in net assets fairly reflect
the results of its operations and changes in financial position for
the periods covered thereby in conformity with generally accepted
accounting principles.
(d) There are no material legal, administrative or other proceedings
pending or, to the knowledge of the Government Fund, threatened
against the Government Fund which assert liability or may, if
successfully prosecuted to their conclusion, result in liability on
the part of the Government Fund.
(e) There are no material contracts outstanding to which the Government
Fund is a party other than as disclosed in the Registration
Statement.
(f) The Government Fund has no known liabilities of a material nature,
contingent or otherwise, other than those shown on the Government
Fund's statement of assets and liabilities as of November 30, 1996
referred to above and those incurred in the ordinary course of the
business of the Government Fund as an investment company since such
date. Prior to the Exchange Date, the Government Fund will advise
the Master Fund of all material liabilities, contingent or
otherwise, incurred by it subsequent to November 30, 1996, whether
or not incurred in the ordinary course of business.
(g) As used in this Agreement, the term "Investments" shall mean the
Government Fund's investments shown on the schedule of its
investments as of November 30, 1996 referred to in Section 2(c)
hereof, as supplemented with such changes as the Government Fund
shall make, and changes resulting from stock dividends, stock
splits, transactions and similar corporate actions.
(h) The Government Fund has filed or will file all federal and state tax
returns which, to the knowledge of the Government Fund's officers,
are required to be filed by the Government Fund and has paid or will
pay all federal and state taxes shown to be due on said returns or
on any assessments received by the Government Fund. All tax
liabilities of the Government Fund have been adequately provided for
on its books, and to the knowledge of the Government Fund, no tax
deficiency or liability of the Government Fund has been asserted,
and no question with respect thereto has been raised, by the
Internal Revenue Service or by any state or local tax authority for
taxes in excess of those already paid.
(i) At both the Valuation Time and the Exchange Date, the Government
Fund will have full right, power and authority to sell, assign,
transfer and deliver the Investments and any other assets and
liabilities of the Government Fund to be transferred to the Master
Fund pursuant to this Agreement. At the Exchange Date, subject only
to the delivery of the Investments and any such other assets and
liabilities as contemplated by this Agreement, the Master Fund will
acquire the Investments and any such other assets and liabilities
subject to no encumbrances, liens or security interests whatsoever
and without any restrictions upon the transfer thereof.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Government Fund of the transactions contemplated by this Agreement,
except such as may be required under the 1933 Act, the 1934 Act, the
1940 Act, state securities or blue sky laws or the H-S-R Act.
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(k) The Registration Statement and the Proxy Statement, insofar as they
do not relate to the Master Fund, (i) on the Effective Date of the
Registration Statement, will comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act and
the rules and regulations thereunder, and (ii) on the Effective Date
of the Registration Statement and at the time of the shareholders'
meeting referred to in Section 7(a) and at the Exchange Date, will
not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that the
representations and warranties in this subsection shall apply only
to statements of fact relating to the Government Fund contained in
the Registration Statement or Proxy Statement, or omissions to state
in any thereof a material fact relating to the Government Fund, as
such Registration Statement or Proxy Statement shall be furnished to
the Government Fund in definitive form as soon as practicable
following effectiveness of the Registration Statement and before any
public distribution of the Proxy Statement.
(l) The Government Fund is and will at all times through the Exchange
Date qualify for taxation as a "regulated investment company" under
Sections 851 and 852 of the Code.
(m) At the Exchange Date, the Government Fund will have sold such of its
assets, if any, as necessary to assure that, after giving effect to
the acquisition of the assets of the Government Fund pursuant to
this Agreement, the Master Fund will remain in compliance with its
mandatory investment restrictions as set forth in the Proxy
Statement.
3. Reorganization.
(a) Subject to the requisite approval of the shareholders of the
Government Fund and to the other terms and conditions contained
herein (including the Government Fund's obligation to distribute to
its shareholders all of its investment company taxable income and
net capital gain as described in Section 8(m) hereof), the
Government Fund agrees to sell, assign, convey, transfer and deliver
to the Master Fund, and the Master Fund agrees to acquire from the
Government Fund, on the Exchange Date all of the Investments and all
of the cash and other properties and assets of the Government Fund,
whether accrued or contingent (including cash received by the
Government Fund upon the liquidation by the Government Fund of any
investments purchased by the Government Fund after November 30, 1996
and designated by the Master Fund as being unsuitable for it to
acquire), in exchange for that number of Master Shares provided for
in Section 4 and the assumption by the Master Fund of all of the
liabilities of the Government Fund, whether accrued or contingent,
existing at the Valuation Time. Pursuant to this Agreement, the
Government Fund will, as soon as practicable after the Exchange
Date, distribute all of the Master Shares received by it to the
shareholders of the Government Fund in complete liquidation of the
Government Fund.
(b) As soon as practicable following the requisite approval of the
shareholders of the Government Fund, the Government Fund will, at
its expense, effect a repositioning of its portfolio to reflect the
investment policies of the Master Fund as described in the
Prospectus/Proxy Statement. Such repositioning will be substantially
completed prior to the Exchange Date, unless otherwise agreed by the
Government Fund and the Master Fund.
(c) The Government Fund will pay or cause to be paid to the Master Fund
any interest, cash or such dividends, rights and other payments
received by it on or after the Exchange Date with respect to the
Investments and other properties and assets of the Government Fund,
whether accrued or contingent, received by it on or after the
Exchange Date. Any such distribution shall be deemed included in the
assets transferred to the Master Fund at the Exchange Date and shall
not be separately valued unless the securities in respect of which
such distribution is made shall have gone "ex" such distribution
prior to the Valuation Time, in which case any such distribution
which remains unpaid at the Exchange Date shall be included in the
determination of the value of the assets of the Government Fund
acquired by the Master Fund.
(d) The Valuation Time shall be 4:00 p.m. Boston time on October 24,
1997 or such earlier or later day as may be mutually agreed by the
parties hereto (the "Valuation Time").
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4. Exchange Date; Valuation Time. On the Exchange Date, the Master Fund will
deliver to the Government Fund a number of full and fractional Master Shares
having an aggregate net asset value equal to the value of assets of the
Government Fund transferred to the Master Fund on such date less the value of
the liabilities of the Government Fund assumed by the Master Fund on that date,
determined as hereafter provided in this Section 4.
(a) The net asset value of the Master Shares to be delivered to the
Government Fund, the value of the assets of the Government Fund and
the value of the liabilities of the Government Fund to be assumed by
the Master Fund shall in each case be determined as of the Valuation
Time.
(b) The net asset value of the Master Shares shall be computed in the
manner set forth in the Proxy Statement. The value of the assets and
liabilities of the shares of the Government Fund shall be determined
by the Master Fund, in cooperation with the Government Fund,
pursuant to procedures which the Master Fund would use in
determining the fair market value of the Master Fund's assets and
liabilities.
(c) No adjustment shall be made in the net asset value of either the
Government Fund or the Master Fund to take into account differences
in realized and unrealized gains and losses.
(d) The Master Fund shall issue the Master Shares to the Government Fund
in a certificate registered in the name of the Government Fund. The
Government Fund shall distribute the Master Shares to the
shareholders of the Government Fund by redelivering such certificate
to the Government Fund's transfer agent which will as soon as
practicable set up open accounts for each Government Fund shareholder
in accordance with written instructions furnished by the Government
Fund. With respect to any Government Fund shareholder holding
Government Fund share certificates as of the Exchange Date, the
Master Fund will not permit such shareholder to receive dividends and
other distributions on the Master Shares (although such dividends and
other distributions shall be credited to the account of such
shareholder), receive certificates representing the Master Shares,
exchange the Master Shares credited to such shareholder's account for
shares of other investment companies managed by Putnam Investment
Management, Inc. ("Putnam"), or pledge such Master Shares until
notified by the Government Fund or the transfer agent that such
shareholder has surrendered his or her outstanding Government Fund
certificates or, in the event of lost, stolen, or destroyed
certificates, posted adequate bond. The Government Fund will, at its
expense, request the shareholders of the Government Fund to surrender
their outstanding Government Fund certificates, or post adequate
bond, as the case may be.
(e) The Master Fund shall assume all liabilities of the Government Fund,
whether accrued or contingent, in connection with the acquisition of
cash, properties and other assets and subsequent dissolution of the
Government Fund or otherwise.
5. Expenses, Fees, etc.
(a) All fees and expenses, including legal and accounting expenses,
portfolio transfer taxes (if any) or other similar expenses incurred
in connection with the consummation by the Government Fund and the
Master Fund of the transactions contemplated by this Agreement will
be allocated ratably between the Master Fund and the Government Fund
in proportion to their net assets as of the Valuation Time, except
that (i) the costs of proxy materials and proxy solicitation will be
borne by the Government Fund, (ii) the costs of filing the
Registration Statement will be borne by the Master Fund, and (iii)
the costs of repositioning the portfolio of the Government Fund to
reflect the investment policies of the Master Fund incurred prior to
the Exchange shall be borne by the Government Fund; provided,
however, that such expenses will in any event be paid by the party
directly incurring such expenses if and to the extent that the
payment by the other party of such expenses would result in the
disqualification of the Master Fund or the Government Fund, as the
case may be, as a "regulated investment company" within the meaning
of Section 851 of the Code.
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(b) In the event the transactions contemplated by this Agreement are not
consummated by reason of the Master Fund's being either unwilling or
unable to go forward (other than by reason of the nonfulfillment or
failure of any condition to the Master Fund's obligations referred
to in Section 7(a) or Section 8) the Master Fund shall pay directly
all reasonable fees and expenses incurred by the Government Fund in
connection with such transactions, including, without limitation,
legal, accounting and filing fees.
(c) In the event the transactions contemplated by this Agreement are not
consummated by reason of the Government Fund's being either
unwilling or unable to go forward (other than by reason of the
nonfulfillment or failure of any condition to the Government Fund's
obligations referred to in Section 7(a) or Section 9) the Government
Fund shall pay directly all reasonable fees and expenses incurred by
the Master Fund in connection with such transactions, including
without limitation legal, accounting and filing fees.
(d) In the event the transactions contemplated by this Agreement are not
consummated for any reason other than (i) the Master Fund's or the
Government Fund's being either unwilling or unable to go forward or
(ii) the nonfulfillment or failure of any condition to the Master
Fund's or the Government Fund's obligations referred to in Section
7(a), Section 8 or Section 9 of this Agreement, then each of the
Master Fund and the Government Fund shall bear all of its own
expenses incurred in connection with such transactions.
(e) Notwithstanding any other provisions of this Agreement, if for any
reason the transactions contemplated by this Agreement are not
consummated, no party shall be liable to the other party for any
damages resulting therefrom, including without limitation
consequential damages, except as specifically set forth above.
6. Exchange Date. Delivery of the assets of the Government Fund to be
transferred, assumption of the liabilities of the Government Fund to be assumed
and the delivery of the Master Shares to be issued shall be made at the offices
of Ropes & Gray, One International Place, Boston, Massachusetts, at 10:00 A.M.
on the next full business day following the Valuation Time, or at such other
time and date agreed to by the Master Fund and the Government Fund, the date
and time upon which such delivery is to take place being referred to herein as
the "Exchange Date."
7. Meeting of Shareholders; Dissolution.
(a) The Government Fund agrees to call a meeting of its shareholders for
the purpose of considering the sale of all of its assets to and the
assumption of all of its liabilities by the Master Fund as herein
provided, adopting this Agreement, and authorizing the liquidation
and dissolution of the Government Fund.
(b) The Government Fund agrees that the liquidation and dissolution of
the Government Fund will be effected in the manner provided in the
Agreement and Declaration of Trust of the Government Fund in
accordance with applicable law and that on and after the Exchange
Date, the Government Fund shall not conduct any business except in
connection with its liquidation and dissolution.
(c) The Master Fund has, after the preparation and delivery to the
Master Fund by the Government Fund of a preliminary version of the
Proxy Statement which was satisfactory to the Master Fund and to
Ropes & Gray for inclusion in the Registration Statement, filed the
Registration Statement with the Commission. Each of the Government
Fund and the Master Fund has cooperated with the other, and each has
furnished to the other the information relating to itself required
by the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder set forth in the Registration Statement,
including the Proxy Statement.
8. Conditions to the Master Fund's Obligations. The obligations of the Master
Fund hereunder shall be subject to the following conditions:
(a) That this Agreement shall have been adopted and the transactions
contemplated hereby shall have been approved by the affirmative vote
of the holders of at least a majority of the outstanding shares of
beneficial interest of the Government Fund entitled to vote.
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(b) That the Government Fund shall have furnished to the Master Fund a
statement of the Government Fund's assets and liabilities, with
values determined as provided in Section 4 of this Agreement,
together with a list of Investments, which list shall identify all
illiquid Investments, all as of the Valuation Time, certified on the
Government Fund's behalf by the Government Fund's President (or any
Vice President) and Treasurer, and a certificate of both such
officers, dated the Exchange Date, that there has been no material
adverse change in the financial position of the Government Fund
since November 30, 1996 other than changes in the Investments and
other assets and properties since that date or changes in the market
value of the Investments and other assets of the Government Fund, or
changes due to dividends paid or losses from operations.
(c) That the Government Fund shall have furnished to the Master Fund a
statement, dated the Exchange Date, signed on behalf of the
Government Fund by the Government Fund's President (or any Vice
President) and Treasurer certifying that as of the Valuation Time
and as of the Exchange Date all representations and warranties of
the Government Fund made in this Agreement are true and correct in
all material respects as if made at and as of such dates and the
Government Fund has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied at or
prior to such dates.
(d) That the Government Fund shall have delivered to the Master Fund a
letter from Price Waterhouse LLP dated the Exchange Date, stating
that on the basis of an examination under attestation standards
established by the American Institute of Certified Public
Accountants ("AICPA"), management's assertions that (1) for the
fiscal period from December 1, 1996 to the Exchange Date the
Government Fund qualified as a regulated investment company under
the Internal Revenue Code (the "Code"), (2) as of the Exchange Date,
the Government Fund has no tax liability other than liabilities
stated for federal or state income taxes and (3) as of the Exchange
Date, the Government Fund has no liability for federal excise tax
purposes under section 4982 of the Code, are fairly stated.
(e) That there shall not be any material litigation pending with respect
to the matters contemplated by this Agreement.
(f) That the Master Fund shall have received an opinion of Ropes & Gray,
in form satisfactory to the Master Fund and dated the Exchange Date,
to the effect that (i) the Government Fund is a business trust duly
established and validly existing under the laws of The Commonwealth
of Massachusetts, and, to the knowledge of such counsel, is not
required to qualify to do business as a foreign association in any
jurisdiction, (ii) this Agreement has been duly authorized,
executed, and delivered by the Government Fund and, assuming that
the Registration Statement and the Proxy Statement comply with the
1933 Act, the 1934 Act and the 1940 Act and assuming due
authorization, execution and delivery of this Agreement by the
Master Fund, is a valid and binding obligation of the Government
Fund, (iii) the Government Fund has power to sell, assign, convey,
transfer and deliver the assets contemplated hereby and, upon
consummation of the transactions contemplated hereby in accordance
with the terms of this Agreement, the Government Fund will have duly
sold, assigned, conveyed, transferred and delivered such assets to
the Master Fund, (iv) the execution and delivery of this Agreement
did not, and the consummation of the transactions contemplated
hereby will not, violate the Government Fund's Agreement and
Declaration of Trust, as amended, or any provision of any agreement
known to such counsel to which the Government Fund is a party or by
which it is bound, and (v) no consent, approval, authorization or
order of any court or governmental authority is required for the
consummation by the Government Fund of the transactions contemplated
hereby, except such as have been obtained under the 1933 Act, the
1934 Act and the 1940 Act and such as may be required under state
securities or blue sky laws and the H-S-R Act, it being understood
that with respect to investment restrictions as contained in the
Government Fund's Agreement and Declaration of Trust, Bylaws or
then-current Registration Statement, such counsel may rely upon a
certificate of an officer of the Government Fund whose
responsibility it is to advise the Government Fund with respect to
such matters.
(g) That the Government Fund shall have received an opinion of Ropes &
Gray, in form satisfactory to the Master Fund, with respect to the
matters specified in Section 9(f) of this Agreement, and such other
matters as the Master Fund may reasonably deem necessary or
desirable.
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(h) That the Master Fund shall have received a ruling from the Internal
Revenue Service or an opinion of legal counsel to the effect that,
on the basis of the existing provisions of the Code, current
administrative rules, and court decisions, for federal income tax
purposes (i) no gain or loss will be recognized by the Master Fund
upon receipt of the Investments transferred to the Master Fund
pursuant to this Agreement in exchange for the Master Shares, (ii)
the basis to the Master Fund of the Investments will be the same as
the basis of the Investments in the hands of the Government Fund
immediately prior to such exchange, and (iii) the Master Fund's
holding periods with respect to the Investments will include the
respective periods for which the Investments were held by the
Government Fund.
(i) That the assets of the Government Fund to be acquired by the Master
Fund will include no assets which the Master Fund, by reason of
charter limitations or of investment restrictions disclosed in the
Proxy Statement, may not properly acquire.
(j) That the Registration Statement shall have become effective under
the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of the Master Fund,
threatened by the Commission.
(k) That the Master Fund shall have received from the Commission, any
relevant state securities administrator, the Federal Trade
Commission (the "FTC") and the Department of Justice (the
"Department") such order or orders as Ropes & Gray deems reasonably
necessary or desirable under the 1933 Act, the 1934 Act, the 1940
Act, any applicable state securities or blue sky laws and the H-S-R
Act in connection with the transactions contemplated hereby, and
that all such orders shall be in full force and effect.
(l) That all actions taken by the Government Fund in connection with the
transactions contemplated by this Agreement and all documents
incidental thereto shall be satisfactory in form and substance to
the Master Fund and Ropes & Gray.
(m) That, prior to the Exchange Date, the Government Fund shall have
declared a dividend or dividends which, together with all previous
such dividends, shall have the effect of distributing to the
shareholders of the Government Fund all of the Government Fund's
investment company taxable income for its taxable years ending on or
after November 30, 1996 and on or prior to the Exchange Date
(computed without regard to any deduction for dividends paid), and
all of its net capital gain realized in each of its taxable years
ending on or after November 30, 1996 and on or prior to the Exchange
Date.
(n) That the Government Fund shall have furnished to the Master Fund a
certificate, signed by the President (or any Vice President) and the
Treasurer of the Government Fund, as to the tax cost to the
Government Fund of the securities delivered to the Master Fund
pursuant to this Agreement, together with any such other evidence as
to such tax cost as the Master Fund may reasonably request.
(o) That the Government Fund's custodian shall have delivered to the
Master Fund a certificate identifying all of the assets of the
Government Fund held by such custodian as of the Valuation Time.
(p) That the Government Fund's transfer agent shall have provided to the
Master Fund (i) the originals or true copies of all of the records
of the Government Fund in the possession of such transfer agent as
of the Exchange Date, (ii) a certificate setting forth the number of
shares of the Government Fund outstanding as of the Valuation Time,
and (iii) the name and address of each holder of record of any such
shares and the number of shares held of record by each such
shareholder.
(q) That all of the issued and outstanding shares of beneficial interest
of the Government Fund shall have been offered for sale and sold in
conformity with all applicable state securities or blue sky laws
and, to the extent that any audit of the records of the Government
Fund or its transfer agent by the Master Fund or its agents shall
have revealed otherwise, either (i) the Government Fund shall have
taken all actions that in the opinion of the Master Fund or its
counsel are necessary to remedy any prior failure on the part of the
Government Fund to have offered for sale and sold such shares in
conformity with such laws or (ii) the Government Fund
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shall have furnished (or caused to be furnished) surety, or deposited
(or caused to be deposited) assets in escrow, for the benefit of the
Master Fund in amounts sufficient and upon terms satisfactory, in the
opinion of the Master Fund or its counsel, to indemnify the Master
Fund against any expense, loss, claim, damage or liability whatsoever
that may be asserted or threatened by reason of such failure on the
part of the Government Fund to have offered and sold such shares in
conformity with such laws.
(r) That the Master Fund shall have received from Price Waterhouse LLP a
letter addressed to the Master Fund dated as of the Exchange Date
satisfactory in form and substance to the Master Fund to the effect
that, on the basis of an examination under attestation standards
established by the AICPA, management's assertion that as of the
Valuation Time the value of the assets of the Government Fund to be
exchanged for the Master Shares has been determined in accordance
with the provisions of Article 10 section 5 (10.5) of the Government
Fund's By-laws pursuant to the procedures customarily utilized by
the Master Fund in valuing its assets and issuing its shares is
fairly stated.
(s) That the Government Fund shall have executed and delivered to the
Master Fund an instrument of transfer dated as of the Exchange Date
pursuant to which the Government Fund will assign, transfer and
convey all of the assets and other property to the Master Fund at
the Valuation Time in connection with the transactions contemplated
by this Agreement.
(t) The Government Fund shall have repositioned its portfolio,
satisfactorily to the Master Fund, to reflect the investment
policies of the Master Fund.
9. Conditions to the Government Fund's Obligations. The obligations of the
Government Fund hereunder shall be subject to the following conditions:
(a) That this Agreement shall have been adopted and the transactions
contemplated hereby shall have been approved by the affirmative vote
of the holders of at least a majority of the outstanding shares of
beneficial interest of the Government Fund entitled to vote.
(b) That the Master Fund shall have furnished to the Government Fund a
statement of the Master Fund's net assets, together with a list of
portfolio holdings with values determined as provided in Section 4,
all as of the Valuation Time, certified by the Master Fund's
President (or any Vice President) and Treasurer (or any Assistant
Treasurer), and a certificate of both such officers, dated the
Exchange Date, to the effect that as of the Valuation Time and as of
the Exchange Date there has been no material adverse change in the
financial position of the Master Fund since March 31, 1997, other
than changes in its portfolio securities since that date, changes in
the market value of its portfolio securities, and changes due to net
dividends paid or losses from operations.
(c) That the Master Fund shall have executed and delivered to the
Government Fund an Assumption of Liabilities dated as of the
Exchange Date pursuant to which the Master Fund will assume all of
the liabilities of the Government Fund existing at the Valuation
Time in connection with the transactions contemplated by this
Agreement.
(d) That the Master Fund shall have furnished to the Government Fund a
statement, dated the Exchange Date, signed on behalf of the Master
Fund by the Master Fund's President (or any Vice President) and
Treasurer (or any Assistant Treasurer) certifying that as of the
Valuation Time and as of the Exchange Date all representations and
warranties of the Master Fund made in this Agreement are true and
correct in all material respects as if made at and as of such dates,
and that the Master Fund has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or
satisfied at or prior to each of such dates.
(e) That there shall not be any material litigation pending or
threatened with respect to the matters contemplated by this
Agreement.
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(f) That the Government Fund shall have received an opinion of Ropes &
Gray, in form satisfactory to the Government Fund and dated the
Exchange Date, to the effect that (i) the Master Fund is a business
trust duly established and validly existing in conformity with the
laws of The Commonwealth of Massachusetts, and, to the knowledge of
such counsel, is not required to qualify to do business as a foreign
association in any jurisdiction except as may be required by state
securities or blue sky laws, (ii) the Master Shares to be delivered
to the Government Fund as provided for by this Agreement are duly
authorized and upon such delivery will be validly issued and will be
fully paid and nonassessable by the Master Fund and no shareholder
of the Master Fund has any preemptive right to subscription or
purchase in respect thereof, (iii) this Agreement has been duly
authorized, executed and delivered by the Master Fund and, assuming
that the Registration Statement and the Proxy Statement comply with
the 1933 Act, the 1934 Act and the 1940 Act and assuming due
authorization, execution and delivery of this Agreement by the
Government Fund, is a valid and binding obligation of the Master
Fund, (iv) the execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not,
violate the Master Fund's Agreement and Declaration of Trust, as
amended, or By-laws, or any provision of any agreement known to such
counsel to which the Master Fund is a party or by which it is bound,
it being understood that with respect to investment restrictions as
contained in the Master Fund's Agreement and Declaration of Trust,
as amended, By-Laws or the Registration Statement, such counsel may
rely upon a certificate of an officer of the Master Fund whose
responsibility it is to advise the Master Fund with respect to such
matters, (v) no consent, approval, authorization or order of any
court or governmental authority is required for the consummation by
the Master Fund of the transactions contemplated herein, except such
as have been obtained under the 1933 Act, the 1934 Act and the 1940
Act and such as may be required under state securities or blue sky
laws, and (vi) the Registration Statement has become effective under
the 1933 Act, and to the best of the knowledge of such counsel, no
stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the 1933 Act.
(g) That the Government Fund shall have received a ruling from the
Internal Revenue Service, or an opinion of legal counsel, to the
effect that, on the basis of the existing provisions of the Code,
current administrative rules, and court decisions, for federal
income tax purposes (i) no gain or loss will be recognized by the
Master Fund upon receipt of the Investments transferred to the
Master Fund pursuant to this Agreement in exchange for the Master
Shares, (ii) the basis to the Master Fund of the Investments will be
the same as the basis of the Investments in the hands of the
Government Fund immediately prior to such exchange, and (iii) the
Master Fund's holding periods with respect to the Investments will
include the respective periods for which the Investments were held
by the Government Fund.
(h) That all actions taken by or on behalf of the Master Fund in
connection with the transactions contemplated by this Agreement and
all documents incidental thereto shall be satisfactory in form and
substance to the Government Fund and Ropes & Gray.
(i) That the Registration Statement shall have become effective under
the 1933 Act, and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of the Master Fund,
threatened by the Commission.
(j) That the Government Fund shall have received from the Commission,
any relevant state securities administrator, the FTC and the
Department such order or orders as Ropes & Gray deems reasonably
necessary or desirable under the 1933 Act, the 1934 Act, the 1940
Act, any applicable state securities or blue sky laws and the H-S-R
Act in connection with the transactions contemplated hereby, and
that all such orders shall be in full force and effect.
10. Indemnification.
(a) The Government Fund will indemnify and hold harmless, out of the
assets of the Government Fund but no other assets, the Master Fund,
its trustees and its officers (for purposes of this subparagraph,
the "Indemnified Parties") against any and all expenses, losses,
claims, damages and liabilities at any time imposed upon
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or reasonably incurred by any one or more of the Indemnified Parties
in connection with, arising out of, or resulting from any claim,
action, suit or proceeding in which any one or more of the
Indemnified Parties may be involved or with which any one or more of
the Indemnified Parties may be threatened by reason of any untrue
statement or alleged untrue statement of a material fact relating to
the Government Fund contained in the Registration Statement, the
Proxy Statement or any amendment or supplement to any of the
foregoing, or arising out of or based upon the omission or alleged
omission to state in any of the foregoing a material fact relating to
the Government Fund required to be stated therein or necessary to
make the statements relating to the Government Fund therein not
misleading, including, without limitation, any amounts paid by any
one or more of the Indemnified Parties in a reasonable compromise or
settlement of any such claim, action, suit or proceeding, or
threatened claim, action, suit or proceeding made with the consent of
the Government Fund. The Indemnified Parties will notify the
Government Fund in writing within ten days after the receipt by any
one or more of the Indemnified Parties of any notice of legal process
or any suit brought against or claim made against such Indemnified
Party as to any matters covered by this Section 10(a). The Government
Fund shall be entitled to participate at its own expense in the
defense of any claim, action, suit or proceeding covered by this
Section 10(a), or, if it so elects, to assume at its expense by
counsel satisfactory to the Indemnified Parties the defense of any
such claim, action, suit or proceeding, and if the Government Fund
elects to assume such defense, the Indemnified Parties shall be
entitled to participate in the defense of any such claim, action,
suit or proceeding at their expense. The Master Fund's obligation
under this Section 10(a) to indemnify and hold harmless the
Indemnified Parties shall constitute a guarantee of payment so that
the Government Fund will pay in the first instance any expenses,
losses, claims, damages and liabilities required to be paid by it
under this Section 10(a) without the necessity of the Indemnified
Parties' first paying the same.
(b) The Master Fund will indemnify and hold harmless, out of the assets
of the Master Fund but no other assets, the Government Fund, its
trustees and its officers (for purposes of this subparagraph, the
"Indemnified Parties") against any and all expenses, losses, claims,
damages and liabilities at any time imposed upon or reasonably
incurred by any one or more of the Indemnified Parties in connection
with, arising out of, or resulting from any claim, action, suit or
proceeding in which any one or more of the Indemnified Parties may
be involved or with which any one or more of the Indemnified Parties
may be threatened by reason of any untrue statement or alleged
untrue statement of a material fact relating to the Master Fund
contained in the Registration Statement, the Proxy Statement, or any
amendment or supplement to any thereof, or arising out of, or based
upon, the omission or alleged omission to state in any of the
foregoing a material fact relating to the Master Fund required to be
stated therein or necessary to make the statements relating to the
Master Fund therein not misleading, including without limitation any
amounts paid by any one or more of the Indemnified Parties in a
reasonable compromise or settlement of any such claim, action, suit
or proceeding, or threatened claim, action, suit or proceeding made
with the consent of the Master Fund. The Indemnified Parties will
notify the Master Fund in writing within ten days after the receipt
by any one or more of the Indemnified Parties of any notice of legal
process or any suit brought against or claim made against such
Indemnified Party as to any matters covered by this Section 10(b).
The Master Fund shall be entitled to participate at its own expense
in the defense of any claim, action, suit or proceeding covered by
this Section 10(b), or, if it so elects, to assume at its expense by
counsel satisfactory to the Indemnified Parties the defense of any
such claim, action, suit or proceeding, and, if the Master Fund
elects to assume such defense, the Indemnified Parties shall be
entitled to participate in the defense of any such claim, action,
suit or proceeding at their own expense. The Government Fund's
obligation under this Section 10(b) to indemnify and hold harmless
the Indemnified Parties shall constitute a guarantee of payment so
that the Master Fund will pay in the first instance any expenses,
losses, claims, damages and liabilities required to be paid by it
under this Section 10(b) without the necessity of the Indemnified
Parties' first paying the same.
11. No Broker, etc. Each of the Government Fund and the Master Fund represents
that there is no person who has dealt with it who by reason of such dealings is
entitled to any broker's or finder's or other similar fee or commission arising
out of the transactions contemplated by this Agreement.
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12. Termination. The Government Fund and the Master Fund may, by mutual
consent of their trustees, terminate this Agreement, and the Government Fund or
the Master Fund, after consultation with counsel and by consent of their
trustees or an officer authorized by such trustees, may waive any condition to
their respective obligations hereunder. If the transactions contemplated by
this Agreement have not been substantially completed by December 31, 1998, this
Agreement shall automatically terminate on that date unless a later date is
agreed to by the Government Fund and the Master Fund.
13. Rule 145. Pursuant to Rule 145 under the 1933 Act, the Master Fund will,
in connection with the issuance of any Master Shares to any person who at the
time of the transaction contemplated hereby is deemed to be an affiliate of a
party to the transaction pursuant to Rule 145(c), cause to be affixed upon the
certificates issued to such person (if any) a legend as follows:
"These shares have not been registered under the Securities Act of 1933, as
amended, and may not be sold or otherwise transferred except to Putnam
Intermediate Government Income Trust unless (i) a registration statement with
respect thereto is effective under the Securities Act of 1933, as amended, or
(ii) in the opinion of counsel reasonably satisfactory to Putnam Intermediate
Government Income Trust such registration is not required."
and, further, the Master Fund will issue stop transfer instructions to its
transfer agent with respect to such shares. The Government Fund will provide
the Master Fund on the Exchange Date with the name of any Government Fund
shareholder who is to the knowledge of the Government Fund an affiliate of the
Government Fund on such date.
14. Covenants, etc. Deemed Material. All covenants, agreements,
representations and warranties made under this Agreement and any certificates
delivered pursuant to this Agreement shall be deemed to have been material and
relied upon by each of the parties, notwithstanding any investigation made by
them or on their behalf.
15. Sole Agreement; Amendments. This Agreement supersedes all previous
correspondence and oral communications between the parties regarding the
subject matter hereof, constitutes the only understanding with respect to such
subject matter, may not be changed except by a letter of agreement signed by
each party hereto, and shall be construed in accordance with and governed by
the laws of The Commonwealth of Massachusetts.
16. Agreement and Declaration of Trust. Copies of the Agreements and
Declarations of Trust of the Government Fund and the Master Fund are on file
with the Secretary of State of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed by the Trustees of each Fund,
respectively, as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees, officers or shareholders
of the Government Fund or the Master Fund individually but are binding only
upon the assets and property of the Government Fund and the Master Fund, as the
case may be.
This Agreement may be executed in any number of counterparts, each of which,
when executed and delivered, shall be deemed to be an original.
PUTNAM MASTER INTERMEDIATE INCOME TRUST
By:/s/ Charles E. Porter
----------------------------
Executive Vice President
PUTNAM INTERMEDIATE GOVERNMENT INCOME TRUST
By:/s/ Charles E. Porter
----------------------------
Executive Vice President
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Appendix B
Securities Ratings
The following rating services describe rated securities as follows:
Moody's Investors Service, Inc.
Bonds
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Standard & Poor's
Bonds
AAA--Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
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BBB--Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB-B-CCC-CC-C--Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB--Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B--Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC--Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC--The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C--The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
D--Bonds rated 'D' are in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be
used on the filing of a bankruptcy petition if debt service payments are
jeopardized.
Duff & Phelps Corporation
Long-Term Debt
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- --High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- --Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- --Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- --Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
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B+, B, B- --Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC--Well below investment-grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
Fitch Investors Service, Inc.
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB--Bonds considered to be speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the
issue and repay principal when due.
CCC--Bonds have certain characteristics which, with passing of time, could lead
to the possibility of default on either principal or interest payments.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable.
C--Bonds are in actual or imminent default in payment of interest or principal.
DDD--Bonds are in default and in arrears in interest and/or principal payments.
Such bonds are extremely speculative and should be valued only on the basis of
their value in liquidation or reorganization of the obligor.
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<PAGE>
PUTNAMINVESTMENTS
This is your PROXY CARD.
Please vote this proxy, sign it below, and return it promptly in the envelope
provided. Your vote is important.
PLEASE FOLD AT PERFORATION BEFORE DETACHING PROXY CARD
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Proxy for a meeting of shareholders, to be held on October 9, 1997 for Putnam
Intermediate Government Income Trust. ------
- ------------------------------------
This proxy is solicited on behalf of the Trustees of the fund.
The undersigned shareholder hereby appoints George Putnam, Hans H. Estin, and
Robert E. Patterson, and each of them separately, Proxies, with power of
substitution, and hereby authorizes them to represent and to vote, as designated
below, at the meeting of shareholders of Putnam Intermediate Government Income
Trust on October 9, 1997, at 2:00 p.m., Boston time, and at any adjournments
thereof, all of the shares of the fund that the undersigned shareholder would be
entitled to vote if personally present.
PLEASE BE SURE TO SIGN AND DATE THIS PROXY.
Please sign your name exactly as it appears on this card. If you are a joint
owner, each owner should sign. When signing as an executor, administrator,
attorney, trustee or guardian, or as custodian for a minor, please give your
full title as such. If you are signing for a corporation, please sign the full
corporate name and indicate the signer's office. If you are a partner, sign in
the partnership name.
- ----------------------------------------------- ----------------------------
Shareholder sign here Date
- ----------------------------------------------- ----------------------------
Co-owner sign here Date
HAS YOUR ADDRESS CHANGED?
Please use this form to notify us of any change in address or telephone number
or to provide us with your comments. Detach this form from the proxy ballot and
return it with your signed proxy in the enclosed envelope.
Street
- -------------------------------------------------------------------------------
City State Zip
- ----------------------------------------------- -------------- ------------
<PAGE>
Telephone
- --------------------------------------------------------------------------------
DO YOU HAVE ANY COMMENTS?
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER:
Your vote is important. Please help us to eliminate the
expense of follow-up mailings by signing and returning
this proxy as soon as possible. A postage-paid envelope is enclosed for your
convenience.
THANK YOU!
- --------------------------------------------------------------------------------
PLEASE FOLD AT PERFORATION BEFORE DETACHING ADDRESS CARD
<PAGE>
If you complete and sign the proxy, we'll vote it exactly as you tell us. If you
simply sign the proxy, it will be voted FOR Proposal 1, FOR fixing the number of
Trustees and electing Trustees as set forth in Proposal 2, FOR Proposal 3, and
AGAINST Proposal 4. In their discretion, the Proxies will also be authorized to
vote upon such other matters that may come before the meeting.
Please mark your choices [X] in blue or black ink.
THE TRUSTEES RECOMMEND THAT YOU VOTE "FOR" PROPOSAL 1.
1. Approval of the Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization providing for the [ ] [ ] [ ]
transfer of all of the assets of
Putnam Intermediate Government Income
Trust (the "fund") to Putnam Master
Intermediate Income Trust (the "Master
fund") in exchange for shares of the
Master Fund and the assumption by the
Master Fund of all of the liabilities
of the fund, and the distribution of
such shares to the shareholders of the
fund in liquidation of the fund.
THE TRUSTEES RECOMMEND THAT YOU VOTE "FOR" FIXING THE NUMBER OF TRUSTEES AND
ELECTING ALL OF THE NOMINEES
2. Proposal to elect Trustees
The nominees for Trustees are: J.A. Baxter, H.H. Estin, J.A. Hill,
R.J. Jackson, E.T. Kennan, L.J. Lasser, R.E. Patterson, D.S. Perkins,
W.F. Pounds, G. Putnam, G. Putnam, III, A.J.C. Smith and
W.N. Thorndike.
[ ] FOR fixing the number of Trustees and electing all the nominees (except as
marked to the contrary below.)
To withhold authority to vote for one or more of the nominees, write
those nominees' names below:
------------------------------------------------------------
[ ] WITHHOLD authority to vote for all nominees
THE TRUSTEES RECOMMEND THAT YOU VOTE "FOR" PROPOSAL 3.
3. Proposal to ratify FOR AGAINST ABSTAIN
<PAGE>
the selection of [ ] [ ] [ ]
Price Waterhouse
LLP as the independent
auditors of your fund.
THE TRUSTEES RECOMMEND THAT YOU VOTE "AGAINST" PROPOSAL 4.
4. Proposal to convert
your fund from closed- [ ] [ ] [ ]
end to open-end status
and authorize certain
related amendments to
the Agreement and
Declaration of Trust.
Note: If you have questions on any of the Proposals, please call
1-800-225-1581.
<PAGE>
PUTNAM MASTER INTERMEDIATE INCOME TRUST
FORM N-14
PART B
STATEMENT OF ADDITIONAL INFORMATION
July 29, 1997
This Statement of Additional Information ("SAI") contains material which may be
of interest to investors but which is not included in the Prospectus/Proxy
Statement (the "Prospectus") of Putnam Master Intermediate Income Trust (the
"Master Fund") dated July 29, 1997 relating to the sale of all or substantially
all of the assets of Putnam Intermediate Government Income Trust (the
"Government Fund") to the Master Fund. This SAI is not a prospectus and is
authorized for distribution only when it accompanies or follows delivery of the
Prospectus. This SAI should be read in conjunction with the Prospectus.
Investors may obtain a free copy of the Prospectus by writing Putnam Investor
Services, One Post Office Square, Boston, MA 02109 or by calling 1-800-225-1581.
<PAGE>
Table of Contents
ADDITIONAL INFORMATION ABOUT THE MASTER FUND AND THE
GOVERNMENT FUND...............................................3
Management.............................................................3
Investment Decisions...................................................4
Brokerage Services, Brokerage Allocation and Other Practices...........4
Investor Servicing Agent and Custodian.................................7
Charges and Expenses...................................................7
Tax Status.............................................................8
Certain Investment Practices..........................................12
Determination of Net Asset Value......................................22
Officers .............................................................23
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS...............24
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ADDITIONAL INFORMATION ABOUT THE MASTER FUND AND THE
GOVERNMENT FUND
The following additional information pertains to both the Master Fund and
Government Fund (each a "fund" and collectively, the "funds"), except where
otherwise noted:
Management
Under Management Contracts between each of the funds and Putnam Investment
Management, Inc. ("Putnam Management"), subject to such policies as the Trustees
may determine, Putnam Management, at its own expense, furnishes continuously an
investment program for each fund and makes investment decisions on behalf of
each fund. Subject to the control of the Trustees, Putnam Management also
manages, supervises and conducts the other affairs and business of each of the
funds, furnishes office space and equipment, provides bookkeeping and clerical
services (including determination of each fund's net asset value, but excluding
shareholder accounting services) and places all orders for the purchase and sale
of each funds' portfolio securities. Putnam Management may place each fund'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 funds and other
clients. In so doing, Putnam Management may cause each of the funds to pay
greater brokerage commissions than it might otherwise pay.
In addition to the fee paid to Putnam Management, each of the funds reimburses
Putnam Management for the compensation and related expenses of certain officers
of the fund 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. The aggregate amount of all such payments and
reimbursements is determined by the Trustees.
Putnam Management pays all other salaries of officers of the funds. Each of the
funds pays all of its expenses not assumed by Putnam Management including,
without limitation, auditing, legal, custodial, investor servicing and
shareholder reporting expenses.
The Management Contracts provide that Putnam Management shall not be subject to
any liability to the relevant fund or to any shareholder of the fund for any act
or omission in the course of or connected with rendering services to the fund in
the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties on the part of Putnam Management.
Each Management Contract may be terminated without penalty by vote of the
Trustees or the shareholders of the relevant fund, or by Putnam Management, on
30 days' written notice. Each Management Contract may be amended only by a vote
of the shareholders of the relevant fund. Each Management Contract also
terminates without payment of any penalty in the event
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<PAGE>
of its assignment. Each Management Contract provides that it will continue in
effect only so long as such continuance is approved at least annually by vote of
either the Trustees or the relevant fund's shareholders, and, in either case, by
a majority of the Trustees who are not "interested persons" of Putnam Management
or the relevant fund. In each of the foregoing cases, the vote of the
shareholders is the affirmative vote of a "majority of the outstanding voting
securities" as defined in the Investment Company Act of 1940.
Investment Decisions
Investment decisions for 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 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 Services, Brokerage Allocation and Other Practices
Brokerage and Research Services
Transactions on U.S. stock exchanges, commodities markets and futures markets
and other agency transactions involve the payment by each of the funds 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 each of the funds usually includes an undisclosed dealer
commission or mark-up. In underwritten offerings, the price paid by each of the
funds 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"))
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<PAGE>
from broker-dealers that execute portfolio transactions for the clients of such
advisers and from third parties with which such 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
security market reviews, industry and company reviews, evaluations of
investments, recommendations as to the purchase and sale of investments,
newspapers, magazines, pricing services, quotations 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 funds),
although not all of these services are necessarily useful and of value in
managing the funds. The management fee paid by each fund 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
securities for the funds and buys and sells investments for the funds 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 a 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, 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 each Management Contract,
Putnam Management may cause the funds 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 transactions for a 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 the funds
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 funds 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 effort to obtain the most favorable price
and execution available with respect to such transactions, as described above.
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<PAGE>
Each 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 securities 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 Rules of Fair Practice 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 funds (and, if permitted
by law, sales of the other Putnam funds) as a factor in the selection of
broker-dealers to execute portfolio transactions for a fund.
Brokerage commissions. The following table shows brokerage commissions paid by
each fund during the fiscal periods indicated:
Master Fund Fiscal year Brokerage Commissions
----------- ---------------------
1996 $19,063
1995 $21,412
1994 $2,533
Government Fund 1996 $17,229
1995 $31,866
1994 $781
The following table shows transactions placed with brokers and dealers by each
fund during its most recent fiscal year to recognize research, statistical and
quotation services received by Putnam Management and its affiliates:
Dollar
value Percent of
of these total Amount of
transactions transactions Commissions
------------- ------------ -----------
Master Fund $16,546,749 25.92% $11,614
Government Fund $13,441,956 19.13% $1,334
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Investor Servicing Agent and Custodian
Putnam Investor Services, a division of Putnam Fiduciary Trust Company ("PFTC"),
is the funds' investor servicing agent (transfer, plan and dividend disbursing
agent), for which it receives fees which are paid monthly by each of the funds
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 relevant fund.
PFTC is the custodian of each of the fund's assets. In carrying out its duties
under its custodian contracts, PFTC may employ one or more subcustodians whose
responsibilities include safeguarding and controlling each of the funds' cash
and securities, handling the receipt and delivery of securities and collecting
interest and dividends on the funds' investments. PFTC and any subcustodians
employed by it have a lien on the securities of the fund (to the extent
permitted by the relevant fund'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 relevant fund. Each of the funds expects
that such advances will exist only in unusual circumstances. Neither PFTC nor
any subcustodian determines the investment policies of the funds or decides
which securities the funds will buy or sell. PFTC pays the fees and other
charges of any subcustodians employed by it. The funds may from time to time pay
custodial expenses in full or in part through the placement by Putnam Management
of the funds' portfolio transactions with the subcustodians or with a
third-party broker having an agreement with the subcustodians. Each of the funds
pays PFTC an annual fee based on the relevant 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.
Charges and Expenses
Management Fees. For the past three fiscal years, the funds incurred the
following fees pursuant to their respective Management Contracts:
Master Fund Fiscal Year Management Fee Paid
----------- -------------------
1996 $2,479,579
1995 $2,378,222
1994 $2,522,541
Government Fund Fiscal Year Management Fee Paid
----------- -------------------
1996 $4,075,170
1995 $4,051,749
1994 $4,096,234
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Administrative expense reimbursement. The funds reimbursed Putnam Management in
the following amounts for administrative services during fiscal 1996, including
the following amounts for compensation of certain fund officers and
contributions to the Putnam Investments, Inc. Profit Sharing Plan for their
benefit:
Portion of total reimbursement
Master Fund Total reimbursement for compensation and contributions
------------------- ----------------------------------
$12,383 $10,925
Portion of total reimbursement
Government Fund Total reimbursement for compensation and contributions
------------------- ----------------------------------
$12,279 $10,865
Investor servicing and custody fees and expenses. During their 1996 fiscal
years, the Government Fund and the Master Fund incurred $625,900 and $409,785,
respectively, in fees and out-of-pocket expenses for investor servicing and
custody services provided by Putnam Fiduciary Trust Company.
Tax Status
Taxation of the funds. Each of the funds 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 so to qualify and to qualify for the
special tax treatment accorded regulated investment companies and their
shareholders, each fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale of stock,
securities and foreign currencies, or other income (including but not limited to
gains from options, futures, or forward contracts) derived with respect to its
business of investing in such stock, securities, or currencies;
(b) derive less than 30% of its gross income from the sale or other disposition
of certain assets (including stock or securities and certain options, futures
contracts, forward contracts and foreign currencies) held for less than three
months;
(c) distribute with respect to each taxable year at least 90% of the sum of its
taxable net investment income, its net tax-exempt income, and the excess, if
any, of the net short-term capital gains over net long-term capital losses for
such year; and
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(d) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of the fund's assets is represented by cash and
cash items, U.S. government securities, securities of other regulated investment
companies, and other securities limited in respect of any one issuer to a value
not greater than 5% of the value of the fund's total assets and to not more than
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its assets is invested in the securities (other than those
of the U.S. government or other regulated investment companies) of any one
issuer or of two or more issuers which the fund controls and which are engaged
in the same, similar or related trades or businesses.
If a fund qualifies as a regulated investment company that is accorded special
tax treatment, the fund will not be subject to federal income tax on income paid
to its shareholders in the form of dividends (including capital gain dividends).
If a fund fails 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, and all distributions from earnings and
profits, including any distributions of net tax-exempt income and net long-term
capital gains, would be taxable to shareholders as ordinary income. In addition,
a fund could be required to recognize unrealized gains, pay substantial taxes
and interest and make substantial distributions before requalifying as a
regulated investment company that is accorded special tax treatment.
If a fund fails to distribute in a calendar year substantially all of its
ordinary income for such year and substantially all of its capital gain net
income for the one-year period ending October 31 (or later if the fund is
permitted so to elect and so elects), plus any retained amount from the prior
year, the fund will be subject to a 4% excise tax on the undistributed amounts.
A dividend paid to shareholders by a fund in January of a year generally is
deemed to have been paid by the fund on December 31 of the preceding year, if
the dividend was declared and payable to shareholders of record on a date in
October, November or December of that preceding year. Each fund intends
generally to make distributions sufficient to avoid imposition of the 4% excise
tax.
Hedging transactions. If a fund engages in hedging transactions, including
hedging transactions in options, futures contracts, and straddles, or other
similar transactions, it will be subject to special tax rules (including
mark-to-market, straddle, wash sale, and short sale rules), the effect of which
may be to accelerate income to the fund, defer losses to the fund, cause
adjustments in the holding periods of the fund's securities, or convert
short-term capital losses into long-term capital losses. These rules could
therefore affect the amount, timing and character of distributions to
shareholders. Each fund will endeavor to make any available elections pertaining
to such transactions in a manner believed to be in the best interests of the
fund.
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Under the 30% gross income test described above (see "Taxation of the funds"), a
fund will be restricted in selling assets held or considered under Code rules to
have been held for less than three months, and in engaging in certain hedging
transactions (including hedging transactions in options and futures) that in
some circumstances could cause certain fund assets to be treated as held for
less than three months.
Certain of each fund's hedging activities (including its transactions, if any,
in foreign currencies or foreign currency-denominated instruments) are likely to
produce a difference between its book income and its taxable income. If a fund's
book income exceeds its taxable income, the distribution (if any) of such excess
will be treated as (i) a dividend to the extent of the fund's remaining earnings
and profits (including earnings and profits arising from tax-exempt income),
(ii) thereafter as a return of capital to the extent of the recipients's basis
in the shares, and (iii) thereafter as a gain from the sale or exchange of a
capital asset. If a fund's book income is less than its taxable income, the fund
could be required to make distributions exceeding book income to qualify as a
regulated investment company that is accorded special tax treatment.
Return of capital distributions. If a fund makes a distribution to shareholders
in excess of its current and accumulated "earnings and profits" in any taxable
year, the excess distribution will be treated as a return of capital to the
extent of the shareholder's tax basis in his or her shares, and thereafter as
capital gain. A return of capital is not taxable, but it reduces a shareholder's
tax basis in his or her shares, thus reducing any loss or increasing any gain on
a subsequent taxable disposition by the shareholder of his or her shares.
Securities issued or purchased at a discount. Each 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 made after applying
any available capital loss carryovers. The amounts and expiration dates of any
capital loss carryovers available to each of the funds are shown in Note 1 of
their respective financial statements included in this SAI or incorporated by
reference into this SAI.
Foreign currency-denominated securities and related hedging transactions. With
respect to investment income and gains received by a fund from sources outside
the United States, such income and gains may be subject to foreign taxes which
are withheld at the source. The effective rate of foreign taxes to which a fund
will be subject depends on the specific countries in which its assets will be
invested and the extent of the assets invested in each such country and
therefore cannot be determined in advance. Each of the funds' transactions in
foreign currencies, foreign currency-denominated debt securities and certain
foreign currency options,
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futures contracts and forward contracts (and similar instruments) may give rise
to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
If more than 50% of a fund's assets at year end consists of the debt and equity
securities of foreign corporations, the fund may elect to permit shareholders to
claim a credit or deduction on their income tax returns for their pro rata
portion of qualified taxes paid by the fund to foreign countries. In such a
case, shareholders will include in gross income from foreign sources their pro
rata share of such taxes. A shareholder's ability to claim a foreign tax credit
or deduction in respect of foreign taxes paid by a fund may be subject to
certain limitations imposed by the Code, as a result of which a shareholder may
not get a full credit or deduction for the amount of such taxes. Shareholders
who do not itemize on their federal income tax returns may claim a credit (but
no deduction) for such foreign taxes.
Investment by a fund in "passive foreign investment companies' could subject the
fund to a U.S. federal income tax or other charge on the proceeds from the sale
of its investment in such a company; however, this tax can be avoided by making
an election to mark such investments to market annually or to treat the passive
foreign investment company as a "qualified electing fund."
A "passive foreign investment company" is any foreign corporation: (i) 75
percent or 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.
Sale of shares. The sale of fund shares may give rise to a gain or loss. In
general, any gain or loss realized upon a taxable disposition of shares will be
treated as long-term capital gain or loss if the shares have been held for more
than 12 months, and otherwise as short-term capital gain or loss. However, if a
shareholder sells shares at a loss within six months of purchase, any loss will
be disallowed for Federal income tax purposes to the extent of any
exempt-interest dividends received on such shares. In addition, any loss (not
already disallowed as provided in the preceding sentence) realized upon a
taxable disposition of shares held for six months or less will be treated as
long-term, rather than short-term, to the extent of any long-term capital gain
distributions received by the shareholder with respect to the shares. All or a
portion of any loss realized upon a taxable disposition of fund shares will be
disallowed if other shares of the same fund are purchased within 30 days before
or after the disposition. In such a case, the basis of the newly purchased
shares will be adjusted to reflect the disallowed loss.
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Shares purchased through tax qualified plans. Special tax rules apply to
investments through defined contribution plans and other tax-qualified plans.
Shareholders should consult their tax adviser to determine the suitability of
shares of a fund as an investment through such plans and the precise effect of
an investment on their particular tax situation.
Backup withholding. Each fund generally is required to withhold and remit to the
U.S. Treasury 31% of the taxable dividends and other distributions paid to any
individual shareholder who fails to furnish the fund with a correct taxpayer
identification number (TIN), who has under-reported dividends or interest
income, or who fails to certify to the fund that he or she is not subject to
such withholding. Shareholders who fail to furnish their correct TIN are subject
to a penalty of $50 for each such failure unless the failure is due to
reasonable cause and not wilful neglect. An individual's taxpayer identification
number is his or her social security number.
Certain Investment Practices
Set forth below is additional information about the investment practices in
which each fund may invest. This information supplements the information
provided in the Prospectus.
Options on Securities
Writing covered options. A 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 the 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.
A fund may write only covered options, which means that, so long as the 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, a 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, a 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. A 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
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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, a 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, a 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. A 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, a 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, a 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 a 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 a fund were to write
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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 a 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 a 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
its normal 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 a 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, a 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,
a fund as purchaser or writer of an option will be locked
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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, it may prohibit indefinitely the
exercise of put options. A fund, as holder of such a put option, could lose its
entire investment if the prohibition remained in effect until the put option's
expiration.
Foreign-traded options are subject to many of the same risks presented by
internationally-traded securities. In addition, because of time differences
between the United States and various foreign countries, and because different
holidays are observed in different countries, foreign options markets may be
open for trading during hours or on days when U.S. markets are closed. As a
result, option premiums may not reflect the current prices of the underlying
interest in the United States.
Over-the-counter ("OTC") options purchased by a fund and assets held to cover
OTC options written by the fund may, under certain circumstances, be considered
illiquid securities for purposes of any limitation on the fund's ability to
invest in illiquid securities.
Futures Contracts and Related Options
Subject to applicable law, and unless otherwise specified in the Prospectus, a
fund may invest without limit in the types of futures contracts and related
options identified in the Prospectus for hedging and non-hedging purposes, such
as to manage the effective duration of the fund's portfolio or as a substitute
for direct investment. A financial futures contract sale creates an obligation
by the seller to deliver the type of financial instrument called for in the
contract in a specified delivery month for a stated price. A financial futures
contract purchase creates an obligation by the purchaser to take delivery of the
type of financial instrument called for in the contract in a specified delivery
month at a stated price. The specific instruments delivered or taken,
respectively, at settlement date are not determined until on or near that date.
The determination is made in accordance with the rules of the exchange on which
the futures contract sale or purchase was made. Futures contracts are traded in
the United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the 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
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price of the initial sale, the seller realizes a loss. If a 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, he 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, a 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, 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 a 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 in order to reduce or eliminate a hedge position then
currently held by the fund. A 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.
Options on futures contracts. A fund may purchase and write call and put options
on futures contracts it may buy or sell and enter into closing transactions with
respect to such options to terminate existing positions. Options on future
contracts give the purchaser the right in return for the premium paid to assume
a position in a futures contract at the specified option exercise price at any
time during the period of the option. A 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
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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 a 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
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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 a 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
-18-
<PAGE>
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.
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, a 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 a 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
-19-
<PAGE>
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.
Currency forward and futures contracts. A forward foreign currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract as agreed by
the parties, at a price set at the time of the contract. In the case of a
cancelable forward contract, the holder has the unilateral right to cancel the
contract at maturity by paying a specified fee. The contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades. A
foreign currency futures contract is a standardized contract for the future
delivery of a specified amount of a foreign currency at a price set at the time
of the contract. Foreign currency futures contracts traded in the United States
are designed by and traded on exchanges regulated by the CFTC, such as the New
York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency futures
contracts in certain respects. For example, the maturity date of a forward
contract may be any fixed number of days from the date of the contract agreed
upon by the parties, rather than a predetermined date in a given month. Forward
contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, a fund either may 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
-20-
<PAGE>
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, a fund would continue to be required to
make daily cash payments of variation margin.
Foreign currency options. In general, options on foreign currencies operate
similarly to options on securities and are subject to many of the risks
described above. Foreign currency options are traded primarily in the
over-the-counter market, although options on foreign currencies are also listed
on several exchanges. Options are traded not only on the currencies of
individual nations, but also on the European Currency Unit ("ECU"). The ECU is
composed of amounts of a number of currencies, and is the official medium of
exchange of the European Community's European Monetary System.
The 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
a 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.
-21-
<PAGE>
Determination of Net Asset Value
Each fund determines the net asset value of its shares at least once each week
as of the close of business on the last day on which the New York Stock Exchange
is open, and on such other days as may be required by its Dividend Reinvestment
Plan. Net asset value is determined by dividing the value of all assets of a
fund (including accrued interest and dividends), less all liabilities (including
accrued expenses), by the total number of shares outstanding.
Securities for which market quotations are readily available are valued at
prices which, in the opinion of Putnam Management, most nearly represent the
market value 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 securities are stated 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, 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 a 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 a 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 a fund'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,
-22-
<PAGE>
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 a fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value following procedures
approved by the Trustees.
Officers (Age)
In addition to the officers of the funds identified in the Prospectus, the
individuals listed below serve as the indicated officers of both the Master Fund
and the Government Fund:
Charles E. Porter (58), Executive Vice President. Managing Director of Putnam
Investments, Inc. and Putnam Management.
Patricia C. Flaherty (50), Senior Vice President. Senior Vice President of
Putnam Investments, Inc. and Putnam Management.
William N. Shiebler (55), Vice President. Director and Senior Managing Director
of Putnam Investments, Inc. President and Director of Putnam Mutual Funds.
Gordon H. Silver (50), Vice President. Director and Senior Managing Director of
Putnam Investments, Inc. and Putnam Management.
John R. Verani (58), Vice President. Senior Vice President of Putnam
Investments, Inc. and Putnam Management.
Paul M. O'Neil (44), Vice President. Vice President of Putnam Investments, Inc.
and Putnam Management.
John D. Hughes (62), Senior Vice President and Treasurer.
Beverly Marcus (53), Clerk and Assistant Treasurer.
The mailing address of each of the officers of the funds is One Post Office
Square, Boston, Massachusetts 02109. The principal occupations of the officers
for the last five years have been with the employers shown above, although in
some cases they have held different positions with such employers.
The Agreement and Declaration of Trust of each of the funds provide that each of
the funds will indemnify its officers against liabilities and expenses incurred
in connection with litigation
-23-
<PAGE>
in which they may be involved because of their offices with the respective
funds, except if it is determined in the manner specified in the Agreement and
Declaration of Trust that they have not acted in good faith in the reasonable
belief that their actions were in the best interest of the respective funds or
that such indemnification would relieve any officer of any liability to the
respective funds or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his or her duties. Each of the
funds, at its expense, provides liability insurance for the benefit of its
officers.
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, MA 02109 are the
independent accountants for the Master Fund, 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 for the Master Fund. Price Waterhouse LLP, 160 Federal Street, Boston,
MA 02110, are the independent accountants for the Government Fund, providing
audit services, tax return reviews and other tax consulting services and
assistance and consultation in connection with the review of various Securities
and Exchange Commission filings for the Government Fund. The Report of
Independent Accountants, financial highlights and financial statements included
in the Master Fund's Annual Report for the fiscal year ended September 30, 1996,
filed electronically on December 2, 1996 (File No. 811-5498), and the financial
highlights and financial statements included in the Master Fund's Semi-Annual
Report for the six months ended March 31, 1997, filed electronically on June 2,
1997 (File No. 811-5498), are incorporated by reference into this SAI. The
Report of Independent Accountants, financial highlights and financial statements
included in the Government Fund's Annual Report for the fiscal year ended
November 30, 1996, filed electronically on January 28, 1997 (File No. 811-5556),
and the financial highlights and financial statements included in the Government
Fund's Semi-Annual Report for the six months ended May 31, 1997, filed
electronically on July 23, 1997 (File No. 811-5556), are also incorporated by
reference into this SAI. The audited financial statements for the Master Fund
and the Government Fund incorporated by reference into the SAI have been so
included and incorporated in reliance upon the reports of Coopers & Lybrand
L.L.P. and Price Waterhouse LLP, respectively, given on their authority as
experts in auditing and accounting.
-24-
<PAGE>
Putnam Master Intermediate Income Trust
and
Putnam Intermediate Government Income Trust
Proforma Combining Financial Statements
(Unaudited)
The accompanying unaudited proforma combining investment portfolio and statement
of assets and liabilities assumes that the exchange described in the next
paragraph occurred as of March 31, 1997 and the unaudited proforma combining
statements of operations for the twelve months ended March 31, 1997 presents the
results of operations of Putnam Master Intermediate Income Trust as if the
combination with Putnam Intermediate Government Income Trust had been
consummated at April 1, 1996. These historical statements have been derived from
Master Intermediate Income Trust's and Intermediate Government Income Trust's
books and records utilized in calculating daily net asset value at March 31,
1997, and for the twelve month period then ended.
The proforma statements give effect to the proposed transfer of all assets of
Intermediate Government Income Trust to Master Intermediate Income Trust in
exchange for the assumption by Master Intermediate Income Trust of all of the
liabilities of Intermediate Government Income Trust and for a number of Master
Intermediate Income Trust's shares equal in value to the value of the net assets
of Intermediate Government Income Trust transferred to Master Intermediate
Income Trust. Under generally accepted accounting principles, the historical
cost of investment securities will be carried forward to the surviving entity
and the results of operations of Master Intermediate Income Trust for
pre-combining periods will not be restated. The proforma statement of operations
does not reflect the expenses of either fund in carrying out its obligations
under the Agreement and Plan of Reorganization.
The unaudited proforma combining statements should be read in conjunction with
the separate financial statements of Master Intermediate Income Trust and
Intermediate Government Income Trust incorporated by reference in this statement
of additional information.
<PAGE>
Master Intermediate Income Trust
Notes to Proforma Combining Statements
(Unaudited)
March 31, 1997
The proforma adjustments to these proforma financial statements are comprised of
the following:
A) Elimination and reduction of duplicative expenses as a result of the merger.
B) $200,000 relates to proxy costs which will be borne by the Intermediate
Government Income Trust. $170,000 relates to SEC filing fees which will be borne
by Master Intermediate Income Trust. The other $90,000 relates to legal and
accounting related merger costs will be allocated ratably between the two funds
upon consummation of the merger.
C) Issuance of Master Intermediate Income Trust shares to the holders of shares
of Intermediate Government Income Trust.
<PAGE>
Putnam Master Intermediate Income Trust
<TABLE>
<CAPTION>
Pro Forma Combining Statement of Assets and Liabilities Master Intermediate
March 31, 1997 (Unaudited) Intermediate Government Pro Forma Pro Forma
Assets Income Trust Income Trust Adjustments Combined
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments in securities, at value
(identified cost $340,856,013, $559,218,309, and $900,074,322) $ 333,255,977 $ 543,960,795 $ -- $ 877,216,772
- ----------------------------------------------------------------------------------------------------------------------------------
Cash 718,957 177 -- 719,134
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 5,344,598 7,369,124 -- 12,713,722
- ----------------------------------------------------------------------------------------------------------------------------------
Receivable for securities sold 1,845,152 -- -- 1,845,152
- ----------------------------------------------------------------------------------------------------------------------------------
Receivable for open forward currency contracts 476,502 1,054,397 -- 1,530,899
- ----------------------------------------------------------------------------------------------------------------------------------
Receivable for closed forward currency contracts 229,379 481,518 -- 710,897
==================================================================================================================================
Total assets 341,870,565 552,866,011 -- 894,736,576
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,919,499 3,220,181 -- 5,139,680
- ----------------------------------------------------------------------------------------------------------------------------------
Payable for securities purchased 11,963,719 17,456,387 -- 29,420,106
- ----------------------------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager 600,531 309,056 -- 909,587
- ----------------------------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees 81,584 126,035 -- 207,619
- ----------------------------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees 5,787 11,267 -- 17,054
- ----------------------------------------------------------------------------------------------------------------------------------
Payable for administrative services 5,766 2,892 -- 8,658
- ----------------------------------------------------------------------------------------------------------------------------------
Payable for open forward currency contracts 922,331 1,862,154 -- 2,784,485
- ----------------------------------------------------------------------------------------------------------------------------------
Payable for closed forward currency contracts 561,231 1,486,303 -- 2,047,534
- ----------------------------------------------------------------------------------------------------------------------------------
Other accrued expenses 75,465 61,824 460,000 (b) 597,289
==================================================================================================================================
Total liabilities 16,135,913 24,536,099 460,000 41,132,012
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets $ 325,734,652 $ 528,329,912 $ (460,000) $ 853,604,564
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets $ 325,734,652 $ 528,329,912 $ (460,000)(b) $ 853,604,564
Shares outstanding 38,448,138 64,333,052 (1,986,663)(c) 100,794,527
Net asset value per share $8.47 $8.21 $8.47
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Putnam Master Intermediate Income Trust
<TABLE>
<CAPTION>
Pro Forma Combining Statement of Operations
Twelve Months ended March 31, 1997 (Unaudited) Master Intermediate
Intermediate Government Pro Forma Pro Forma
Investment income: Income Trust Income Trust Adjustments Combined
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest (net of foreign tax of $26,643, $257,183 and 283,826,
respectively) $ 28,089,399 $ 39,190,106 $ -- $ 67,279,505
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends 186,590 -- -- 186,590
===================================================================================================================================
Total investment income 28,275,989 39,190,106 -- 67,466,095
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------------------------------------------
Compensation of Manager 2,474,673 4,027,593 (306,004)(A) 6,196,262
- -----------------------------------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees 394,441 584,592 -- 979,033
- -----------------------------------------------------------------------------------------------------------------------------------
Compensation of Trustees 21,397 32,027 (18,424)(A) 35,000
- -----------------------------------------------------------------------------------------------------------------------------------
Administrative services 7,305 11,797 (6,102)(A) 13,000
- -----------------------------------------------------------------------------------------------------------------------------------
Reports to shareholders 49,913 61,345 (81,150)(A) 30,108
- -----------------------------------------------------------------------------------------------------------------------------------
Auditing 57,853 50,868 (43,721)(A) 65,000
- -----------------------------------------------------------------------------------------------------------------------------------
Legal 35,324 9,395 -- 44,719
- -----------------------------------------------------------------------------------------------------------------------------------
Postage 156,345 123,679 -- 280,024
- -----------------------------------------------------------------------------------------------------------------------------------
Exchange listing fees 28,340 46,351 -- 74,691
- -----------------------------------------------------------------------------------------------------------------------------------
Other 5,168 17,360 -- 22,528
===================================================================================================================================
Total expenses 3,230,759 4,965,007 (455,401) 7,740,365
- -----------------------------------------------------------------------------------------------------------------------------------
Expense reduction (60,904) (87,126) 26,838 (121,192)
===================================================================================================================================
Net expenses 3,169,855 4,877,881 (428,563) 7,619,173
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 25,106,134 34,312,225 428,563 59,846,922
===================================================================================================================================
Net realized gain on investments 7,964,122 914,514 -- 8,878,636
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized gain on written options 53,950 125,450 179,400
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (630,594) (2,647,564) -- (3,278,158)
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities in
foreign currencies during the period (126,071) (103,393) -- (229,464)
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (8,267,917) (10,283,113) -- (18,551,030)
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss on investments (1,006,510) (11,994,106) -- (13,000,616)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 24,099,624 $ 22,318,119 $ 428,563 $ 46,846,306
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Proforma Combining Investment Portfolio
Master Intermediate Income Trust and Intermediate
Intermediate Government Income Trust Master Government
March 31, 1997 (Unaudited) Intermediate Income Trust Income Trust Proforma Combined
Corporate Bonds and Notes PRINCIPAL (35.7%)* PRINCIPAL (--%)* PRINCIPAL (13.6%)
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advertising (0.1%) (--%)
- ------------------------------------------------------------------------------------------------------------------------------------
Adams Outdoor Advertising, Ltd. sr. notes 10 3/4s, 2006 $ 50,000 52,750 $ 50,000 52,750
Lamar Advertising Co. sr. sub. notes 9 5/8s, 2006 250,000 248,750 250,000 248,750
------------- -------------
301,500 301,500
Aerospace and Defense (0.6%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
Alliant Techsystems, Inc. sr. sub. notes 11 3/4s, 2003 250,000 267,500 250,000 267,500
BE Aerospace sr. sub. notes Ser. B, 9 7/8s, 2006 465,000 476,625 465,000 476,625
Howmet Corp. sr. sub. notes 10s, 2003 300,000 319,500 300,000 319,500
Moog, Inc. sr. sub. notes Ser. B, 10s, 2006 100,000 103,750 100,000 103,750
Sequa Corp. sr. sub. notes 9 3/8s, 2003 600,000 594,000 600,000 594,000
Tracor, Inc. 144A sr. sub. notes 8 1/2s, 2007 185,000 177,600 185,000 177,600
------------- -------------
1,938,975 1,938,975
Agriculture (0.5%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
PMI Holdings Corp. sub. disc. deb. stepped-coupon Ser. B, zero %
(11 1/2s, 9/1/00), 2005 (STP) 1,380,000 1,007,400 1,380,000 1,007,400
Premium Standard Farms, Inc. sr. sec. notes 11s, 2003 (PIK) 787,737 827,124 787,737 827,124
------------- -------------
1,834,524 1,834,524
Apparel (0.2%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Anvil Knitwear Inc. 144A sr. notes 10 7/8s, 2007 165,000 160,050 165,000 160,050
GFSI, Inc. 144A sr. sub. notes 9 5/8s, 2007 85,000 82,875 85,000 82,875
Guess Jeans, Inc. sr. sub. notes 9 1/2s, 2003 125,000 125,000 125,000 125,000
William Carter Co. 144A sr. sub. notes 12s, 2008 170,000 171,700 170,000 171,700
------------- -------------
539,625 539,625
Automotive (0.1%) (--%)
- ------------------------------------------------------------------------------------------------------------------------------------
CSK Auto, Inc. 144A sr. sub. notes 11s, 2006 230,000 232,300 230,000 232,300
DRA Inc. 144A notes 11 1/2s, 2004 (PIK) 210,000 212,100 210,000 212,100
Titan Wheel International Inc. sr. sub. notes 8 3/4s, 2007 60,000 59,100 60,000 59,100
------------- -------------
503,500 503,500
Automotive Parts (0.3%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
A.P.S. Inc. company guaranty 11 7/8s, 2006 300,000 301,500 300,000 301,500
Aftermarket Technology Corp. sr. sub. notes 12s, 2004 248,000 272,800 248,000 272,800
Aftermarket Technology Corp. sr. sub. notes 12s, 2004 150,000 165,000 150,000 165,000
Harvard Industries Inc. sr. notes 11 1/8s, 2005 250,000 128,750 250,000 128,750
Key Plastics Corp. 144A sr. sub. notes 10 1/4s, 2007 210,000 208,425 210,000 208,425
------------- -------------
1,076,475 1,076,475
Banks (0.5%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
First Nationwide Holdings 144A sr. sub. notes 10 5/8s, 2003 1,540,000 1,632,400 1,540,000 1,632,400
Beverages (0.1%) (--%)
- ------------------------------------------------------------------------------------------------------------------------------------
0
Canandaigua Wine Co. sr. sub. notes Ser. C, 8 3/4s, 2003 310,000 311,550 310,000 311,550
Broadcasting (1.9%) (0.7%)
- ------------------------------------------------------------------------------------------------------------------------------------
Affinity Group sr. sub. notes 11 1/2s, 2003 250,000 262,500 250,000 262,500
Capstar Broadcasting 144A sr. disc. notes stepped-coupon zero %
(12 3/4s, 2/1/02), 2009 (STP) 605,000 320,650 605,000 320,650
Chancellor Broadcasting Corp. sr. sub. notes 9 3/8s, 2004 100,000 98,000 100,000 98,000
Comcast UK Cable, Ltd. deb. stepped-coupon zero %
(11.2s, 11/15/00), 2007 (Bermuda) (STP) 750,000 487,500 750,000 487,500
Commodore Media, Inc. sr. sub. notes stepped-coupon 7 1/2s,
(13 1/4s, 5/1/98), 2003 (STP) 1,150,000 1,230,500 1,150,000 1,230,500
Granite Broadcasting Corp. sr. sub. notes 9 3/8s, 2005 100,000 94,000 100,000 94,000
Jacor Communications, Inc. company guaranty 9 3/4s, 2006 120,000 120,000 120,000 120,000
New City Broadcasting Corp. sr. sub. notes 11 3/8s, 2003 250,000 277,500 250,000 277,500
Pegasus Media & Communications notes Ser. B, 12 1/2s, 2005 200,000 216,000 200,000 216,000
Petracom Holdings, Inc. notes stepped-coupon zero %
(17 1/2s, 8/1/98), 2003 (STP) 929,000 891,840 929,000 891,840
SFX Broadcasting, Inc. sr. sub. notes Ser. B, 10 3/4s, 2006 700,000 731,500 700,000 731,500
Spanish Broadcasting Systems 144A sr. notes 11s, 2004 210,000 208,950 210,000 208,950
TCI Satellite Entertainment 144A sr. sub. notes 10 7/8s, 2007 220,000 191,400 220,000 191,400
Telemedia Broadcasting Corp. 144A deb. stepped-coupon 3.8s,
(16s, 6/15/99), 2004 (STP) 1,248,000 1,135,680 1,248,000 1,135,680
TV Azteca SA 144A sr. notes 10 1/2s, 2007 (Mexico) 95,000 92,562 95,000 92,562
------------- -------------
6,358,582 6,358,582
Building Products (0.6%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
Cemex S.A. 144A bonds 12 3/4s, 2006 (Mexico) 400,000 449,000 400,000 449,000
Schuller International Corp. sr. notes 10 7/8s, 2004 650,000 705,250 650,000 705,250
Southdown, Inc. sr. sub. notes Ser. B, 10s, 2006 500,000 535,000 500,000 535,000
Waxman Industries Inc. sr. notes stepped-coupon Ser. B, zero %
(12 3/4s, 6/1/99), 2004 (STP) 248,000 208,320 248,000 208,320
------------- -------------
<PAGE>
1,897,570 1,897,570
Building and Construction (1.5%) (0.6%)
- ------------------------------------------------------------------------------------------------------------------------------------
Atrium Companies Inc. 144A sr. sub. notes 10 1/2s, 2006 225,000 222,750 225,000 222,750
Continental Homes Holding Corp. sr. notes 10s, 2006 115,000 119,025 115,000 119,025
Inter-City Products sr. notes 9 3/4s, 2000 695,000 712,375 695,000 712,375
NVR, Inc. sr. notes 11s, 2003 1,000,000 1,062,500 1,000,000 1,062,500
Presley Cos. sr. notes 12 1/2s, 2001 500,000 486,250 500,000 486,250
Scotsman Group, Inc. sr. secd. notes 9 1/2s, 2000 800,000 804,000 800,000 804,000
Terex Corp. sr. notes Ser. B, 13 1/4s, 2002 1,100,000 1,210,000 1,100,000 1,210,000
Webb (Del E.) Corp. sr. sub. notes 9 3/4s, 2008 110,000 110,000 110,000 110,000
------------- -------------
4,726,900 4,726,900
Buses (0.2%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
MCII Holdings sec. notes stepped-coupon zero %
(12s, 11/15/98), 2002 (STP) 855,000 733,163 855,000 733,163
Business Services (0.3%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Express, Inc. sr. sub. notes Ser. B, 9 1/8s, 2004 500,000 482,500 500,000 482,500
Intertek Finance PLC 144A sr. sub. notes 10 1/4s, 2006
(United Kingdom) 190,000 192,375 190,000 192,375
Pierce Leahy Corp. sr. sub. notes 11 1/8s, 2006 185,000 199,800 185,000 199,800
------------- -------------
874,675 874,675
Cable Television (3.0%) (1.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Adelphia Communications Corp. sr. notes 9 1/2s, 2004 (PIK) 1,891,737 1,607,976 1,891,737 1,607,976
American Telecasting, Inc. sr. disc. notes stepped-coupon zero %
(14 1/2s, 8/15/00), 2005 (STP) 500,000 150,000 500,000 150,000
Charter Communications International, Inc. disc.
notes stepped-coupon Ser. B, zero % (14s, 3/15/01), 2007 (STP) 600,000 363,000 600,000 363,000
Comcast Corp. sr. sub. notes 9 3/8s, 2005 1,000,000 1,000,000 1,000,000 1,000,000
Diamond Cable Communication Co. sr. disc. notes stepped-coupon
zero % (11 3/4s, 12/15/00), 2005 (STP) 700,000 448,000 700,000 448,000
Diamond Cable Communication Co. 144A sr. disc. notes
stepped-coupon zero % (10 3/4s, 2/15/02), 2007 (STP) 1,000,000 540,000 1,000,000 540,000
Falcon Holdings Group, Inc. sr. sub. notes 11s, 2003 (PIK) 1,403,116 1,220,711 1,403,116 1,220,711
Heartland Wireless Communications, Inc. 144A sr. notes 14s, 2004 480,000 216,000 480,000 216,000
International Cabletel, Inc. sr. notes stepped-coupon Ser. B,
zero % (11 1/2s, 2/01/01), 2006 (STP) 1,390,000 861,800 1,390,000 861,800
Lenfest Communications, Inc. sr. notes 8 3/8s, 2005 500,000 455,000 500,000 455,000
Marcus Cable Co. (L.P.) sr. sub. disc. notes stepped-coupon
zero % (13 1/2s, 8/1/99), 2004 (STP) 750,000 596,250 750,000 596,250
Telewest Communications PLC deb. stepped-coupon zero %
(11s, 10/1/00), 2007 (United Kingdom) (STP) 1,740,000 1,131,000 1,740,000 1,131,000
Tevecap S.A. 144A sr. notes 12 5/8s, 2004 (Brazil) 250,000 257,500 250,000 257,500
TV Filme, Inc. 144A sr. notes 12 7/8s, 2004 (Brazil) 115,000 117,366 115,000 117,366
UIH Australia/Pacific, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 5/15/01), 2006 (Australia) (STP) 1,260,000 655,200 1,260,000 655,200
Wireless One, Inc. sr. notes 13s, 2003 310,000 201,500 310,000 201,500
------------- -------------
9,821,303 9,821,303
Cellular Communications (2.1%) (0.8%)
- ------------------------------------------------------------------------------------------------------------------------------------
Call-Net Enterprises sr. disc. notes stepped-coupon zero %
(13 1/4s, 12/1/99), 2004 (STP) 285,000 237,263 285,000 237,263
Cencall Communications Corp. sr. disc. notes stepped-coupon
zero % (10 1/8s, 1/15/99), 2004 (STP) 1,380,000 952,200 1,380,000 952,200
Comunicacion Celular bonds stepped-coupon zero %
(13 1/8s, 11/15/00), 2003 (Colombia) 1,500,000 1,035,000 1,500,000 1,035,000
Dial Call Communications, Inc. sr. disc. notes
stepped-coupon zero % (12 1/4s, 4/15/99), 2004 (STP) 750,000 540,000 750,000 540,000
Intercel, Inc. sr. disc. notes stepped-coupon zero %
(12s, 5/1/01), 2006 (STP) 750,000 442,500 750,000 442,500
International Wireless Communications, Inc. sr. disc.
notes zero %, 2001 245,000 137,200 245,000 137,200
Millicom International Cellular S.A. sr. disc. notes
stepped-coupon zero % (13 1/2s, 6/1/01), 2006 (Luxembourg) (STP) 775,000 503,750 775,000 503,750
NEXTEL Communications, Inc. sr. disc. notes stepped-coupon
zero % (11 1/2s, 9/1/98), 2003 (STP) 1,045,000 815,100 1,045,000 815,100
Omnipoint Corp. sr. notes 11 5/8s, 2006 190,000 165,300 190,000 165,300
Omnipoint Corp. sr. notes Ser. A, 11 5/8s, 2006 210,000 174,300 210,000 174,300
Pricellular Wireless Corp. sr. disc. notes stepped-coupon
Ser. B, zero % (14s, 11/15/97), 2001 (STP) 1,200,000 1,224,000 1,200,000 1,224,000
Pricellular Wireless Corp. sr. notes 10 3/4s, 2004 500,000 506,250 500,000 506,250
------------- -------------
6,732,863 6,732,863
Chemicals (0.5%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
Acetex Corp. sr. notes 9 3/4s, 2003 (Canada) 1,000,000 980,000 1,000,000 980,000
Freedom Chemicals, Inc. sr. sub. notes 10 5/8s, 2006 105,000 109,200 105,000 109,200
ISP Holdings, Inc. 144A sr. notes 9 3/4s, 2002 500,000 520,000 500,000 520,000
Sterling Chemicals Holdings sr. disc. notes
stepped-coupon zero % (13 1/2s, 8/15/01), 2008 (STP) 185,000 113,775 185,000 113,775
------------- -------------
1,722,975 1,722,975
Computer Equipment (0.3%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Computervision Corp. sr. sub. notes 11 3/8s, 1999 1,000,000 1,037,500 1,000,000 1,037,500
Computer Services (0.2%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Unisys Corp. sr. notes 11 3/4s, 2004 545,000 569,525 545,000 569,525
Conglomerates (0.5%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
Axia, Inc. sr. sub. notes Ser. B, 11s, 2001 985,000 1,026,863 985,000 1,026,863
MacAndrews & Forbes Holdings, Inc. sub. deb. notes 13s, 1999 600,000 601,500 600,000 601,500
------------- -------------
1,628,363 1,628,363
Consumer Durable Goods (0.2%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Icon Fitness Corp. 144A sr. disc. notes stepped-coupon zero %
(14s, 11/15/01), 2006 (STP) 345,000 186,300 345,000 186,300
Remington Products Co. sr. sub. notes Ser. B, 11s, 2006 500,000 415,000 500,000 415,000
------------- -------------
601,300 601,300
<PAGE>
Consumer Products (0.1%) (--%)
- ------------------------------------------------------------------------------------------------------------------------------------
Interact Systems, Inc. 144A sr. notes stepped-coupon zero %
(14s, 8/1/99), 2003 (STP) 520,000 280,800 520,000 280,800
Consumer Services (0.7%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
Affinity Group Holdings 144A sr. notes 11s, 2007 375,000 373,125 375,000 373,125
Coinmach Corp. sr. notes Ser. B, 11 3/4s, 2005 1,582,000 1,748,110 1,582,000 1,748,110
------------- -------------
2,121,235 2,121,235
Containers (0.6%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
Innova S De R.L. 144A sr. notes 12 7/8s, 2007 (Mexico) 270,000 268,313 270,000 268,313
Ivex Packaging Corp. sr. sub. notes 12 1/2s, 2002 1,500,000 1,631,250 1,500,000 1,631,250
------------- -------------
1,899,563 1,899,563
Cosmetics (0.3%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Revlon Worldwide Corp. 144A sr. disc. notes zero %, 2001 1,415,000 877,300 1,415,000 877,300
Electric Utilities (1.3%) (0.5%)
- ------------------------------------------------------------------------------------------------------------------------------------
AES China Generating Co. sr. notes 10 1/8s, 2006 (China) 335,000 353,425 335,000 353,425
El Paso Electric Co. 1st mtge. Ser. D, 8.9s, 2006 1,000,000 1,042,450 1,000,000 1,042,450
Hidro Pierda Aguila 144A bonds 10 5/8s, 2001 (Argentina) 85,000 88,719 85,000 88,719
Midland Funding Corp. deb. Ser. A, 11 3/4s, 2005 1,950,000 2,214,908 1,950,000 2,214,908
Northeast Utilities System notes Ser. A, 8.58s, 2006 556,807 525,604 556,807 525,604
Northeast Utilities System notes Ser. B, 8.38s, 2005 153,333 146,665 153,333 146,665
------------- -------------
4,371,771 4,371,771
Electronics (0.4%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
Celestica International Ltd. 144A sr. sub. notes 10 1/2s, 2006
(India) 140,000 147,000 140,000 147,000
Cirent Semiconductor sr. sub. notes 10.22s, 2002 169,861 169,650 169,861 169,650
Cirent Semiconductor 144A sr. sub. notes 10.14s, 2004 170,559 170,346 170,559 170,346
International Semi-Tech. Corp. sr. secd. disc. notes
stepped-coupon zero % (11 1/2s, 8/15/00), 2003 (Canada) (STP) 1,350,000 688,500 1,350,000 688,500
Motors and Gears Inc. 144A sr. notes Ser. A, 10 3/4s, 2006 240,000 243,600 240,000 243,600
------------- -------------
1,419,096 1,419,096
Entertainment (0.4%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
Premier Parks, Inc. sr. notes Ser. A, 12s, 2003 1,000,000 1,100,000 1,000,000 1,100,000
Trump Holdings & Funding Corp. sr. notes 15 1/2s, 2005 275,000 310,750 275,000 310,750
------------- -------------
1,410,750 1,410,750
Environmental Control (0.1%) (--%)
- ------------------------------------------------------------------------------------------------------------------------------------
Allied Waste Industries, Inc. 144A sr. sub. notes 10 1/4s, 2006 250,000 255,000 250,000 255,000
Finance (--%) (--%)
- ------------------------------------------------------------------------------------------------------------------------------------
Owen Financial Corp. notes 11 7/8s, 2003 120,000 129,600 120,000 129,600
Financial Services (0.4%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
Aames Financial Corp. sr. notes 9 1/8s, 2003 260,000 254,800 260,000 254,800
Dollar Financial Group Inc. 144A sr. notes 10 7/8s, 2006 115,000 116,725 115,000 116,725
First Federal Financial Corp. notes 11 3/4s, 2004 500,000 510,000 500,000 510,000
Imperial Credit Industries, Inc. 144A sr. notes 9 7/8s, 2007 125,000 122,500 125,000 122,500
Ocwen Federal Bank FSB sub. deb. 12s, 2005 200,000 221,000 200,000 221,000
Outsourcing Solutions Inc. 144A sr. sub. notes 11s, 2006 125,000 130,625 125,000 130,625
------------- -------------
1,355,650 1,355,650
Food (0.7%) (0.3%)
- ------------------------------------------------------------------------------------------------------------------------------------
Del Monte Corp. notes 12 1/4s, 2002 (PIK) 654,000 712,860 654,000 712,860
Mafco, Inc. sr. sub. notes 11 7/8s, 2002 1,000,000 1,057,500 1,000,000 1,057,500
MBW Foods, Inc. 144A sr. sub. notes 9 7/8s, 2007 65,000 63,213 65,000 63,213
Specialty Foods Corp. sr. sub. notes 11 1/4s, 2003 (STP) 100,000 88,500 100,000 88,500
Specialty Foods Corp. sr. notes Ser. B, 10 1/4s, 2001 250,000 244,375 250,000 244,375
------------- -------------
2,166,448 2,166,448
Food Chains (0.9%) (0.3%)
- ------------------------------------------------------------------------------------------------------------------------------------
Southland Corp. deb. 4s, 2004 1,250,000 896,500 1,250,000 896,500
Stater Brothers sr. notes 11s, 2001 1,750,000 1,907,500 1,750,000 1,907,500
------------- -------------
2,804,000 2,804,000
Gaming Equipment (0.2%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Alliance Gaming Corp. sr. notes 12 7/8s, 2003 180,000 196,200 180,000 196,200
Argosy Gaming Co. 1st mtge. 13 1/4s, 2004 650,000 568,750 650,000 568,750
------------- -------------
764,950 764,950
Health Care (0.4%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
IMED Corp. sr. sub. notes 9 3/4s, 2006 340,000 350,200 340,000 350,200
Tenet Healthcare Corp. sr. notes 8s, 2005 465,000 452,213 465,000 452,213
Tenet Healthcare Corp. sr. sub. notes 8 5/8s, 2007 465,000 453,375 465,000 453,375
------------- -------------
<PAGE>
1,255,788 1,255,788
Health Care Services (--%) (--%)
- ------------------------------------------------------------------------------------------------------------------------------------
Genesis Health Ventures, Inc. sr. sub. notes 9 1/4s, 2006 105,000 104,475 105,000 104,475
Hospital Management (0.8%) (0.3%)
- ------------------------------------------------------------------------------------------------------------------------------------
Columbia/HCA Healthcare Corp. med. term notes 8.05s, 2006 2,000,000 2,066,820 2,000,000 2,066,820
Paracelsus Healthcare Corp. sr. sub. notes 10s, 2006 700,000 658,000 700,000 658,000
------------- -------------
2,724,820 2,724,820
Insurance (0.2%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Reliance Group Holdings, Inc. sr. sub. deb. 9 3/4s, 2003 500,000 515,000 500,000 515,000
Lodging (0.4%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
HMH Properties, Inc. sr. notes Ser. B, 9 1/2s, 2005 750,000 761,250 750,000 761,250
Host Marriott Corp. sr. notes Ser. B, 9 1/2s, 2005 500,000 507,500 500,000 507,500
------------- -------------
1,268,750 1,268,750
Media (--%) (--%)
- ------------------------------------------------------------------------------------------------------------------------------------
RBS Participacoes S.A. 144A company guaranty 11s, 2007 (Brazil) 130,000 129,194 130,000 129,194
Medical Supplies and Devices (0.4%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
Graphic Controls Corp. sr. sub. notes Ser. A, 12s, 2005 1,000,000 1,087,500 1,000,000 1,087,500
Wright Medical Technology, Inc. sr. secd. notes Ser. B,
10 3/4s, 2000 350,000 353,500 350,000 353,500
------------- -------------
1,441,000 1,441,000
Metals and Mining (0.3%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Acindar Industria Argentina de Aceros S.A. bonds 11 1/4s, 2004
(Argentina) 90,000 90,450 90,000 90,450
Continental Global Group 144A sr. notes Ser. A, 11s, 2007 210,000 208,950 210,000 208,950
NL Industries, Inc. sr. notes 11 3/4s, 2003 200,000 210,000 200,000 210,000
Renco Metals, Inc. sr. notes 11 1/2s, 2003 190,000 197,600 190,000 197,600
Royal Oak Mines, Inc. company guaranty Ser. B, 11s, 2006
(Canada) 175,000 176,750 175,000 176,750
Weirton Steel Co. sr. notes 11 3/8s, 2004 250,000 250,000 250,000 250,000
------------- -------------
1,133,750 1,133,750
Motion Picture Distribution (0.7%) (0.3%)
- ------------------------------------------------------------------------------------------------------------------------------------
Act III Theatres, Inc. sr. sub. notes 11 7/8s, 2003 1,100,000 1,193,500 1,100,000 1,193,500
Cinemark Mexico USA notes Ser. B, 13s, 2003 (Mexico) (PIK) 527,700 509,231 527,700 509,231
Cinemark Mexico USA notes Ser. D, 13s, 2003 (Mexico) (PIK) 35,500 34,258 35,500 34,258
Cinemark USA, Inc. notes 9 5/8s, 2008 400,000 400,000 400,000 400,000
------------- -------------
2,136,989 2,136,989
Networking (0.3%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
CellNet Data Systems, Inc. sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 6/15/00), 2005 (STP) 1,735,000 1,101,725 1,735,000 1,101,725
Oil and Gas (1.6%) (0.6%)
- ------------------------------------------------------------------------------------------------------------------------------------
Abraxas Petroleum Corp. 144A sr. notes Ser. B, 11 1/2s, 2004 185,000 192,863 185,000 192,863
CIA Naviera Perez Companc S.A. 144A bonds 9s, 2004 (Argentina) 115,000 113,850 115,000 113,850
Cliffs Drilling Co. company guaranty Ser. B, 10 1/4s, 2003 140,000 144,200 140,000 144,200
Costilla Energy, Inc. sr. notes 10 1/4s, 2006 65,000 68,250 65,000 68,250
Flores & Rucks, Inc. sr. sub. notes 9 3/4s, 2006 115,000 117,300 115,000 117,300
Kelley Oil & Gas Corp. sr. sub. notes Ser. B, 10 3/8s, 2006 160,000 164,800 160,000 164,800
Maxus Energy Corp. global notes 9 7/8s, 2002 750,000 776,250 750,000 776,250
Maxus Energy Corp. notes 9 1/2s, 2003 250,000 258,750 250,000 258,750
Parker Drilling Corp. sr. notes Ser. B, 9 3/4s, 2006 195,000 205,725 195,000 205,725
Texas Petrochemical Corp. sr. sub. notes 11 1/8s, 2006 100,000 105,500 100,000 105,500
Transamerican Refining Corp. 144A 15s, 1998 205,000 205,000 205,000 205,000
Transamerican Refining Corp. 1st mtge. stepped-coupon Ser. 1,
zero % (18.5s, 2/15/98), 2002 (STP) 1,000,000 915,000 1,000,000 915,000
TransTexas Gas Corp. sr. disc. notes stepped-coupon zero %
(13 1/4s, 12/16/01), 2003 (STP) 846,000 532,980 846,000 532,980
Transtexas Gas Corp. sr. secd. notes 11 1/2s, 2002 1,200,000 1,314,000 1,200,000 1,314,000
------------- -------------
5,114,468 5,114,468
Packaging and Containers (0.1%) (--%)
- ------------------------------------------------------------------------------------------------------------------------------------
Printpack, Inc. sr. notes Ser. B, 9 7/8s, 2004 145,000 147,175 145,000 147,175
US Can Corp. company guaranty Ser. B, 10 1/8s, 2006 115,000 119,600 115,000 119,600
------------- -------------
266,775 266,775
Paging (0.4%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
Mobile Telecommunications Tech. sr. notes 13 1/2s, 2002 1,000,000 940,000 1,000,000 940,000
Pronet, Inc. sr. sub. notes 11 7/8s, 2005 500,000 465,000 500,000 465,000
------------- -------------
1,405,000 1,405,000
Paper and Forest Products (1.5%) (0.6%)
- ------------------------------------------------------------------------------------------------------------------------------------
APP International Finance Co. notes 11 3/4s, 2005
(Netherlands) 500,000 532,500 500,000 532,500
Domtar, Inc. notes 8 3/4s, 2006 (Canada) 400,000 404,000 400,000 404,000
Florida Coast Paper LLC 1st mtge. Ser. B, 12 3/4s, 2003 670,000 686,750 670,000 686,750
Gaylord Container Corp. sr. sub. disc. deb. 12 3/4s, 2005 250,000 272,500 250,000 272,500
<PAGE>
Repap New Brunswick sr. notes 10 5/8s, 2005 (Canada) 1,500,000 1,500,000 1,500,000 1,500,000
Riverwood International Corp. company guaranty 10 7/8s, 2008 1,800,000 1,476,000 1,800,000 1,476,000
------------- -------------
4,871,750 4,871,750
Pharmaceuticals (0.2%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Twin Laboratories, Inc. company guaranty 10 1/4s, 2006 600,000 616,500 600,000 616,500
Publishing (0.1%) (--%)
- ------------------------------------------------------------------------------------------------------------------------------------
Hollinger International Publishing, Inc. company guaranty
9 1/4s, 2007 135,000 129,600 135,000 129,600
Hollinger International Publishing, Inc. company guaranty
8 5/8s, 2005 135,000 130,613 135,000 130,613
Sun Media Corp. 144A sr. sub. notes 9 1/2s, 2007 (Canada) 90,000 85,500 90,000 85,500
------------- -------------
345,713 345,713
Real Estate (0.1%) (--%)
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Hospitality Corp. 144A sr. sub. notes 9 3/4s, 2007 315,000 311,850 315,000 311,850
Recreation (2.6%) (1.0%)
- ------------------------------------------------------------------------------------------------------------------------------------
Arizona Charlies Corp. 1st mtge. Ser. B, 12s, 2000 (NON) 715,000 407,550 715,000 407,550
Capitol Queen Corp. 1st mtge. notes Ser. B, 12s, 2000
(In default) (NON) 260,000 65,000 260,000 65,000
Casino America, Inc. sr. notes 12 1/2s, 2003 485,000 465,600 485,000 465,600
Casino Magic Corp. 144A 1st mtge. 13s, 2003 215,000 208,013 215,000 208,013
Coast Hotels & Casinos, Inc. company guaranty Ser. B, 13s,
2002 400,000 450,000 400,000 450,000
Colorado Gaming & Entertainment Co. sr. notes 12s, 2003 (PIK) 370,300 366,597 370,300 366,597
Elsinore Corp. 144A exch. 1st mortgage 11 1/2s, 2000 513,970 493,411 513,970 493,411
Grand Casinos, Inc. 1st mtge. 10 1/8s, 2003 250,000 245,625 250,000 245,625
Grate Bay Property Funding Corp. 1st mtge. 10 7/8s, 2004 1,000,000 820,000 1,000,000 820,000
Harveys Casino Resorts sr. sub. notes 10 5/8s, 2006 150,000 162,000 150,000 162,000
Hollywood Casino Corp. sr. notes 12 3/4s, 2003 900,000 895,500 900,000 895,500
Lady Luck Gaming Corp. 1st mtge. 11 7/8s, 2001 1,200,000 1,152,000 1,200,000 1,152,000
Louisiana Casino Cruises Corp. 1st mtge. 11 1/2s, 1998 444,000 448,440 444,000 448,440
Mohegan Tribal Gaming Auth. sr notes Ser. B, 13 1/2s, 2002 750,000 986,250 750,000 986,250
PRT Funding Corp. sr. notes 11 5/8s, 2004 300,000 210,000 300,000 210,000
Trump A.C. 1st mtge. 11 1/4s, 2006 425,000 386,750 425,000 386,750
Trump Castle Funding Corp. notes 11 1/2s, 2000 594,000 594,000 594,000 594,000
------------- -------------
8,356,736 8,356,736
Restaurants (0.2%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
AmeriKing. Inc. sr. notes 10 3/4s, 2006 90,000 90,900 90,000 90,900
FRD Acquisition Co. sr. notes Ser. B, 12 1/2s, 2004 500,000 520,000 500,000 520,000
------------- -------------
610,900 610,900
Retail (1.0%) (0.4%)
- ------------------------------------------------------------------------------------------------------------------------------------
Guitar Center Management Co. 144A sr. notes 11s, 2006 650,000 695,500 650,000 695,500
K mart Corp. med. term notes 7.55s, 2004 1,250,000 1,133,638 1,250,000 1,133,638
Loehmanns, Inc. sr. notes 11 7/8s, 2003 330,000 353,100 330,000 353,100
Mothers Work, Inc. sr. notes 12 5/8s, 2005 600,000 624,000 600,000 624,000
Specialty Retailers, Inc. sr. sub. notes 11s, 2003 250,000 265,625 250,000 265,625
Supermercados Norte 144A bonds 10 7/8s, 2004 (Argentina) 135,000 131,288 135,000 131,288
------------- -------------
3,203,151 3,203,151
Semiconductors (0.1%) (--%)
- ------------------------------------------------------------------------------------------------------------------------------------
Fairchild Semiconductor Corp. 144A sr. sub. notes 10 1/8s, 2007 215,000 213,925 215,000 213,925
Shipping (0.2%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Newport News Shipbuilding sr. notes 8 5/8s, 2006 125,000 125,938 125,000 125,938
Transport Maritima Mexicana S.A. de CV sr. notes 10s, 2006
(Mexico) 500,000 490,000 500,000 490,000
------------- -------------
615,938 615,938
Specialty Consumer Products (0.2%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Genesco, Inc. sr. notes 10 3/8s, 2003 160,000 164,800 160,000 164,800
Sassco Fashions Ltd. 144A notes 12 3/4s, 1999 395,000 398,950 395,000 398,950
------------- -------------
563,750 563,750
Steel (0.5%) (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
AK Steel Corp. sr. notes 9 1/8s, 2006 220,000 216,700 220,000 216,700
Ispat Mexicana, S.A. 144A notes 10 3/8s, 2001 (Mexico) 1,250,000 1,253,125 1,250,000 1,253,125
------------- -------------
1,469,825 1,469,825
Supermarkets (0.2%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Quality Food Centers, Inc. 144A sr. sub. notes 8.7s, 2007 145,000 139,925 145,000 139,925
Ralphs Grocery Co. sr. notes 10.45s, 2004 500,000 517,500 500,000 517,500
------------- -------------
657,425 657,425
Telecommunications (2.5%) (1.0%)
- ------------------------------------------------------------------------------------------------------------------------------------
American Communication Services, Inc. sr. disc. notes
stepped-coupon zero % (12 3/4s, 4/1/01), 2006 (STP) 1,180,000 649,000 1,180,000 649,000
Brooks Fiber Properties, Inc. sr. disc. notes stepped-coupon
zero % (11 7/8s, 11/1/01), 2006 (STP) 290,000 172,550 290,000 172,550
Brooks Fiber Properties, Inc. sr. disc. notes stepped-coupon
zero % (10 7/8s, 3/1/01), 2006 (STP) 425,000 263,500 425,000 263,500
<PAGE>
Dobson Communications Corp. 144A sr. notes 11 3/4s, 2007 285,000 285,713 285,000 285,713
Fonorola, Inc. sr. notes 12 1/2s, 2002 (Canada) 250,000 279,375 250,000 279,375
Frontiervision Operating Partners L.P. sr. sub. notes 11s, 2006 140,000 138,600 140,000 138,600
GST Telecommunications,Inc. company guaranty stepped-coupon
zero % (13 7/8s, 15/15/00), 2005 (STP) 1,002,000 631,260 1,002,000 631,260
Hyperion Telecommunication Corp. sr. disc. notes stepped-coupon
Ser. B, zero % (13s, 4/15/01), 2003 (STP) 770,000 419,650 770,000 419,650
ICG Holdings, Inc. sr. disc. notes stepped-coupon zero %
(13 1/2s, 9/15/00), 2005 (STP) 1,260,000 844,200 1,260,000 844,200
Intermedia Communication, Inc. sr. notes Ser. B, 13 1/2s, 2005 700,000 789,250 700,000 789,250
International Cabletel, Inc. 144A sr. notes 10s, 2007 675,000 641,250 675,000 641,250
Metrocall, Inc. sr. sub. notes 10 3/8s, 2007 750,000 600,000 750,000 600,000
Nextlink Communications, Inc. sr. notes 12 1/2s, 2006 605,000 614,075 605,000 614,075
Orbcomm Global Capital Corp. sr. notes Ser. B, 14s, 2004 525,000 519,750 525,000 519,750
Teleport Communications Group Inc. sr. disc. notes
stepped-coupon zero % (11 1/8s, 7/1/01), 2007 (STP) 500,000 335,000 500,000 335,000
Winstar Communications, Inc. 144A sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 1,300,000 767,000 1,300,000 767,000
Winstar Equipment Corp. 144A company guaranty 12 1/2s, 2004 210,000 205,275 210,000 205,275
------------- -------------
8,155,448 8,155,448
Telephone Services (0.2%) (0.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Globo Communicacoes 144A company guaranty 10 1/2s, 2006 400,000 404,000 400,000 404,000
McLeod, Inc. 144A sr. disc. notes stepped-coupon zero %
(10 1/2s, 3/1/02), 2007 (STP) 455,000 250,250 455,000 250,250
------------- -------------
654,250 654,250
Textiles (0.7%) (0.3%)
- ------------------------------------------------------------------------------------------------------------------------------------
Foamex (L.P.) Capital Corp. sr. sub. deb. 11 7/8s, 2004 750,000 791,250 750,000 791,250
Glenoit Corp. 144A sr. sub. notes 11s, 2007 105,000 104,344 105,000 104,344
Polysindo Inernational Eka company guaranty 13s, 2001
(Indonesia) 1,000,000 1,120,000 1,000,000 1,120,000
Polysindo International Finance company guaranty 11 3/8s, 2006
(Indonesia) 395,000 423,638 395,000 423,638
------------- -------------
2,439,232 2,439,232
------------- -------------
Total Corporate Bonds and Notes (cost $108,904,497, $-- and
$108,904,497) $116,383,558 $116,383,558
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Foreign Government Bonds and Notes PRINCIPAL (25.8%) PRINCIPAL (32.7%) PRINCIPAL (30.1%)
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARS Argentina (Republic of) deb. Ser. A, 6 1/4s, 2019 4,035,200 $ 3,606,460 4,035,200 3,606,460
AUD Australia (Government of) notes 8 3/4s, 2001 4,530,000 $ 3,721,524 3,780,000 3,105,377 8,310,000 6,826,901
BRC Brazil (Republic of) deb. Ser. RG, 6 7/8s, 2006 4,210,000 3,746,900 4,210,000 3,746,900
CAD Canada (Government of) bonds 7s, 2006 1,850,000 1,361,807 4,550,000 3,349,310 6,400,000 4,711,117
DKK Denmark (Government of) bonds 8s, 2006 11,140,000 1,904,824 25,845,000 4,419,226 36,985,000 6,324,050
DKK Denmark (Government of) notes 8s, 2001 11,460,000 1,986,547 11,460,000 1,986,547
FRF France Treasury notes 7s, 2000 48,106,000 9,256,399 118,547,000 22,810,426 166,653,000 32,066,825
FRF France Treasury notes 5 1/2s, 2001 39,030,000 7,136,598 120,540,000 22,040,624 159,570,000 29,177,222
FRF France Treasury bill 4 1/2s, 1998 29,110,000 5,224,740 30,120,000 5,406,017 59,230,000 10,630,757
DEM Germany (Unity Fund) bonds 8s, 2002 18,995,000 12,795,558 18,995,000 12,795,558
DEM Germany (Federal Republic of) notes 8s, 2002 7,915,000 5,331,763 7,915,000 5,331,763
DEM Germany (Federal Republic of) bonds Ser. 95,
7 3/8s, 2005 5,375,000 3,542,176 5,375,000 3,542,176
DEM Germany (Federal Republic of) bonds Ser. 95,
6 7/8s, 2005 2,260,000 1,446,211 2,260,000 1,446,211
DEM Germany (Federal Republic of) bonds Ser. 96,
6 1/4s, 2006 3,935,000 2,413,592 29,525,000 18,109,606 33,460,000 20,523,198
DEM Germany (Federal Republic of) bonds Ser. 118,
5 1/4s, 2001 9,575,000 5,855,832 9,575,000 5,855,832
DEM Germany (Federal Republic of) bonds Ser. 121,
4 3/4s, 2001 18,045,000 10,777,463 33,170,000 19,810,961 51,215,000 30,588,424
USD Russian Ministry of Finance notes 9 1/4s, 2001 2,655,000 2,575,350 3,770,000 3,656,900 6,425,000 6,232,250
ZAR South Africa (Republic of) bonds 12s, 2005 9,185,000 1,783,374 13,315,000 2,585,261 22,500,000 4,368,635
GBP United Kingdom Treasury bonds 7 1/2s, 2006 6,665,000 10,821,294 8,065,000 13,094,334 14,730,000 23,915,628
GBP United Kingdom Treasury bonds 7s, 2002 3,080,000 4,973,866 7,610,000 12,289,325 10,690,000 17,263,191
GBP United Kingdom Treasury bonds 6 3/4s, 2004 7,830,000 12,263,346 7,830,000 12,263,346
GBP United Kingdom Treasury bonds 6s, 1999 2,480,000 3,982,033 6,125,000 9,834,658 8,605,000 13,816,691
----------- ------------ ------------
Total Foreign Government Bonds and Notes
(cost $92,374,237, $179,870,349 and $272,244,586) $84,095,393 $172,924,289 $257,019,682
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL (23.4%) PRINCIPAL (57.2%) PRINCIPAL (44.3%)
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Agency Obligations (3.0%) (3.2%) (3.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Association 8 1/2s, TBA,
April 16, 2027 $4,050,000 $ 4,149,954 $ 4,050,000 $ 4,149,954
Federal National Mortgage Association 7s, TBA,
April 16, 2027 5,970,000 5,706,902 $17,560,000 16,786,131 23,530,000 22,493,033
----------- ------------ ------------
9,856,856 16,786,131 26,642,987
U.S. Government Agency Mortgage Pass-Through Certificates (16.6%) (40.7%) (31.5%)
- ------------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
8 1/2s, Dwarf, with various due dates from
March 1, 2006 to March 1, 2006 5,959 6,168 5,959 6,168
8s, with various due dates from July 1, 2026 to
October 1, 2026 5,493,898 5,514,503 5,493,898 5,514,503
7 1/2s, with various due dates from May 1, 2025 to
February 1, 2027 10,611,800 10,412,841 46,098,089 45,233,645 56,709,889 55,646,486
7s, with various due dates from April 1, 2023 to
May 1, 2026 4,315,917 4,125,718 18,207,295 17,404,900 22,523,212 21,530,618
6 1/2s, September 1, 2002 262,275 256,560 262,275 256,560
Government National Mortgage Association
8s, with various due dates from July 15, 2023 to
February 15, 2027 6,632,115 6,659,050 51,684,627 51,895,150 58,316,742 58,554,200
7 1/2s, with various due dates from February 15, 2023
to February 15, 2027 16,192,136 15,870,178 61,055,069 59,814,968 77,247,205 75,685,146
7s, with various due dates from July 15, 2025 to
June 15, 2026 12,072,570 11,514,219 42,259,279 40,304,889 54,331,849 51,819,108
----------- ------------ ------------
54,102,677 214,910,112 269,012,789
<PAGE>
U.S. Treasury Obligations (3.8%) (13.3%) (9.7%)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
12 3/8s, May 15, 2004 15,000,000 19,549,200 15,000,000 19,549,200
11 5/8s, November 15, 2004 20,000,000 25,496,800 20,000,000 25,496,800
10 3/4s, August 15, 2005 3,000,000 3,713,910 3,000,000 3,713,910
U.S. Treasury Notes
9 1/8s, May 15, 1999 15,020,000 15,789,775 15,020,000 15,789,775
6 1/2s, October 15, 2006 5,359,000 5,192,389 9,819,000 9,513,727 15,178,000 14,706,116
5 5/8s, November 30, 1998 3,475,000 3,434,829 3,475,000 3,434,829
----------- ------------ ------------
12,341,128 70,349,502 82,690,630
----------- ------------ ------------
Total U.S. Government and Agency Obligation
(cost $78,109,995, $310,337,599 and $388,447,594) $76,300,661 $302,045,745 $378,346,406
- ------------------------------------------------------------------------------------------------------------------------------------
Units PRINCIPAL (1.8%) PRINCIPAL (--%) PRINCIPAL (0.7%)
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Advanced Radio Telecommunications units 14s, 2007 210 $ 228,900 210 $ 228,900
Australis Media, Ltd. units stepped-coupon zero %
(15 3/4s, 5/15/00), 2003 (Australia) (STP) 600 348,000 600 348,000
Celcaribe S.A. 144A units stepped-coupon zero %
(13 1/2s, 3/15/98), 2004 (STP) 95 244,500 95 1,244,500
Colt Telecommunications Group PLC units stepped-coupon
zero % (12s, 12/15/01), 2006 (United Kingdom) (STP) 1,010 638,825 1,010 638,825
Diva Systems Corp. 144A units stepped-coupon zero %
(13s, 5/15/01), 2006 (STP) 475 279,656 475 279,656
Esat Holdings Ltd. 144A units stepped-coupon zero %
(12 1/2s, 2/1/02), 2007 (STP) 255 142,800 255 142,800
Fitzgerald Gaming Co. units 13s, 2002 1,035 714,150 1,035 714,150
Globalstar L.P. Capital 144A units 11 3/8s, 2004 225 219,375 225 219,375
Ionica PLC units stepped-coupon zero % (15s, 5/1/02),
2007 (United Kingdom) (STP) 170 75,650 170 75,650
Mccaw Intl. Ltd. 144A units zero % (13s, 4/15/02),
2007 (STP) 930 465,000 930 465,000
Nextlink Communications 144A pfd. units 14s, 2009 (PIK) 7,220 317,680 7,220 317,680
Real Time Data 144A units stepped-coupon zero %
(13 1/2s, 8/15/01), 2006 (STP) 380 201,400 380 201,400
RSL Communications, Ltd. 144A units 12 1/4s, 2006 615 630,375 615 630,375
Spanish Broadcasting System 144A 14 1/4s, 2005 265 259,700 265 259,700
Wireless One Inc. units stepped-coupon zero %
(13 1/2s, 8/1/01), 2006 (STP) 200 60,000 200 60,000
----------- ------------
Total Units ($5,585,519, $-- and $5,585,519) $5,826,011 $ 5,826,011
- ------------------------------------------------------------------------------------------------------------------------------------
Brady Bonds PRINCIPAL (1.6%) PRINCIPAL (--%) PRINCIPAL (0.6%)
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Argentina (Republic of) deb. 6 3/4s, 2005 $2,832,$00 2,531,458 2,832,400 $ 2,531,458
Brazil (Republic of) deb. Ser. EI, 6 7/8s, 2006 2,855,000 2,540,950 2,855,000 2,540,950
----------- ------------
Total Brady Bonds ($5,066,243, $-- and $5,066,243) $5,072,408 $ 5,072,408
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Backed Securities PRINCIPAL (1.1%) PRINCIPAL (--%) PRINCIPAL (0.4%)
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Chemical Master Credit Card Trust Ser. 95-2,
Class A, 6.23s, 2003 $1,096,000 $1,075,450 1,096,000 $ 1,075,450
Contimortgage Home Equity Loan Trust Ser. 97-1,
Class M2, 7.67s, 2025 350,000 346,500 350,000 346,500
Sears Credit Account Master Trust Ser. 95-5,
Class A, 6.05s, 2004 2,255,000 2,147,888 2,255,000 2,147,888
----------- ------------
Total Asset-Backed Securities ($3,726,304, $-- $3,726,304) $3,569,838 $ 3,569,838
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stocks NUMBER OF (1.0%) NUMBER OF (--%) NUMBER OF (0.4%)
SHARES VALUE SHARES VALUE SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
AmeriKing, Inc. (NON) 150 $ 7,500 150 $ 7,500
Applause Enterprises, Inc. (NON)(RES) 12,730 38,190 12,730 38,190
Axia Inc. 144A (NON) 2,955 147,750 2,955 147,750
Chesapeake Energy Corp. (NON) 12,124 253,089 12,124 253,089
Elsinore Corp. (NON) 16,807 1,849 16,807 1,849
Exide Corp. 5,000 81,875 5,000 81,875
Grand Union Co. (NON) 53,023 188,894 53,023 188,894
Lady Luck Gaming Corp. (NON) 35,327 61,822 35,327 61,822
NEXTEL Communications, Inc. Class A (NON) 20,000 267,500 20,000 267,500
PMI Holdings Corp. 144A (NON) 464 116,000 464 116,000
Premium Holdings L.P. (NON) 327 1,635 327 1,635
PSF Holdings LLC Class A (NON) 71,533 1,895,625 71,533 1,895,625
Specialty Foods Acquisition Corp. (NON) 10,050 2,513 10,050 2,513
Terex Corp. Rights expiration date 5/15/02 4,400 22,000 4,400 22,000
----------- ------------
Total Common Stocks (cost $8,273,343, $--
and $8,273,343) $3,086,242 $ 3,086,242
- ------------------------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations PRINCIPAL (1.1%) PRINCIPAL (--%) PRINCIPAL (0.4%)
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Citicorp Mtge. Securities, Inc. Ser. 92-10,
Class M, 8s, 2022 1,000,000 $1,002,220 1,000,000 $ 1,002,220
Resolution Trust Corp. Ser. 94-1, Class A2A,
7 3/4s, 2029 441,093 442,196 441,093 442,196
Resolution Trust Corp. Ser. 94-1, Class M1,
7.2021s, 2029 1,305,659 1,277,914 1,305,659 1,277,914
Rural Housing Trust Ser. 87-1, Class D,
6.33s, 2026 793,451 770,402 793,451 770,402
----------- ------------
Total Collateralized Mortgage Obligations
(cost $3,304,794, $-- and $3,304,794) $3,492,732 $ 3,492,732
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stocks NUMBER OF (0.8%) NUMBER OF (--%) NUMBER OF (0.3%)
SHARES VALUE SHARES VALUE SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
American Radio Systems Corp. 144A $11.375 pfd. 800 $ 78,400 800 $ 78,400
AmeriKing, Inc. $3.25 pfd. (PIK) 6,000 159,000 6,000 159,000
Cablevision Systems Ser. M, $11.125 dep. shs. pfd. 11,716 1,045,653 11,716 1,045,653
Chancellor Radio Broadcasting 144A $12.00 pfd. 2,800 273,000 2,800 273,000
Diva Systems Corp. Ser. C, $6.00 pfd. 9,600 79,200 9,600 79,200
Fitzgeralds Gaming Co. $3.75 pfd. 11,765 200,005 11,765 200,005
Fresenius Medical Care Ser. D, $9.00 trust pfd. 340 333,200 340 333,200
<PAGE>
SFX Broadcasting, Inc. Ser. E, $12.625 pfd. (PIK) 5,600 543,200 5,600 543,200
----------- ------------
Total Preferred Stocks (cost $2,929,577, $--
and $2,929,577) $2,711,658 $ 2,711,658
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Bonds and Notes PRINCIPAL (0.6%) PRINCIPAL (--%) PRINCIPAL (0.2%)
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Argosy Gaming cv. sub. notes 12s, 2001 $ 350,000 217,000 350,000 $ 217,000
GST Telecommunications, Inc. cv. sr. disc. notes
stepped-coupon zero % (13 7/8s, 15/15/00), 2005 (STP) 164,000 114,800 164,000 114,800
Integrated Device Technology, Inc. cv. sub. notes
5 1/2s, 2002 290,000 234,175 290,000 234,175
National Semiconductor Corp. cv. deb. 6 1/2s, 2002 125,000 125,781 125,000 125,781
Pricellular Wireless Corp. 144A cv. sub. notes
stepped-coupon zero % (10 3/4s, 8/15/00) (STP) 900,000 765,000 900,000 765,000
VLSI Technology, Inc. cv. sub. notes 8 1/4s, 2005 60,000 56,625 60,000 56,625
Winstar Communications. Inc. 144A cv. sr. disc. notes
stepped-coupon zero % (14s, 10/15/00), 2005 (STP) 650,000 403,000 650,000 403,000
----------- ------------
Total Convertible Bonds and Notes (cost $1,660,860,
$-- and $1,660,860) $1,916,381 $ 1,916,381
- ------------------------------------------------------------------------------------------------------------------------------------
Warrants EXPIRATION NUMBER OF (0.2%) NUMBER OF (--%) NUMBER OF (0.1%)
DATE WARRANTS VALUE WARRANTS VALUE WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Becker Gaming Corp. 144A 11/15/00 32,500 $ 325 32,500 $ 325
Capital Gaming International, Inc. 2/1/99 6,825 273 6,825 273
Cellnet Data Systems 144A 6/15/00 6,940 100,630 6,940 100,630
Comunicacion Cellular SA 144A (Colombia) (RES) 11/15/20 1,500 105,000 1,500 105,000
County Seat Holdings, Inc. 10/15/98 1,200 24 1,200 24
Fitzgerald Gaming Co. 144A 3/15/99 500 50 500 50
Hyperion Telecommunications 144A 4/15/01 770 23,100 770 23,100
IFINT Diversified Holdings 144A 00/00/00 3,770 60,320 3,770 60,320
Intelcom Group Inc. 144A 10/15/05 9,768 136,752 9,768 136,752
Interact Systems Inc. 144A 8/1/03 520 130 520 130
Intermedia Communications 144A 6/1/00 700 14,000 700 14,000
International Wireless Communications Holdings 8/15/01 245 2 245 2
Louisiana Casino Cruises, Inc. 144A 12/1/98 1,470 73,500 1,470 73,500
NEXTEL Communications Inc. 4/25/99 750 8 750 8
Pagemart, Inc. 144A 12/31/03 1,840 11,960 1,840 11,960
Petracom Holdings, Inc. 144A 2/1/03 1,400 9,975 1,400 9,975
SDW Hldgs Corp. Ser. B 144A 12/15/06 3,700 48,100 3,700 48,100
Sterling Chemicals Holdings 8/15/08 185 6,475 185 6,475
Telemedia Broadcasting Corp. 144A 4/1/04 21 15,923 21 15,923
Wright Medical Technology, Inc. 144A 7/1/00 100 12,028 100 12,028
----------- ------------
Total Warrants (cost $728,724, $-- and $728,724) $ 618,575 $ 618,575
- ------------------------------------------------------------------------------------------------------------------------------------
Purchased Options Outstanding EXPIRATION DATE/ NUMBER OF (--%) NUMBER OF (0.1%) NUMBER OF (0.1%)
STRIKE PRICE CONTRACTS VALUE CONTRACTS VALUE CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
JPY U.S. Dollars in exchange for
Japanese Yen (Call) Apr. 97/125 JPY 4,700,000,000 $ 23,970 9,800,000,000 $49,980 14,500,000,000 $ 73,950
DEM U.S. Dollars in exchange for
Deutschemarks (Call) May 97/1.692 DEM 14,100,000 114,210 29,700,000 240,570 43,800,000 354,780
---------- ------- ----------
Total Purchashed Options Outstanding (cost $147,580,
$310,150, and $457,730) $ 138,180 $290,550 $ 428,730
- ------------------------------------------------------------------------------------------------------------------------------------
Short-Term Investments PRINCIPAL (9.2%) PRINCIPAL (13.0%) PRINCIPAL (11.6%)
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Interest in $576,440,000 joint repurchase agreement
dated March 31, 1997 with S.B.C. Warburg Inc. due
April 1, 1997 with year with respect to various
U.S. Treasury obligations -- maturity value of
$30,044,340 for an effective yield of 6.40% $30,039,000 $ 30,044,340 $30,039,000 $ 30,044,340
====================================================================================================================================
Interest in $803,250,000 joint repurchase agreement dated March 31, 1997 with
UBS Securities due April 1, 1997 with year with respect to various U.S. Treasury
obligations -- maturity value of
$68,700,211 for an effective yield of 6.40% $68,688,000 $ 68,700,211 68,688,000 68,700,211
====================================================================================================================================
Total Short-Term Investments (cost $30,044,340,
$68,700,211 and $98,744,551) $ 30,044,340 $ 68,700,211 $ 98,744,551
====================================================================================================================================
Total Investments (cost $340,856,013, $559,218,309 and
$900,074,322) $333,255,977 $543,960,795 $877,216,772
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Percentages indicated are based on net assets as follows:
Master Intermediate Income Trust $325,734,652
Intermediate Government Income Trust $528,329,912
Proforma $853,604,564
(RES) Restricted excluding 144A securities, as to public resale.
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new
interest rate to be paid and the date the fund will begin receiving
interest at this rate.
(PIK) Income may be received in cash or additional securities at the discretion
of the issuer.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
TBA after the name of a security represents to be announced securities.
Master Intermediate Income Trust
Forward Currency Contracts to Buy at March 31, 1997
(aggregate face value $62,755,167)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------
Australian Dollars $ 2,764,799 $ 2,766,367 6/18/97 $ (1,568)
British Pounds 423,297 422,387 6/18/97 910
Canadian Dollars 5,649,315 5,746,577 6/18/97 (97,262)
Deutschemarks 23,070,482 22,867,298 6/18/97 203,184
Italian Lira 8,187,768 8,050,543 6/18/97 137,225
Japanese Yen 12,310,584 12,542,404 6/18/97 (231,820)
Spanish Peseta 4,782,769 4,766,190 6/18/97 16,579
Swedish Krona 307,079 303,735 6/18/97 3,344
Swiss Francs 5,284,666 5,289,666 6/18/97 (5,000)
- ----------------------------------------------------------------------------
$ 25,592
Intermediate Government Income Trust
Forward Currency Contracts to Buy at March 31, 1997
(aggregate face value $136,245,401)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------
Australian Dollars $10,881,594 $10,917,404 6/18/97 $(35,810)
British Pounds 3,089,710 3,083,066 6/18/97 6,644
Canadian Dollars 13,858,057 14,095,486 6/18/97 (237,429)
Danish Krone 1,524,572 1,518,187 6/18/97 6,385
Deutschemarks 39,762,066 39,363,605 6/18/97 398,461
Italian Lira 17,252,245 16,933,037 6/18/97 319,208
Japanese Yen 26,037,577 26,516,617 6/18/97 (479,040)
Spanish Peseta 10,072,143 10,044,251 6/18/97 27,892
Swedish Krona 1,405,458 1,390,151 6/18/97 15,307
Swiss Francs 12,371,890 12,383,597 6/18/97 (11,707)
- ----------------------------------------------------------------------------
$ 9,911
Proforma Combined
Forward Currency Contracts to Buy at March 31, 1997
(aggregate face value $199,000,568)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------
Australian Dollars $13,646,393 $13,683,771 6/18/97 $(37,378)
British Pounds 3,513,007 3,505,453 6/18/97 7,554
Canadian Dollars 19,507,372 19,842,063 6/18/97 (334,691)
Danish Krone 1,524,572 1,518,187 6/18/97 6,385
Deutschemarks 62,832,548 62,230,903 6/18/97 601,645
Italian Lira 25,440,013 24,983,580 6/18/97 456,433
Japanese Yen 38,348,161 39,059,021 6/18/97 (710,860)
Spanish Peseta 14,854,912 14,810,441 6/18/97 44,471
Swedish Krona 1,712,537 1,693,886 6/18/97 18,651
Swiss Francs 17,656,556 17,673,263 6/18/97 (16,707)
- ----------------------------------------------------------------------------
$35,503
Master Intermediate Income Trust
Forward Currency Contracts to Sell at March 31, 1997
(aggregate face value $56,939,955)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------
British Pounds $14,975,121 $14,596,161 6/18/97 $(378,960)
Danish Krone 1,129,636 1,124,906 6/18/97 (4,730)
Deutschemarks 16,929,483 16,792,127 6/18/97 (137,356)
French Francs 10,644,652 10,627,140 6/18/97 (17,512)
Japanese Yen 6,354,915 6,461,259 6/18/97 106,344
Swedish Krona 2,087,752 2,056,407 6/18/97 (31,345)
Swiss Francs 5,289,817 5,281,955 6/18/97 (7,862)
- ----------------------------------------------------------------------------
$(471,421)
Intermediate Government Income Trust
Forward Currency Contracts to Sell at March 31, 1997
(aggregate face value $114,972,551)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------
British Pounds $39,696,726 $38,890,071 6/18/97 $(806,655)
Canadian Dollars 2,206,803 2,247,781 6/18/97 40,978
Deutschemarks 16,203,519 16,083,518 6/18/97 (120,001)
French Francs 27,110,630 27,062,559 6/18/97 (48,071)
Japanese Yen 13,079,698 13,294,949 6/18/97 215,251
Swedish Krona 5,274,875 5,193,810 6/18/97 (81,065)
Swiss Francs 12,217,968 12,199,863 6/18/97 (18,105)
- ----------------------------------------------------------------------------
$(817,668)
Proforma Combined
Forward Currency Contracts to Sell at March 31, 1997
(aggregate face value $171,912,506)
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ----------------------------------------------------------------------------
British Pounds $54,671,847 $53,486,232 6/18/97 $(1,185,615)
Canadian Dollars 2,206,803 2,247,781 6/18/97 40,978
Danish Krone 1,129,636 1,124,906 6/18/97 (4,730)
Deutschemarks 33,133,002 32,875,645 6/18/97 (257,357)
French Francs 37,755,282 37,689,699 6/18/97 (65,583)
Japanese Yen 19,434,613 19,756,208 6/18/97 321,595
Swedish Krona 7,362,627 7,250,217 6/18/97 (112,410)
Swiss Francs 17,507,785 17,481,818 6/18/97 (25,967)
- ----------------------------------------------------------------------------
$(1,289,089)
<PAGE>
PUTNAM MASTER INTERMEDIATE INCOME TRUST
FORM N-14
PART C
OTHER INFORMATION
Item 15. Indemnification
The information required by this item is incorporated herein by reference to the
Registrant's Initial Registration Statement on Form N-2 under the Investment
Company Act of 1940 (File No. 811-5498).
Item 16. Exhibits
1. Agreement and Declaration of Trust dated May 10, 1988, as amended April
15, 1988 -- Exhibit 1.
2. By-Laws, as amended July 7, 1991 -- Exhibit 2.
3. Not applicable.
4. Agreement and Plan of Reorganization -- constitutes Exhibit A to Part A
hereof.
5a. Portions of Agreement and Declaration of Trust Relating to
Shareholders' Rights -- contained in Exhibit 1.
5b. Portions of By-Laws Relating to Shareholders' Rights -- contained in
Exhibit 2.
6. Management Contract dated July 11, 1991 -- Exhibit 3.
7. Not applicable.
8. Retirement Plan of the Trustees -- Incorporated by reference to
Registrant's Registration Statement on Form N-14 filed on June 2, 1997
(File No. 811-5498)
9. Custodian Agreement with Putnam Fiduciary Trust Company dated May 3,
1991, as amended July 13, 1992 -- Incorporated by reference to
Registrant's Registration Statement on Form N-14 filed on June 2, 1997
(File No. 811-5498)
10. Not applicable
11. Opinion of Ropes & Gray -- Incorporated by reference to
Registrant's Registration Statement on Form N-14 filed on June 2, 1997
(File No. 811-5498)
12. Internal Revenue Service Private Letter Ruling -- To be filed by
Amendment.
13a. Investor Servicing Agreement dated July 1, 1991 with Putnam Fiduciary
Trust Company -- Incorporated by reference to Registrant's Registration
Statement on Form N-14 filed on June 2, 1997 (File No. 811-5498)
13b. Dividend Reinvestment Plan Agency Agreement, dated October 15, 1993 --
Incorporated by reference to Registrant's Registration Statement on
Form N-14 filed on June 2, 1997 (File No. 811-5498)
14a. Consent of Price Waterhouse LLP Independent Accountants to the Putnam
Intermediate Government Income Trust -- Exhibit 4.
<PAGE>
14b. Consent of Coopers & Lybrand L.L.P. Independent Accountants to the
Putnam Master Intermediate Income Trust -- Exhibit 5.
15. Not applicable.
16a. Power of Attorney -- Incorporated by reference to Registrant's
Registration Statement on Form N-14 filed on June 2, 1997 (File No.
811-5498)
17. Not applicable.
Item 17. Undertakings
(a) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this Registration Statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) under the Act, the reoffering prospectus
will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other items of the applicable form.
(b) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (a) above will be filed as a part of an
amendment to this Registration Statement and will not be used until
the amendment is effective, and that, in determining any liability
under the Act, each post-effective amendment shall be deemed to be
a new Registration Statement for the securities offered therein,
and the offering of the securities at that time shall be deemed to
be the initial bona fide offering of them.
(c) The Registrant agrees to file by amendment to this Registration
Statement a copy of the Internal Revenue Service Private Letter
Ruling or an opinion of counsel supporting the tax consequences of
the proposed reorganization within a reasonable time after receipt
of such ruling or opinion.
- - - - - - - - - - - - - - - - - - - -
-2-
<PAGE>
NOTICE
A copy of the Agreement and Declaration of Trust, as amended, of Putnam Master
Intermediate Income Trust, is on file with the Secretary of State of The
Commonwealth of Massachusetts, and notice is hereby given that this Registration
Statement has been executed on behalf of the Registrant by an officer of the
Registrant as an officer and not individually, and the obligations of or arising
out of this Registration Statement are not binding upon any of the Trustees,
officers, or shareholders of the Registrant individually, but are binding only
upon the assets and property of the Registrant.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and The
Commonwealth of Massachusetts on the 28th day of July, 1997.
PUTNAM MASTER INTERMEDIATE INCOME TRUST
By: Gordon H. Silver, Vice President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form N-14 has been signed below by the following persons in the
capacities and on the date indicated.
Signature Title
/s/ George Putnam President and Chairman of the Trustees;
- ---------------------- Principal Executive Officer; Trustee
George Putnam
/s/ William F. Pounds Vice Chairman and Trustee
- ----------------------
William F. Pounds
/s/ John D. Hughes Principal Financial Officer; Senior Vice President;
- ---------------------- Treasurer
John D. Hughes
/s/ Paul G. Bucuvalas Principal Accounting Officer; Assistant Treasurer
- ----------------------
Paul G. Bucuvalas
/s/ Jameson A. Baxter Trustee
- ----------------------
Jameson A. Baxter
/s/ Hans H. Estin Trustee
- ----------------------
Hans H. Estin
/s/ John A. Hill Trustee
- ----------------------
John A. Hill
-3-
<PAGE>
/s/ Ronald J. Jackson Trustee
- ----------------------
Ronald J. Jackson
/s/ Elizabeth T. Kennan Trustee
- ----------------------
Elizabeth T. Kennan
/s/ Lawrence J. Lasser Trustee
- ----------------------
Lawrence J. Lasser
/s/ Robert E. Patterson Trustee
- ----------------------
Robert E. Patterson
/s/ Donald S. Perkins Trustee
- ----------------------
Donald S. Perkins
/s/ George Putnam, III Trustee
- ----------------------
George Putnam, III
/s/ A.J.C. Smith Trustee
- ----------------------
A.J.C. Smith
/s/ W. Nicholas Thorndike Trustee
- ----------------------
W. Nicholas Thorndike
By: /s/ Gordon H. Silver
-----------------------------
Gordon H. Silver, as
Attorney-in-Fact
July 28, 1997
-4-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
99.1 Agreement and Declaration of Trust dated May 10, 1988, as amended
April 15, 1988 -- Exhibit 1.
99.2 By-laws, as amended July 7, 1991 -- Exhibit 2.
99.3 Management Contract dated July 11, 1991 -- Exhibit 3.
99.4 Consent of Price Waterhouse LLP Independent Accountants to the Putnam
Intermediate Government Income Trust -- Exhibit 4.
99.5 Consent of Coopers Lybrand L.L.P. Independent Accountants to the
Putnam Master Intermediate Income Trust -- Exhibit 5.
EXHIBIT 1
PUTNAM MASTER INTERMEDIATE INCOME TRUST
AGREEMENT AND DECLARATION OF TRUST
AGREEMENT AND DECLARATION OF TRUST made at Boston, Massachusetts, this
10th day of March, 1988 by the Trustees hereunder, and by the holders of shares
of beneficial interest to be issued hereunder as hereinafter provided.
WITNESSETH that
WHEREAS, this Trust has been formed to carry on the business of an
investment company; and
WHEREAS, the Trustees have agreed to manage all property coming into
their hands as trustees of a Massachusetts voluntary association with
transferable shares in accordance with the provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold all
cash, securities and other assets, which they may from time to time acquire in
any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon
the following terms and conditions for the pro rata benefit of the holders from
time to time of Shares in this Trust as hereinafter set forth.
ARTICLE I
Name and Definitions
Name
Section 1. This Trust shall be known as "Putnam Master Intermediate
Income Trust", and the Trustees shall conduct the business of the Trust under
that name or any other name as they may from time to time determine.
Definitions
Section 2. Whenever used herein, unless otherwise required by the
context or specifically provided:
(a) The "Trust" refers to the Massachusetts business trust
established by this Agreement and Declaration of Trust, as amended from
time to time;
(b) "Trustees" refers to the Trustees of the Trust named
herein or elected in accordance with Article IV;
<PAGE>
(c) "Shares" means the equal proportionate transferable units
of interest into which the beneficial interest in the Trust shall be
divided from time to time;
(d) "Shareholder" means a record owner of Shares;
(e) The "1940 Act" refers to the Investment Company Act of
1940 and the Rules and Regulations thereunder, all as amended from time
to time;
(f) The terms "Affiliated Person", "Assignment", "Commission",
"Interested Person", "Principal Underwriter" and "Majority Shareholder
Vote" (the 67% or 50% requirement of the third sentence of Section
2(a)(42) of the 1940 Act, whichever may be applicable) shall have the
meanings given them in the 1940 Act;
(g) "Declaration of Trust" shall mean this Agreement and
Declaration of Trust as amended or restated from time to time; and
(h) "Bylaws" shall mean the Bylaws of the Trust as amended
from time to time.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to provide investors a managed investment
primarily in securities, debt instruments and other instruments and rights of a
financial character.
ARTICLE III
Shares
Division of Beneficial Interest
Section 1. The beneficial interest in the Trust shall at all times be
divided into Shares, without par value, each of which shall represent an equal
proportionate interest in the Trust with each other Share, none having priority
or preference over another. The number of Shares authorized shall be unlimited.
The Trustees may from time to time divide or combine the Shares into a greater
or lesser number without thereby changing the proportionate beneficial interests
in the Trust.
Ownership of Shares
Section 2. The ownership of Shares shall be recorded on the books of
the Trust or a transfer or similar agent. No certificates certifying the
ownership of Shares shall be issued except as the Trustees may otherwise
determine from time to time. The Trustees may make
-2-
<PAGE>
such rules as they consider appropriate for the issuance of Share certificates,
the transfer of shares and similar matters. The record books of the Trust as
kept by the trust or any transfer or similar agent, as the case may be, shall be
conclusive as to who are the Shareholders and as to the number of Shares held
from time to time by each Shareholder.
Investment in the Trust
Section 3. The Trustees shall accept investments in the Trust from such
persons and on such terms and for such consideration, which may consist of cash
or tangible or intangible property or a combination thereof, as they or the
Bylaws from time to time authorize.
No Preemptive Rights
Section 4. Shareholders shall have no preemptive or other right to
subscribe to any additional Shares or other securities issued by the Trust.
Status of Shares and Limitation of Personal Liability
Section 5. Shares shall be deemed to be personal property giving only
the rights provided in this instrument. Every Shareholder by virtue of having
become a Shareholder shall be held to have expressly assented and agreed to the
terms hereof and to have become a party hereto. The death of a shareholder
during the continuance of the Trust shall not operate to terminate the same nor
entitle the representative of any deceased Shareholder to an accounting or to
take any action in court or elsewhere against the Trust or the Trustees, but
only to the rights of said decedent under this Trust. Ownership of Shares shall
not entitle the Shareholder to any title in or to the whole or any part of the
Trust property or right to call for a partition or division of the same or for
an accounting, nor shall the ownership of shares constitute the Shareholders
partners. Neither the Trust nor the Trustees, nor any officer, employee or agent
of the Trust shall have any power to bind personally any Shareholder, nor except
as specifically provided herein to call upon any Shareholder for the payment of
any sum of money or assessment whatsoever other than such as the Shareholder may
at any time personally agree to pay.
ARTICLE IV
The Trustees
Election
Section 1. In each year beginning in 1988, at the annual meeting of
Shareholders or at any special meeting held in lieu thereof, or at any special
meeting held before 1988, the Shareholders shall fix the number of and elect a
Board of not less than three Trustees, each of whom shall serve until the next
annual meeting or special meeting in lieu thereof and until the election and
qualification of his or her successor, or until he or she sooner dies, resigns
or is removed. The initial Trustees, each of whom shall serve until the
-3-
<PAGE>
first meeting of Shareholders at which Trustees are elected and until his or her
successor is elected and qualified, or until he or she sooner dies, resigns or
is removed shall be George Putnam, Richard M. Cutler and Alla O'Brien and such
other persons as the Trustee or Trustees then in office shall, prior to any sale
of Shares pursuant to public offering, appoint.
Effect of Death, Resignation, etc. of a Trustee
Section 2. The death, declination, resignation, retirement, removal or
incapacity of the Trustees, or any one of them, shall not operate to annul the
Trust or to revoke any existing agency created pursuant to the terms of this
Declaration of Trust.
Powers
Section 3. Subject to the provisions of this Declaration of Trust, the
business of the Trust shall be managed by the Trustees, and they shall have all
powers necessary or convenient to carry out that responsibility. Without
limiting the foregoing, the Trustees may adopt Bylaws not inconsistent with this
Declaration of Trust providing for the conduct of the business of the Trust and
may amend and repeal them to the extent that such Bylaws do not reserve that
right to the Shareholders; they may fill vacancies in or add to their number,
and may elect and remove such officers and appoint and terminate such agents as
they consider appropriate; they may appoint from their own number, and
terminate, any one or more committees consisting of two or more Trustees,
including an executive committee which may, when the Trustees are not in
session, exercise some or all of the power and authority of the Trustees as the
Trustees may determine; they may employ one or more custodians of the assets of
the Trust and may authorize such custodians to employ subcustodians and to
deposit all or any part of such assets in a system or systems for the central
handling of securities, retain a transfer agent or a shareholder servicing
agent, or both, provide for the distribution of Shares by the Trust, through one
or more principal underwriters or otherwise, set record dates for the
determination of Shareholders with respect to various matters, and in general
delegate such authority as they consider desirable to any officer of the Trust,
to any committee of the Trustees and to any agent or employee of the Trust or to
any such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and
authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
write options on and lease the assets of the Trust except as otherwise
provided in Article IX, Section 5;
(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and
to execute and deliver proxies or powers of
-4-
<PAGE>
attorney to such person or persons as the Trustees shall deem proper,
granting to such person or persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
(d) To exercise powers and rights of subscription or otherwise
which in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating
any trust, whether in bearer, unregistered or other negotiable form, or
in the name of the Trustees or of the Trust or in the name of a
custodian, subcustodian or other depositary or a nominee or nominees or
otherwise;
(f) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer,
any security of which is or was held in the Trust; to consent to any
contract, lease, mortgage, purchase or sale of property by such
corporation or issuer, and to pay calls or subscriptions with respect
to any security held in the Trust;
(g) To join with other security holders in acting through a
committee, depositary, voting trustee or otherwise, and in that
connection to deposit any security with, or transfer any security to,
any such committee, depositary or trustee, and to delegate to them such
power and authority with relation to any security (whether or not so
deposited or transferred) as the Trustees shall deem proper, and to
agree to pay, and to pay, such portion of the expenses and compensation
of such committee, depositary or trustee as the Trustees shall deem
proper;
(h) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy, including
but not limited to claims for taxes;
(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(j) To borrow funds;
(k) To endorse or guarantee the payment of any notes or other
obligations of any person; to make contracts of guaranty or suretyship,
or otherwise assume liability for payment thereof; and to mortgage and
pledge the Trust property or any part thereof to secure any of or all
such obligations;
(l) To purchase and pay for entirely out of Trust property
such insurance as they may deem necessary or appropriate for the
conduct of the business, including without limitation, insurance
policies insuring the assets of the Trust and payment of
-5-
<PAGE>
distributions and principal on its portfolio investments, and insurance
policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisers or managers, principal underwriters, or
independent contractors of the Trust individually against all claims
and liabilities of every nature arising by reason of holding, being or
having held any such office or position, or by reason of any action
alleged to have been taken or omitted by any such person as
Shareholder, Trustee, officer, employee, agent, investment adviser or
manager, principal underwriter, or independent contractor, including
any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify
such person against such liability; and
(m) To pay pensions for faithful service, as deemed
appropriate by the Trustees, and to adopt, establish and carry out
pension, profit-sharing, share bonus, share purchase, savings, thrift
and other retirement, incentive and benefit plans, trusts and
provisions, including the purchasing of life insurance and annuity
contracts as a means of providing such retirement and other benefits,
for any or all of the Trustees, officers, employees and agents of the
Trust.
The Trustees shall not in any way be bound or limited by any present or
future law or custom in regard to investments by trustees. Except as otherwise
provided herein or from time to time in the Bylaws, any action to be taken by
the Trustees may be taken by a majority of the Trustees present at a meeting of
Trustees (a quorum being present), within or without Massachusetts, including
any meeting held by means of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
each other at the same time and participation by such means shall constitute
presence in person at a meeting, or by written consents of a majority of the
Trustees then in office.
Payment of Expenses by Trust
Section 4. The Trustees are authorized to pay or to cause to be paid
out of the assets of the Trust, all expenses, fees, charges, taxes and
liabilities incurred or arising in connection with the Trust, or in connection
with the management thereof, including, but not limited to, the Trustees'
compensation and such expenses and charges for the services of the Trust's
officers, employees, investment adviser or manager, principal underwriter,
auditor, counsel, custodian, transfer agent, Shareholder servicing agent, and
such other agents or independent contractors and such other expenses and charges
as the Trustees may deem necessary or proper to incur.
Ownership of Assets of the Trust
Section 5. Title to all of the assets of the Trust shall at all times
be considered as vested in the Trustees.
-6-
<PAGE>
Advisory, Management and Distribution
Section 6. Subject to a favorable Majority Shareholder Vote, the
Trustees may, at any time and from time to time, contract for exclusive or
nonexclusive advisory and/or management services with any corporation, trust,
association or other organization (the "Manager"), every such contract to comply
with such requirements and restrictions as may be set forth in the Bylaws; and
any such contract may contain such other terms interpretive of or in addition to
said requirements and restrictions as the Trustees may determine, including,
without limitation, authority to determine from time to time what investments
shall be purchased, held, sold or exchanged and what portion, if any, of the
assets of the Trust shall be held uninvested and to make changes in the Trust's
investments. The Trustees may also, at any time and from time to time, contract
with the Manager or any other corporation, trust, association or other
organization, appointing it exclusive or nonexclusive distributor or principal
underwriter for the Shares, every such contract to comply with such requirements
and restrictions as may be set forth in the Bylaws; and any such contract may
contain such other terms interpretive of or in addition to said requirements and
restrictions as the Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is
a shareholder, director, officer, partner, trustee, employee,
manager, adviser, principal underwriter or distributor or
agent of or for any corporation, trust, association, or other
organization, or of or for any parent or affiliate of any
organization, with which an advisory or management contract,
or principal underwriter's or distributor's contract, or
transfer, Shareholder servicing or other agency contract may
have been or may hereafter be made, or that any such
organization, or any parent or affiliate thereof, is a
Shareholder or has an interest in the Trust, or that
(ii) any corporation, trust, association or other organization with
which an advisory or management contract or principal
underwriter's or distributor's contract, or transfer,
Shareholder servicing or other agency contract may have been
or may hereafter be made also has an advisory or management
contract, or transfer, Shareholder servicing or other agency
contract with one or more other corporations, trusts,
associations, or other organizations, or has other business or
interests shall not affect the validity of any such contract
or disqualify any Shareholder, Trustee or officer of the Trust
from voting upon or executing the same or create any liability
or accountability to the Trust or its Shareholders.
-7-
<PAGE>
ARTICLE V
Shareholders' Voting Powers and Meetings
Voting Powers
Section 1. The Shareholders shall have power to vote only (i) for the
election of Trustees as provided in Article IV, Section 1, (ii) with respect to
any Manager as provided in Article IV, Section 6, (iii) with respect to any
termination of this Trust to the extent and as provided in Article IX, Section
4, (iv) with respect to any merger, consolidation or sale of assets of the Trust
to the extent and as provided in Article IV, Section 5, (v) with respect to any
conversion of the Trust as provided in Article IX, Section, 6, (vi) with respect
to any amendment of this Declaration of Trust to the extent and as provided in
Article IX, Section 9, (vii) to the same extent as the stockholders of a
Massachusetts business corporation as to whether or not court action, proceeding
or claim should or should not be brought or maintained derivatively or as a
class action on behalf of the Trust or the Shareholders, and (viii) with respect
to such additional matters relating to the Trust as may be required by this
Declaration of Trust, the Bylaws or any registration of the Trust with the
Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled to vote and each fractional Share shall
be entitled to a proportionate fractional vote. There shall be no cumulative
voting in the election of Trustees. Shares may be voted in person or by proxy. A
proxy with respect to Shares held in the name of two or more persons shall be
valid if executed by any one of them unless at or prior to exercise of the proxy
the Trust receives a specific written notice to the contrary from any one of
them. A proxy purporting to be executed by or on behalf of a Shareholder shall
be deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger. Until Shares are issued, the
Trustees may exercise all rights of Shareholders and may take any action
required by law, this Declaration of Trust or Bylaws to be taken by
Shareholders.
Voting Power and Meetings
Section 2. There shall be an annual meeting of the Shareholders on the
date fixed in the Bylaws at the office of the Trust in Boston, Massachusetts, or
at such other place as may be designated in the call thereof, which call shall
be made by the Trustees. In the event that such meeting is not held in any year
on the date fixed in the Bylaws, whether the omission be by oversight or
otherwise, a subsequent special meeting may be called by the Trustees and held
in lieu of the annual meeting with the same effect as though held on such date.
Special meetings may also be called by the Trustees from time to time for the
purpose of taking action upon any matter requiring the vote or authority of the
Shareholders as herein provided or upon any other matter deemed by the Trustees
to be necessary or desirable. Written notice of any meeting of Shareholders
shall be given or caused to be given by the Trustees by mailing such notice at
least seven days before such meeting, postage prepaid, stating the time, place
and purpose of the meeting, to each Shareholder entitled to vote at such meeting
at the
-8-
<PAGE>
Shareholder's address as it appears on the records of the Trust. If the Trustees
shall fail to call or give notice of any meeting of Shareholders for a period of
30 days after written application by Shareholders holding at least 25% of the
then outstanding shares entitled to vote at such meeting requesting a meeting to
be called for a purpose requiring action by the Shareholders as provided herein
or in the Bylaws, then Shareholders holding at least 25% of the then outstanding
shares entitled to vote at such meeting may call and give notice of such
meeting, and thereupon the meeting shall be held in the manner provided for
herein in case of call thereof by the Trustees. Notice of a meeting need not be
given to any Shareholder if a written waiver of notice, executed by him or her
before or after the meeting, is filed with the records of the meeting, or to any
Shareholder who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him or her.
Quorum and Required Vote
Section 3. A majority of Shares entitled to vote shall be a quorum for
the transaction of business at a Shareholders' meeting but any lesser number
shall be sufficient for adjournments. Any adjourned session or sessions may be
held, within a reasonable time after the date set for the original meeting,
without the necessity of further notice. Except when a larger vote is required
by any provision of this Declaration of Trust or the Bylaws, a majority of the
Shares voted shall decide any questions and a plurality shall elect a Trustee.
Action by Written Consent
Section 4. Any action taken by Shareholders may be taken without a
meeting if a majority of Shareholders entitled to vote on the matter (or such
larger proportion thereof as shall be required by any express provision of this
Declaration of Trust or the Bylaws) consent to the action in writing and such
written consents are filed with the records of the meetings of Shareholders.
Such consent shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
Additional Provisions
Section 5. The Bylaws may include further provisions of Shareholders'
votes and meetings and related matters.
ARTICLE VI
Distributions
The Trustees may each year, or more frequently if they so determine,
distribute to the Shareholders such amounts as the Trustees may determine. Any
amounts shall be distributed pro rata in proportion to the number of Shares held
by each Shareholder. Such distributions shall be made in cash or Shares or a
combination thereof as determined by the Trustees. Any
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such distribution paid in Shares will be paid at the net asset value thereof as
determined in accordance with the Bylaws.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Compensation
Section 1. The Trustees as such shall be entitled to reasonable
compensation from the Trust; they may fix the amount of their compensation.
Nothing herein shall in any way prevent the employment of any Trustee for
advisory, management, legal, accounting, investment banking or other services
and payment for the same by the Trust.
Limitation of Liability
Section 2. The Trustees shall not be responsible or liable in any event
for any neglect or wrongdoing of any officer, agent, employee, manager or
principal underwriter of the Trust, nor shall any Trustee be responsible for the
act or omission of any other Trustee, but nothing herein contained shall protect
any Trustee against any liability to which he or she would otherwise be subject
by reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever executed or done by or on behalf of the
trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been executed or done only in or with respect to
their or his or her capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
ARTICLE VIII
Indemnification
Trustees, Officers, etc.
Section 1. The Trust shall indemnify each of its Trustees and officers
including persons who serve at the Trust's request as directors, officers or
Trustees of another organization in which the Trust has any interest as a
Shareholder, creditor or otherwise) (hereinafter referred to as a "Covered
Person") against all liabilities and expenses, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened, while in office or thereafter, by reason of being or having
been such a
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Covered Person except with respect to any matter as to which such Covered Person
shall have been finally adjudicated in any such action, suit or other proceeding
(a) not to have acted in good faith in the reasonable belief that such Covered
Person's action was in the best interests of the Trust or (b) to be liable to
the Trust or its Shareholders by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
Covered Person's office. Expenses, including counsel fees so incurred by any
such Covered Person (but excluding amounts paid in satisfaction of judgments, in
compromise or as fines or penalties), shall be paid from time to time by the
Trust in advance of the final disposition of any such action, suit or proceeding
upon receipt of an undertaking by or on behalf of such Covered Person to repay
amounts so paid to the Trust if it is ultimately determined that indemnification
of such expenses is not authorized under this Article, provided, however, that
either (a) such Covered Person shall have provided appropriate security for such
undertaking, (b) the Trust shall be insured against losses arising from any such
advance payments or (c) either a majority of the disinterested Trustees acting
on the matter (provided that a majority of the disinterested Trustees then in
office act on the matter), or independent legal counsel in a written opinion,
shall have determined, based upon a review of readily available facts (as
opposed to a full trial type inquiry) that there is reason to believe that such
Covered Person will be found entitled to indemnification under this Article.
Compromise Payment
Section 2. As to any matter disposed of (whether by a compromise
payment, pursuant to a consent decree or otherwise) without an adjudication by a
court, or by any other body before which the proceeding was brought, that such
Covered Person either (a) did not act in good faith in the reasonable belief
that his or her action was in the best interests of the Trust or (b) is liable
to the Trust or its Shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office, indemnification shall be provided if (a) approved as in the
best interests of the Trust, after notice that it involves such indemnification,
by at least a majority of the disinterested Trustees acting on the matter
(provided that a majority of the disinterested Trustees then in office act on
the matter) upon a determination, based upon a review of readily available facts
(as opposed to a full trial type inquiry) that such Covered Person acted in good
faith in the reasonable belief that his or her action was in the best interests
of the Trust and is not liable to the Trust or its Shareholders by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office, or (b) there has been
obtained an opinion in writing of independent legal counsel, based upon a review
of readily available facts (as opposed to a full trial type inquiry) to the
effect that such Covered Person appears to have acted in good faith in the
reasonable belief that his or her action was in the best interests of the Trust
and that such indemnification would not protect such Covered Person against any
liability to the Trust to which he or she would otherwise be subject by reason
of wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office. Any approval pursuant to
this Section shall not prevent the recovery from any Covered Person of any
amount paid to such Covered Person in
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accordance with this Section as indemnification if such Covered Person is
subsequently adjudicated by a court of competent jurisdiction not to have acted
in good faith in the reasonable belief that such Covered Person's action was in
the best interests of the Trust or to have been liable to the Trust or its
Shareholders by reason of wilful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office.
Indemnification Not Exclusive
Section 3. The right of indemnification hereby provided shall not be
exclusive of or affect any other rights to which such Covered Person may be
entitled. As used in this Article VIII, the term "Covered Person" shall include
such person's heirs, executors and administrators and a "disinterested Trustee"
is a Trustee who is not an "interested person" of the Trust as defined in
Section 2(a)(19) of the 1940 Act (or who has been exempted from being an
"interested person" by any rule, regulation or order of the Commission) and
against whom none of such actions, suits or other proceedings or another action,
suit or other proceeding on the same or similar grounds is then or has been
pending. Nothing contained in this Article shall affect any rights to
indemnification to which personnel of the Trust, other than Trustees or
officers, and other persons may be entitled by contract or otherwise under law,
nor the power of the Trust to purchase and maintain liability insurance on
behalf of any such person.
Shareholders
Section 4. In case any Shareholder or former Shareholder shall be held
to be personally liable solely by reason of his or her being or having been a
Shareholder and not because of his or her acts or omissions or for some other
reason, the Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled to be
held harmless from and indemnified against all loss and expense arising from
such liability.
ARTICLE IX
Miscellaneous
Trustees, Shareholders, etc. Not Personally Liable; Notice
Section 1. All persons extending credit to, contracting with or having
any claim against the Trust shall look only to the assets of the Trust for
payment under such credit, contract or claim, and neither the Shareholders nor
the Trustees, nor any of the Trust's officers, employees or agents, whether
past, present or future, shall be personally liable therefor. Nothing in this
Declaration of Trust shall protect any Trustee against any liability to which
such Trustee would otherwise be subject by reason of wilful misfeasance, bad
faith,
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gross negligence or reckless disregard of the duties involved in the conduct of
the office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking made
or issued by the Trustees or by any officer or officers shall give notice that
this Declaration of Trust is on file with the Secretary of The Commonwealth of
Massachusetts and shall recite that the same was executed or made by or on
behalf of the Trust or by them as Trustee or Trustees or as officer or officers
and not individually and that the obligations of such instrument are not binding
upon any of them or the Shareholders individually but are binding only upon the
assets and property of the Trust, and may contain such further recital as he or
she or they may deem appropriate, but the omission thereof shall not operate to
bind any Trustee or Trustees or officer or officers or Shareholder or
Shareholders individually.
Trustee's Good Faith Action, Expert Advice, No Bond or Surety
Section 2. The exercise by the Trustees of their powers and discretions
hereunder shall be binding upon everyone interested. A Trustee shall be liable
for his or her own wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee, and
for nothing else, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, and shall be
under no liability for any act or omission in accordance with such advice or for
failing to follow such advice. The Trustees shall not be required to give any
bond as such, nor any surety if a bond is required.
Liability of Third Persons Dealing with Trustee
Section 3. No person dealing with the Trustees shall be bound to make
any inquiry concerning the validity of any transaction made or to be made by the
Trustees or to see to the application of any payments made or property
transferred to the Trust or upon its order.
Duration and Termination of Trust
Section 4. Unless terminated as provided herein, the Trust shall
continue without limitation of time. The Trust may be terminated at any time by
vote of Shareholders holding at least 66-2/3% of the Shares entitled to vote
(provided, however, if such termination is recommended by two-thirds of the
Trustees the vote of a majority of shares entitled to vote shall be sufficient
authorization) or by the Trustees by written notice to the Shareholders. Upon
termination of the Trust, after paying or otherwise providing for all charges,
taxes, expenses and liabilities, whether due or accrued or anticipated, of the
Trust or as may be determined by the Trustees, the Trust shall in accordance
with such procedures as the Trustees consider appropriate reduce the remaining
assets to distributable form in cash or shares or other securities, or any
combination thereof, and distribute the proceeds to the Shareholders,
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ratably according to the number of Shares held by the several Shareholders on
the date of termination.
Merger, Consolidation and Sale of Assets
Section 5. The Trust may merge or consolidate with any other
corporation, association, trust or other organization or may sell, lease or
exchange all or substantially all of its assets, including its good will, upon
such terms and conditions and for such consideration when and as authorized at
any meeting of Shareholders called for the purpose, or may liquidate or dissolve
when and as authorized, by the affirmative vote of the holders of not less than
two-thirds of the Shares entitled to vote, provided, however, that if such
merger, consolidation, sale, lease or exchange is recommended by two-thirds of
the Trustees, the vote of the holders of a majority of Shares entitled to vote
shall be sufficient authorization. Nothing contained herein shall be construed
as requiring approval of Shareholders for any sale of assets in the ordinary
course of business of the Trust.
Conversion
Section 6. The Fund may be converted at any time from a "closed-end
company" to an "open-end company" as those terms are defined in Section 5(a)(2)
and 5(a)(1), respectively, of the 1940 Act as in effect on October 1, 1987, upon
the approval of such a proposal, together with the necessary amendments to the
Declaration of Trust to permit such a conversion, by the holders of two-thirds
of the Fund's outstanding Shares entitled to vote, except that if such proposal
is recommended by two-thirds of the total number of Trustees then in office or
such proposal is voted upon after the beginning of the fiscal year commencing in
1993 such proposal may be adopted by a vote of a majority of the Fund's
outstanding Shares entitled to vote. In addition, commencing with the beginning
of the fiscal year commencing in 1993, and in each fiscal year thereafter, if
Shares of the Fund have traded on the principal securities exchange where listed
at an average discount of more than ten percent (10%), determined on the basis
of the discount as of the end of the last trading day in each week during the
period of twelve (12) calendar weeks preceding the beginning of each such fiscal
year, the Trustees will submit to the shareholders at the next succeeding annual
meeting, or within six months thereafter if the Fund does not then hold annual
meetings, a proposal to convert the Fund from a "closed-end company" to an
"open-end company" as those terms are defined above, together with the necessary
amendments to this Declaration of Trust to permit such a conversion. Upon the
adoption of such proposal and related amendments by the Fund's outstanding
shares entitled to vote, the Fund shall upon complying with any requirements of
the 1940 Act and state law, become an "open-end" investment company. Such
affirmative vote or consent shall be in addition to the vote or consent of the
holders of the Shares otherwise required by law, or any agreement between the
Trust and any national securities exchange.
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Filing of Copies, References, Headings
Section 7. The original or a copy of this instrument and of each
amendment hereto shall be kept at the office of the Trust where it may be
inspected by any Shareholder. A copy of this instrument and of each amendment
hereto shall be filed by the Trust with the Secretary of State of The
Commonwealth of Massachusetts and with the Boston City Clerk, as well as any
other governmental office where such filing may from time to time be required.
Anyone dealing with the Trust may rely on a certificate by an officer of the
Trust as to whether or not any such amendments have been made and as to any
matters in connection with the Trust hereunder, and, with the same effect as if
it were the original, may rely on a copy certified by an officer of the Trust to
be a copy of this instrument, or of any such amendments. In this instrument and
in any such amendment, references to this instrument and all expressions such as
"herein", "hereof" and "hereunder" shall be deemed to refer to this instrument
as amended or affected by any such amendments. Headings are placed herein for
convenience of reference only and shall not be taken as a part hereof or control
or affect the meaning, construction or effect of this instrument. This
instrument may be executed in any number of counterparts each of which shall be
deemed an original.
Applicable Law
Section 8. This Declaration of Trust is made in The Commonwealth of
Massachusetts, and it is created under and is to be governed by and construed
and administered according to the laws of said Commonwealth. The Trust shall be
of the type commonly called a Massachusetts business trust, and without limiting
the provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
Amendments
Section 9. This Declaration of Trust may be amended at any time by an
instrument in writing signed by a majority of the then Trustees when authorized
to do so by vote of Shareholders holding a majority of the Shares entitled to
vote, except that an amendment amending or affecting the provisions of Section 1
of Article IV, Sections 5 and 6 of this Article IX or of this sentence shall
require the vote of Shareholders holding two-thirds of the Shares entitled to
vote. Amendments having the purpose of changing the name of the Trust or of
supplying any omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision contained herein shall not
require authorization by Shareholder vote.
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IN WITNESS WHEREOF, each of the undersigned has hereunto set his or her
hand in the City of Boston, Massachusetts for himself or herself and his or her
assigns, as of the day and year first above written.
/s/ George Putnam
-------------------------------
George Putnam
/s/ Alla O'Brien
-------------------------------
Alla O'Brien
/s/ Richard M. Cutler
-------------------------------
Richard M. Cutler
THE COMMONWEALTH OF MASSACHUSETTS
Suffolk, ss. Boston, March 10, 1988
Then personally appeared the above named George Putnam, Alla O'Brien
and Richard M. Cutler and acknowledged the foregoing instrument to be their free
act and deed, before me,
/s/ Anne B. McCarthy
-------------------------------
Notary Public
My Commission Expires: 11/10/89
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PUTNAM MASTER INTERMEDIATE INCOME TRUST
FIRST AMENDMENT TO AGREEMENT AND DECLARATION OF TRUST
April 15, 1988
Pursuant to the provisions of Article IX, Section 9 and Article V,
Section 1 of the Agreement and Declaration of Trust (the "Declaration of Trust")
of Putnam Master Intermediate Income Trust (the "Trust") made on March 10, 1988,
the undersigned, constituting at least a majority of the Trustees of the Trust,
there being no shares of beneficial interest of the Trust outstanding, hereby
amend the Declaration of Trust as follows:
1. The first sentence of Article IV, Section 1 is hereby amended by
deleting the year "1988" each place it appears therein, and by
inserting in place thereof the year "1989," so that such sentence shall
read in its entirety as follows:
"In each year beginning 1989, at the annual meeting of Shareholders or
at any special meeting held in lieu thereof, or at any special meeting
held before 1989, the Shareholders shall fix the number of and elect a
Board of not less than three Trustees, each of whom shall serve until
the next annual meeting or special meeting in lieu thereof and until
the election and qualification of his or her successor, or until he or
she sooner dies, resigns or is removed."
2. The first sentence of Article V, Section 2 is hereby amended by
inserting after the word "Shareholders" the words "in each year
beginning in 1989," so that such sentence shall read in its entirety as
follows:
"There shall be an annual meeting of the Shareholders in each year
beginning in 1989 on the date fixed in the Bylaws at the office of the
Trust in Boston, Massachusetts, or at such other place as may be
designated in the call thereof, which call shall be made by the
Trustees."
3. The second sentence of Article IX, Section 2 is hereby amended by
deleting the words "and shall not be liable for errors of judgment or
mistakes of fact or law," so that such sentence shall read in its
entirety as follows:
"A Trustee shall be liable for his or her own willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in
the conduct of the office of Trustee, and for nothing else."
4. The first sentence of Article IX, Section 9 is hereby amended by
including therein a reference to Article IV, Section 4 of the
Declaration of Trust, so that such sentence shall read in its entirety
as follows:
<PAGE>
"This Declaration of Trust may be amended at any time by an instrument
in writing signed by a majority of the then Trustees when authorized to
do so by vote of Shareholders holding a majority of the shares entitled
to vote, except that an amendment amending or affecting the provisions
of Section 1 of Article IV, Sections 4, 5 and y of this Article IX or
of this sentence shall require the vote of Shareholders holding
two-thirds of the shares entitled to vote."
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of
the date first above written.
Signature Title Date
--------- ----- ----
/s/ George Putnam Trustee April 15, 1988
- ------------------------------- --
George Putnam
/s/ Richard M. Cutler Trustee April 15, 1988
- ------------------------------- --
Richard M. Cutler
/s/ Alla O'Brien Trustee April 15, 1988
- ------------------------------- --
Alla O'Brien
/s/ Hans H. Estin Trustee April 15, 1988
- ------------------------------- --
Hans H. Estin
/s/ John A. Hill Trustee April 15, 1988
- ------------------------------- --
John A. Hill
/s/ Robert E. Patterson Trustee April 15, 1988
- ------------------------------- --
Robert E. Patterson
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/s/ Donald S. Perkins Trustee April 15, 1988
- ------------------------------- --
Donald S. Perkins
/s/ William F. Pounds Trustee April 15, 1988
- ------------------------------- --
William F. Pounds
/s/ Robert C. Seamans, Jr. Trustee April 15, 1988
- ------------------------------- --
Robert C. Seamans, Jr.
/s/ Eli Shapiro Trustee April 15, 1988
- ------------------------------- --
Eli Shapiro
/s/ D. Reid Weedon, Jr. Trustee April 15, 1988
- ------------------------------- --
D. Reid Weedon, Jr.
THE COMMONWEALTH OF MASSACHUSETTS
Suffolk, ss. Boston, April 15, 1988
--
Then personally appeared the above named George Putnam, Richard M.
Cutler, Alla O'Brien, Hans H. Estin, John A. Hill, Robert E. Patterson, Donald
S. Perkins, William F. Pounds, Robert C. Seamans, Jr., Eli Shapiro and D. Reid
Weedon, Jr. and acknowledged the foregoing instrument to be their free act and
deed, before me.
/s/ Beverly Marcus
-----------------------------
Notary Public
My Commission Expires: 4/4/94
EXHIBIT 2
BYLAWS
OF
PUTNAM HIGH INCOME CONVERTIBLE AND BOND FUND,
PUTNAM INTERMEDIATE GOVERNMENT INCOME TRUST,
PUTNAM MASTER INCOME TRUST,
PUTNAM MASTER INTERMEDIATE INCOME TRUST, AND
PUTNAM PREMIER INCOME TRUST
(as amended through June 7, 1991)
ARTICLE I
Agreement and Declaration of Trust and Principal Office
1.1 Agreement and Declaration of Trust. These Bylaws shall be subject
to the Agreement and Declaration of Trust, as from time to time in effect (the
"Declaration of Trust"), of the Massachusetts business trust established by the
Declaration of Trust (the "Trust").
1.2 Principal Office of the Trust. The principal office of the Trust
shall be located in Boston, Massachusetts.
ARTICLE 2
Meetings of Trustees
2.1 Regular Meetings. Regular meetings of the Trustees may be held
without call or notice at such places and at such times as the Trustees may from
time to time determine, provided that notice of the first regular meeting
following any such determination shall be given to absent Trustees.
2.2 Special Meetings. Special meetings of the Trustees may be held at
any time and at any place designated in the call of the meeting when called by
the Chairman of the Trustees, the President or the Treasurer or by two or more
Trustees, sufficient notice thereof being given to each Trustee by the Clerk or
an Assistant Clerk or by the officer or the Trustees calling the meeting.
2.3 Notice of Special Meetings. It shall be sufficient notice to a
Trustee of a special meeting to send notice by mail at least forty-eight hours
or by telegram at least twenty-four hours before the meeting addressed to the
Trustee at his or her usual or last known business or residence address or to
give notice to him or her in person or by telephone at least twenty-four hours
before the meeting. Notice of a special meeting need not be given to any Trustee
if a written waiver of notice, executed by him or her before or after the
meeting, is filed with the records of the meeting, or to any Trustee who attends
the meeting without protesting prior thereto or at its commencement
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the lack of notice to him or her. Neither notice of a meeting nor a waiver of a
notice need specify the purposes of the meeting.
2.4 Quorum. At any meeting of the Trustees a majority of the Trustees
then in office shall constitute a quorum. Any meeting may be adjourned from time
to time by a majority of the votes cast upon the question, whether or not a
quorum is present and the meeting may be held as adjourned without further
notice.
2.5 Notice of Certain Actions by Consent. If in accordance with the
provisions of the Declaration of Trust any action is taken by the Trustees by
written consent of less than all of the Trustees, then prompt notice of any such
action shall be furnished to each Trustee who did not execute such written
consent, provided that the effectiveness of such action shall not be impaired by
any delay or failure to furnish such notice.
ARTICLE 3
Officers
3.1 Enumeration; Qualification. The officers of the Trust shall be a
Chairman of the Trustees, a President, a Treasurer, a Clerk and such other
officers, if any, as the Trustees from time to time may in their discretion
elect. The Trust may also have such agents as the Trustees from time to time may
in their discretion appoint. The Chairman of the Trustees and the President
shall be a Trustee and may but need not be a shareholder; and any other officer
may but need not be a Trustee or a shareholder. Any two or more offices may be
held by the same person. A Trustee may but need not be a shareholder.
3.2 Election. The Chairman of the Trustees, the President, the
Treasurer and the Clerk shall be elected by the Trustees upon the occurrence of
any vacancy in any such office. Other officers, if any, may be elected or
appointed by the Trustees at any time. Vacancies in any such other office may be
filled at any time.
3.3 Tenure. The Chairman of the Trustees, the President, the Treasurer
and the Clerk shall hold office in each case until he or she dies, resigns, is
removed or becomes disqualified. Each other officer shall hold office and each
agent shall retain authority at the pleasure of the Trustees.
3.4 Powers. Subject to the other provisions of these Bylaws, each
officer shall have, in addition to the duties and powers herein and in the
Declaration of Trust set forth, such duties and powers as are commonly incident
to the office occupied by him or her as if the Trust were organized as a
Massachusetts business corporation and such other duties and powers as the
Trustees may from time to time designate.
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3.5 Chairman; President. Unless the Trustees otherwise provide, the
Chairman of the Trustees or, if there is none or in the absence of the Chairman
of the Trustees, the President shall preside at all meetings of the shareholders
and of the Trustees. Unless the Trustees otherwise provide, the President shall
be the chief executive officer.
3.6 Treasurer. Unless the Trustees shall provide otherwise, the
Treasurer shall be the chief financial and accounting officer of the Trust, and
shall, subject to the provisions of the Declaration of Trust and to any
arrangement made by the Trustees with a custodian, investment adviser or
manager, or transfer, shareholder servicing or similar agent, be in charge of
the valuable papers, books of account and accounting records of the Trust, and
shall have such other duties and powers as may be designated from time to time
by the Trustees or by the President.
3.7 Clerk. The Clerk shall record all proceedings of the shareholders
and the Trustees in books to be kept therefor, which books or a copy thereof
shall be kept at the principal office of the Trust. In the absence of the Clerk
from any meeting of the shareholders or Trustees, an Assistant Clerk, or if
there be none or if he or she is absent, a temporary Clerk chosen at such
meeting shall record the proceedings thereof in the aforesaid books.
3.8 Resignations and Removals. Any Trustee or officer may resign at any
time by written instrument signed by him or her and delivered to the Chairman of
the Trustees, the President or the Clerk or to a meeting of the Trustees. Such
resignation shall be effective upon receipt unless specified to be effective at
some other time. The Trustees may remove any officer elected by them with or
without cause. Except to the extent expressly provided in a written agreement
with the Trust, no Trustee or officer resigning and no officer removed shall
have any right to any compensation for any period following his or her
resignation or removal, or any right to damages on account of such removal.
ARTICLE 4
Committees
4.1 Quorum; Voting. A majority of the members of any Committee of the
Trustees shall constitute a quorum for the transaction of business, and any
action of such a Committee may be taken at a meeting by a vote of a majority of
the members present (a quorum being present) or evidenced by one or more
writings signed by such a majority. Members of a Committee may participate in a
meeting of such Committee by means of a conference telephone or other
communications equipment by means
3
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of which all persons participating in the meeting can hear each other at the
same time and participation by such means shall constitute presence in person at
a meeting.
ARTICLE 5
Reports
5.1 General. The Trustees and officers shall render reports at the time
and in the manner required by the Declaration of Trust or any applicable law.
Officers and Committees shall render such additional reports as they may deem
desirable or as may from time to time be required by the Trustees.
ARTICLE 6
Fiscal Year
6.1 General. Except as from time to time otherwise provided by the
Trustees, the initial fiscal year of the Trust shall end on such date as is
determined in advance or in arrears by the Treasurer, and subsequent fiscal
years shall end on such date in subsequent years.
ARTICLE 7
Seal
7.1 General. The seal of the Trust shall consist of a flat-faced die
with the word "Massachusetts", together with the name of the Trust and the year
of its organization cut or engraved thereon but, unless otherwise required by
the Trustees, the seal shall not be necessary to be placed on, and its absence
shall not impair the validity of, any document, instrument or other paper
executed and delivered by or on behalf of the Trust.
ARTICLE 8
Execution of Papers
8.1 General. Except as the Trustees may generally or in particular
cases authorize the execution thereof in some other manner, all deeds, leases,
contracts, notes and other obligations made by the Trustees shall be signed by
the President, the Vice Chairman, a Vice President or the Treasurer and need not
bear the seal of the Trust.
ARTICLE 9
Issuance of Shares and Share Certificates
9.1 Sale of Shares. Except as otherwise determined by the Trustees, the
Trust will issue and sell for cash or securities from time to time, full and
fractional shares of its shares of beneficial interest, such shares to be issued
and sold at a price of not less than the par value per share, if any, and not
less than the net asset value per share as from time to time
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determined in accordance with the Declaration of Trust and these Bylaws and, in
the case of fractional shares, at a proportionate reduction in such price. In
the case of shares sold for securities, such securities shall be valued in
accordance with the provisions for determining the value of the assets of the
Trust as stated in the Declaration of Trust and these Bylaws. The officers of
the Trust are severally authorized to take all such actions as may be necessary
or desirable to carry out this Section 9.1.
9.2 Share Certificates. In lieu of issuing certificates for shares, the
Trustees or the transfer agent may either issue receipts therefor or may keep
accounts upon the books of the Trust for the record holders of such shares, who
shall in either case be deemed, for all purposes hereunder, to be the holders of
certificates for such shares as if they had accepted such certificates and shall
be held to have expressly assented and agreed to the terms hereof.
The Trustees may at any time authorize the issuance of share
certificates. In that event, each shareholder shall be entitled to a certificate
stating the number of shares owned by him, in such form as shall be prescribed
from time to time by the Trustees. Such certificate shall be signed by the
President or a Vice President and by the Treasurer or an Assistant Treasurer.
Such signatures may be facsimile if the certificate is signed by a transfer
agent or by a registrar. In case any officer who has signed or whose facsimile
signature has been placed on such certificate shall cease to be such officer
before such certificate is issued, it may be issued by the Trust with the same
effect as if he were such officer at the time of its issue.
9.3 Loss of Certificates. The transfer agent of the Trust, with the
approval of any two officers of the Trust, is authorized to issue and
countersign replacement certificates for the shares of the Trust which have been
lost, stolen or destroyed upon (i) receipt of an affidavit or affidavits of loss
or non-receipt and of an indemnity agreement executed by the registered holder
or his legal representative and supported by an open penalty surety bond, said
agreement and said bond in all cases to be in form and content satisfactory to
and approved by the President or the Treasurer, or (ii) receipt of such other
documents as may be approved by the Trustees.
9.4 Issuance of New Certificate to Pledgee. A pledgee of shares
transferred as collateral security shall be entitled to a new certificate if the
instrument of transfer substantially describes the debt or duty that is intended
to be secured thereby. Such new certificate shall express on its face that it is
held as collateral security, and the name of the pledgor shall be stated
thereon, who alone shall be liable as a shareholder and entitled to vote
thereon.
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9.5 Discontinuance of Issuance of Certificates. The Trustees may at any
time discontinue the issuance of share certificates and may, by written notice
to each shareholder, require the surrender of share certificates to the Trust
for cancellation. Such surrender and cancellation shall not affect the ownership
of shares in the Trust.
ARTICLE 10
Provisions Relating to the Conduct of the Trust's Business
10.1 Certain Definitions. When used herein the following words shall
have the following meanings: "Distributor" shall mean any one or more
corporations, firms or associations which have distributor's or principal
underwriter's contracts in effect with the Trust. "Manager" shall mean any
corporation, firm or association which may at the time have an advisory or
management contract with the Trust.
10.2 Limitations on Dealings with Officers or Trustees. The Trust will
not lend any of its assets to the Distributor or Manager or to any officer or
director of the Distributor or Manager or any officer or Trustee of the Trust,
and shall not permit any officer or Trustee of the Trust or any officer or
director of the Distributor or Manager to deal for or on behalf of the Trust
with himself or herself as principal or agent, or with any partnership,
association or corporation in which he or she has a financial interest; provided
that the foregoing provisions shall not prevent (a) officers and Trustees of the
Trust or officers and directors of the Distributor or Manager from buying,
holding or selling shares in the Trust or from being partners, officers or
directors or otherwise financially interested in the Distributor or the Manager;
(b) purchases or sales of securities or other property if such transaction is
permitted by or is exempt or exempted from the provisions of the Investment
Company Act of 1940 or any Rule or Regulation thereunder and if such transaction
does not involve any commission or profit to any security dealer who is, or one
or more of whose partners, shareholders, officers or directors is, an officer or
Trustee of the Trust or an officer or director of the Distributor or Manager ;
(c) employment of legal counsel, registrar, transfer agent, shareholder
servicing agent, dividend disbursing agent or custodian who is, or has a
partner, shareholder, officer or director who is, an officer or Trustee of the
Trust or an officer or director of the Distributor or Manager; (d) sharing
statistical, research, legal and management expenses and office hire and
expenses with any other investment company in which an officer or Trustee of the
Trust or an officer or director of the Distributor or Manager is an officer or
director or otherwise financially interested.
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10.3 Securities and Cash of the Trust to be held by Custodian Subject
to Certain Terms and Conditions.
(a) All securities and cash owned by the Trust shall be held by or
deposited with one or more banks or trust companies having (according to its
last published report) not less than $1,000,000 aggregate capital, surplus and
undivided profits (any such bank or trust company being hereby designated as
"Custodian"), provided such a Custodian can be found ready and willing to act;
subject to such rules, regulations and orders, if any, as the Securities and
Exchange Commission may adopt, the Trust may, or may permit any Custodian to,
deposit all or any part of the securities owned by the Trust in a system for the
central handling of securities pursuant to which all securities of any
particular class or series of any issue deposited within the system may be
transferred or pledged by bookkeeeping entry, without physical delivery. The
Custodian may appoint, subject to the approval of the Trustees, one or more
subcustodians.
(b) The Trust shall enter into a written contract with each Custodian
regarding the powers, duties and compensation of such Custodian with respect to
the cash and securities of the Trust held by such Custodian.
Said contract and all amendments thereto shall be approved by the Trustees.
(c) The Trust shall upon the resignation or inability to serve of any
Custodian or upon change of any Custodian:
(i) in case of such resignation or inability to serve, use its best
efforts to oobtain a successor Custodian;
(ii) require that the cash and securities owned by the Trust be
delivered directly to the successor Custodian; and
(iii) in the event that no successor Custodian can be found, submit
to the shareholders, before permitting delivery of the cash and securities owned
by the Trust otherwise than to a successor Custodian, the question whether the
Trust shall be liquidated or shall function without a Custodian.
10.4 Reports to Shareholders. The Trust shall send to each shareholder
of record at least semi-annually a statement of the condition of the Trust and
of the results of its operations, containing all information required by
applicable laws or regulations.
10.5 Determination of Net Asset Value Per Share. Net asset value per
share of the Trust shall mean: (i) the value of all the assets of the Trust;
(ii) less total liabilities of the Trust; (iii) divide by the number of shares
of the Trust outstanding, in each case at the time of such determination.
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Except as otherwise determined by the Trustees, the net asset value per share
shall be determined at least once each week as of the close of business on the
last day of the week on which the New York Stock Exchange is open for trading,
at such time or times that the Trustees set at least annually.
In valuing the portfolio investments of the Trust for determination of
net asset value per share of the Trust, securities for which market quotations
are readily available shall be valued at prices which, in the opinion of the
Trustees or the person designated by the Trustees to make the determination,
most nearly represent the market value of such securities, and other securities
and assets shall be valued at their fair value as determined by or pursuant to
the direction of the Trustees, which in the case of debt obligations, commercial
paper and repurchase agreements may, but need not, be on the basis of yields for
securities of comparable maturity, quality and type, or on the basis of
amortized cost. Expenses and liabilities of the Trust shall be accrued each day.
Liabilities may include such reserves for taxes, estimated accrued expenses and
contingencies as the Trustees or their designates may in their sole discretion
deem fair and reasonable under the circumstances. No accruals shall be made in
respect of taxes on unrealized appreciation of securities owned unless the
Trustees shall otherwise determine.
ARTICLE 11
Shareholders
11.1 Annual Meeting. The annual meeting of the shareholders of the
Trust shall be held on the last Friday in April in each year or on such other
day as may be fixed by the Trustees. The meeting shall be held at such time as
the Chairman of the Trustees or the Trustees may fix in the notice of the
meeting or otherwise. Purposes for which an annual meeting is to be held,
additional to those prescribed by law or these Bylaws, may be specified by the
Chairman of the Trustees or by the Trustees.
11.2 Record Dates. For the purpose of determining the shareholders of
the Trust who are entitled to vote or act at any meeting or any adjournment
thereof, or who are entitled to receive payment of any dividend or of any other
distribution, the Trustees may from time to time fix a time, which shall be not
more than 90 days before the date of any meeting of shareholders or more than 60
days before the date of payment of any dividend or of any other distribution, as
the record date for determining the shareholders of the Trust having the right
to notice of and to vote at such meeting and any adjournment thereof or the
right to receive such dividend or distribution, and in such case only
shareholders of record on such record date shall have such right notwithstanding
any transfer of shares on the books of the Trust
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after the record date; or without fixing such record date the Trustees may for
any such purposes close the register or transfer books for all or part of such
period.
11.3 Proxies. The placing of a shareholder's name on a proxy pursuant
to telephone or electronically transmitted instructions obtained pursuant to
procedures reasonably designed to verify that such instructions have been
authorized by such shareholder shall constitute execution of such proxy by or on
behalf of such shareholder.
ARTICLE 12
Amendments to the Bylaws
12.1 General. These Bylaws may be amended or repealed, in whole or in
part, by a majority of the Trustees then in office at any meeting of the
Trustees, or by one or more writings signed by such a majority.
EXHIBIT 3
PUTNAM MASTER INTERMEDIATE INCOME TRUST
MANAGEMENT CONTRACT
Management Contract dated as of July 11, 1991 between PUTNAM MASTER
INTERMEDIATE INCOME TRUST, a Massachusetts business trust (the "Fund"), and THE
PUTNAM MANAGEMENT COMPANY, INC., a Delaware corporation (the "Manager").
WITNESSETH:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY MANAGER TO FUND.
(a) The Manager, at its expense, will furnish continuously an investment
program for the Fund, will determine what investments shall be purchased, held,
sold or exchanged by the Fund and what portion, if any, of the assets of the
Fund shall be held uninvested and shall, on behalf of the Fund, make changes in
the Fund's investments. Subject always to the control of the Trustees of the
Fund and except for the functions carried out by the officers and personnel
referred to in Section 1(d), the Manager will also manage, supervise and conduct
the other affairs and business of the Fund and matters incidental thereto. In
the performance of its duties, the Manager will comply with the provisions of
the Agreement and Declaration of Trust and By-Laws of the Fund and its stated
investment objectives, policies and restrictions, and will use its best efforts
to safeguard and promote the welfare of the Fund and to comply with other
policies which the Trustees may from time to time determine and shall exercise
the same care and diligence expected of the Trustees.
(b) The Manager, at its expense, except as such expense is paid by the Fund
as provided in Section 1(d), will furnish (1) all necessary investment and
management facilities, including salaries of personnel, required for it to
execute its duties faithfully; (2) suitable office space for the Fund; and (3)
administrative facilities, including bookkeeping, clerical personnel and
equipment necessary for the efficient conduct of the affairs of the Fund,
including determination of the Fund's net asset value, but excluding shareholder
accounting services. Except as otherwise provided in Section 1(d), the Manager
will pay the compensation, if any, of the officers of the Fund.
(c) The Manager, at its expense, shall place all orders for the purchase
and sale of portfolio investments for the Fund's account with brokers or dealers
selected by the Manager. In the selection of such brokers or dealers and the
placing of such orders, the Manager shall use its best efforts to obtain for the
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Fund the most favorable price and execution available, except to the extent it
may be permitted to pay higher brokerage commissions for brokerage and research
services as described below. In using its best efforts to obtain for the Fund
the most favorable price and execution available, the Manager, bearing in mind
the Fund's best interests at all times, shall consider all factors it deems
relevant, including by way of illustration, price, the size of the transaction,
the nature of the market for the security, 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 or dealer involved
and the quality of service rendered by the broker or dealer in other
transactions. Subject to such policies as the Trustees of the Fund may
determine, the Manager shall not be deemed to have acted unlawfully or to have
breached any duty created by this Contract or otherwise solely by reason of its
having caused the Fund to pay a broker or dealer that provides brokerage and
research services to the Manager an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction, if the
Manager determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Manager's overall responsibilities with respect to the Fund and to other clients
of the Manager as to which the Manager exercises investment discretion. The
Manager agrees that in connection with purchases or sales of portfolio
investments for the Fund's account, neither the Manager or any officer,
director, employee or agent of the Manager shall act as a principal or receive
any commission other than as provided in Section 3.
(d) The Fund will pay or reimburse the Manager for (i) the compensation of
the Vice Chairman of the Fund and of any persons assisting him in the office, as
determined from time to time by the Trustees of the Fund, (ii) the compensation
in whole or in part of such other officers of the Fund and persons assisting
them as may be determined from time to time by the Trustees of the Fund, and
(iii) the cost of suitable office space, utilities, support services and
equipment of the Vice Chairman and persons assisting him and, as determined from
time to time by the Trustees of the Fund, all or a part of such cost
attributable to the other officers and persons assisting them whose compensation
is paid in whole or in part by the Fund. The Fund will pay the fees, if any, of
the Trustees of the Fund.
(e) The Manager shall not be obligated to pay any expenses of or for the
Fund not expressly assumed by the Manager pursuant to this Section 1 other than
as provided in Section 3.
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2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Fund may be a shareholder, director, officer or employee of, or
be otherwise interested in, the Manager, and in any person controlled by or
under common control with the Manager, and that the Manager and any person
controlled by or under common control with the Manager may have an interest in
the Fund. It is also understood that the Manager and any person controlled by or
under common control with the Manager have and may have advisory, management,
service or other contracts with other organizations and persons, and may have
other interests and business.
3. COMPENSATION TO BE PAID BY THE FUND TO THE MANAGER.
The Fund will pay to the Manager as compensation for the Manager's services
rendered, for the facilities furnished and for the expenses borne by the Manager
pursuant to paragraphs (a), (b), (c) and (e) of Section 1, a fee, computed and
paid quarterly at the following annual rates:
(a) 0.75% of the first $500 million of the average net
asset value of the Fund;
(b) 0.65% of the next $500 million of such average
net asset value;
(c) 0.60% of the next $500 million of such average net
asset value; and
(d) 0.55% of any excess over $1.5 billion of such average
net asset value.
Such average net asset value shall be determined by taking the average of the
weekly determinations of such net asset value, determined at the close of the
last business day of each week, for each week which ends during the quarter.
Such fees shall be payable for each fiscal quarter within 30 days after the
close of such quarter.
The fees payable by the Fund to the Manager pursuant to this Section 3
shall be reduced by any commissions, fees, brokerage or similar payments
received by the Manager or any affiliated person of the Manager in connection
with the purchase and sale of portfolio investments of the Fund, less any direct
expenses approved by the Trustees incurred by the Manager or any affiliated
person of the Manager in connection with obtaining such payments.
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In the event that expenses of the Fund for any fiscal year should exceed
the expense limitation 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 compensation due the Manager for such fiscal
year shall be reduced by the amount of excess by a reduction or refund thereof.
In the event that the expenses of the Fund exceed any expense limitation which
the Manager may, by written notice to the Fund, voluntarily declare to be
effective subject to such terms and conditions as the Manager may prescribe in
such notice, the compensation due the Manager shall be reduced, and, if
necessary, the Manager shall assume expenses of the Fund to the extent required
by the terms and conditions of such expense limitation.
If the Manager shall serve for less than the whole of a quarter, the
foregoing compensation shall be prorated.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; and this Contract shall not be amended
unless such amendment be approved at a meeting by the affirmative vote of a
majority of the outstanding shares of the Fund, and by the vote, cast in person
at a meeting called for the purpose of voting on such approval, of a majority of
the Trustees of the Fund who are not interested persons of the Fund or of the
Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution, and shall remain
in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) Either party hereto may at any time terminate this Contract by not more
than sixty days' nor less than thirty days' written notice delivered or mailed
by registered mail, postage prepaid, to the other party, or
(b) If (i) the Trustees of the Fund or the shareholders by the affirmative
vote of a majority of the outstanding shares of the Fund, and (ii) a majority of
the Trustees of the Fund who are not interested persons of the Fund or of the
Manager, by vote cast in person at a meeting called for the purpose of voting on
such approval, do not specifically approve at least annually the continuance of
this Contract, then this Contract shall automatically terminate at the close of
business on March 31, 1993 or the expiration of one year from the effective date
of the
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last such continuance, whichever is later.
Action by the Fund under (a) above may be taken either (i) by vote of a
majority of its Trustees, or (ii) by the affirmative vote of a majority of the
outstanding shares of the Fund.
Termination of this Contract pursuant to this Section 5 will be without the
payment of any penalty.
6. CERTAIN DEFINITIONS.
For the purposes of this Contract, the "affirmative vote of a majority of
the outstanding shares of the Fund" means the affirmative vote, at a duly called
and held meeting of shareholders of the Fund, (a) of the holders of 67% or more
of the shares of the Fund present (in person or by proxy) and entitled to vote
at such meeting, if the holders of more than 50% of the outstanding shares of
the Fund entitled to vote at such meeting are present in person or by proxy, or
(b) of the holders of more than 50% of the outstanding shares of the Fund
entitled to vote at such meeting, whichever is less.
For the purposes of this Contract, the terms "affiliated person",
"control", "interested person" and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940 and the Rules and
Regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act; the term "specifically
approve at least annually" shall be construed in a manner consistent with the
Investment Company Act of 1940 and the Rules and Regulations thereunder; and the
term "brokerage and research services" shall have the meaning given in the
Securities Exchange Act of 1934 and the Rules and Regulations thereunder.
7. NON-LIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith or gross negligence on the
part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Fund or to
any shareholder of the Fund, for any act or omission in the course of, or
connected with, rendering services hereunder.
8. TERMINATION OF PRIOR CONTRACT.
This Contract shall become effective as of its date, and supersedes the
Management Contract dated April 12, 1988.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Fund
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is on file with the Secretary of State of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Fund as Trustees and not individually and that the obligations
of or arising out of this instrument are not binding upon any of the Trustees,
officers or shareholders but are binding only upon the assets and property of
the Fund.
IN WITNESS WHEREOF, PUTNAM MASTER INTERMEDIATE INCOME TRUST and THE PUTNAM
MANAGEMENT COMPANY, INC. have each caused this instrument to be signed in
duplicate in its behalf by its President or a Vice President thereunto duly
authorized, all as of the day and year first above written.
PUTNAM MASTER INTERMEDIATE INCOME TRUST
By: /s/ Charles E. Porter
-----------------------------------
THE PUTNAM MANAGEMENT COMPANY, INC.
By: /s/ Gordon H. Silver
-----------------------------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus/Proxy
Statement and Statement of Additional Information constituting part of this
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-14 (the
"Registration Statement") of Putnam Master Intermediate Income Trust of our
report dated January 13, 1997 relating to the financial statements and financial
highlights appearing in the November 30, 1996 Annual Report to the Shareholders
of Putnam Intermediate Government Income Trust, which is incorporated by
reference into such Statement of Additional Information. We also consent to the
reference to us under the heading "Independent Public Accountants and Financial
Statements" in such Statement of Additional Information and to the reference to
us under the heading "Financial Highlights" in the Prospectus/Proxy Statement of
Putnam Master Intermediate Income Trust.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
July 25, 1997
[letterhead]
Coopers Coopers & Lybrand L.L.P.
&Lybrand
a professional services firm
Consent of Independent Accountants
We consent to the incorporation by reference in the Prospectus and Statement of
Additional Information constituting parts of Pre-Effective Amendment No. 1 to
the Registration Statement of Putnam Master Intermediate Income Trust (the
"Fund") on Form N-14 (File 333-28271) of our report dated November 14, 1996 on
our audit, of the financial statements and financial highlights of the Fund,
which report is included in the Annual Report for Putnam Master Intermediate
Income Trust for the year ended September 30, 1996, which is incorporated by
reference in the Registration Statement.
We also consent to the references to our firm under the caption "Independent
Accountants and Financial Statements" in the Statement of Additional Information
and under the heading "financial highlights" in such Prospectus.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 24, 1997
