As filed with the Securities and Exchange Commission on
June 2, 1997
Registration No.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
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. [ ]
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.
Calculation of the Registration Fee under the Securities Act of 1933:
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Per Aggregate Offering
Being Registered Registered(1) Unit(2) Price(1)
- ---------------- ------------- ------------------- ------------------
<S> <C> <C> <C>
Common Shares, 67,454,545.4545 shares $8.25 $556,500,000
no par value
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee based
on Rule 457(f).
(2) Based on market value of shares of Putnam Intermediate Government Income
Trust on May 29, 1997.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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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 10.
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.
<PAGE>
Table of Contents
A Message from the Chairman 3
Notice of Shareholder Meeting 6
Combined Prospectus/Proxy Statement 8
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 advisor.
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<PAGE>
A Message from the Chairman
[photograph: George Putnam]
Dear Shareholder:
I am writing you to ask you for your vote on important 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
government and corporate 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 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.
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<PAGE>
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 a lower yield because of
increased fund expenses, which appears to be inconsistent with the fund's
investment objective.
The fund's favorable performance serves as evidence of the benefits of the
closed-end structure. For the one, three and five year periods ended May 31,
1997 and for the period since inception in April 1988 through May 31, 1997 the
fund's performance (measured at net asset value) places it in the top [ ]% of a
universe of intermediate government funds used by the Trustees to evaluate the
fund's performance. (See page [ ] of the enclosed proxy statement for more
information on performance).
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.
***********
Although we would like very much to have each shareholder attend their 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.
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<PAGE>
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
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<PAGE>
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 11.
2. Fixing the number of Trustees and electing Trustees to oversee your fund. See
page 54.
3. Ratifying the selection by the Trustees of the independent auditors of your
fund for its current fiscal year. See page 66.
4. Approving or disapproving the conversion of your fund from closed-end to
open-end status. See page 67.
5. Transacting other business as may properly come before the meeting.
By the Trustees
George Putnam, Chairman
William F. Pounds, Vice Chairman
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
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<PAGE>
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 14, 1997
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<PAGE>
Prospectus/Proxy Statement
July 14, 1997
Table of Contents
1. Proposal regarding approval or disapproval of
Agreement and Plan of Reorganization [ ]
Synopsis [ ]
Risk factors [ ]
Introduction [ ]
Background and reasons for the proposed reorganization [ ]
Information about the reorganization [ ]
Information about the Master Fund [ ]
Information about the Government Fund [ ]
Information about the funds [ ]
2. Proposal regarding election of trustees [ ]
3. Proposal regarding ratification of auditors [ ]
4. Proposal regarding open-ending [ ]
Voting information [ ]
Appendix A: Agreement and Plan of Reorganization [ ]
Appendix B: Securities Ratings [ ]
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 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. 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.
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<PAGE>
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 documents have been filed with the Securities and Exchange
Commission and are also incorporated into this Prospectus/Proxy Statement by
reference: (i) the Report of Independent Accountants and financial statements
included in the Government Fund's Annual Report to Shareholders for the fiscal
year ended November 30, 1996; (ii) the Report of Independent Accountants and
financial statements included in the Master Fund's Annual Report to Shareholders
for the fiscal year ended September 30, 1996; (iii) the Master Fund's Semiannual
Report to Shareholders for the period ended March 31, 1997; and (iv) a Statement
of Additional Information, dated July [ ], 1997, relating to the proposed
transaction (the "SAI").
For a free copy of any of the above, 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.
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.
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<PAGE>
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 6).
How do your fund's Trustees recommend that shareholders vote on these proposals?
The Trustees recommend that you vote
1. For the proposed transaction 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 [ ] 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 21, 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.
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<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
reorganization of the Government Fund into 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
received by the Government Fund to its 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.
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.
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
[ ], 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.
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<PAGE>
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 will not invest in a security having a remaining effective
maturity of more than 10 years, while the Master Fund will 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 supranational 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
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<PAGE>
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 March
31, 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.
Credit Quality Government Fund Master Fund
-------------- --------------- -----------
AAA 95.38% 53.57%
AA 2.04% 3.44%
A 0.00% 0.73%
BBB 0.48% 0.54%
BB 1.36% 8.99%
B .70% 36.25%
CCC --- 1.30%
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.
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<PAGE>
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 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.
Master Master Fund
Government Fund Fund (Pro Forma Combined)
Shareholder transaction
expenses(a)
Maximum sales charge
imposed on purchases (as a
percentage of offering
price) None(b) None(b) None(b)
Dividend Reinvestment and
Cash Purchase Plan None(c) None(c) None(c)
Annual fund operating
expenses (as a percentage of
average net assets)
Management fees .74% .75% .69%
Other expenses .16% .20% .19%
Total fund operating .90% .95% .88%
expenses
- ------------------------
(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.
(b) Does not include underwriting commission of 7% paid by shareholders in
initial offering of each fund.
(c) 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
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<PAGE>
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.
1 3 5 10
year years years years
---- ----- ----- -----
Intermediate
Fund $9 $29 $50 $111
Master $10 $30 $53 $117
Fund
Master $9 $28 $49 $108
Fund
(Pro forma combined)
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 42.
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 cash
dividends or other distributions, receive certificates for Master Shares, or
pledge Master Shares until certificates representing Government Fund shares have
been surrendered, or, in the case of lost certificates, an adequate surety bond
has been posted. Until that
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<PAGE>
time, such Government Fund shareholders will be enrolled in the Master Fund's
dividend reinvestment plan and will receive all dividends in additional shares
of the Master Fund.
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 47 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 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.
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
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<PAGE>
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 of an investment in the Master Fund are greater than the risks of an
investment in the Government Fund, especially the risks associated with
investments by the Master Fund in corporate fixed income securities and
lower-rated securities. The broader diversification of the Master Fund is
intended to mitigate the risk of investing in any one sector, 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 of the Master Fund"
on page 25 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.
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
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sensitive to changes in interest rates. However, as of March 31, 1997, the funds
had comparable dollar-weighted average maturities and durations.
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.
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 [ ],
1997 (the "Agreement"), the form of which is attached to this Prospectus/Proxy
Statement as Exhibit 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, all as more fully described below under
"Information about the reorganization."
After receipt of the Master Shares, the Government Fund will cause the Master
Shares to be distributed 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.
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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 beneficial interest 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 March 31, 1997)
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Government Fund Master Fund
----------------------- ----------------------
NAV Market Price NAV Market Price
--- ------------ --- ------------
1 year 5.08% 4.67% 8.64% 10.36%
3 year 6.59% 6.41% 8.05% 7.63%
5 year 7.24% 3.78% 9.37% 7.33%
From Inception 8.36% 5.95% 9.32% 6.97%
The dividend yield for each fund as of June 30, 1997 was as follows:
Government Fund Master Fund
----------------------- ----------------------
NAV Market Price NAV Market Price
--- ------------ --- ------------
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
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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 Exhibit 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 of the Government Fund shares held by the
shareholder. New certificates for Master Shares will be issued only upon written
request.
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
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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 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 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.
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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 Internal Revenue Code of 1986, as
amended (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;
(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.
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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)
Master Fund
Government Master (Pro Forma
Fund(1) Fund(2) Combined)(3)
Net assets
(000's omitted) $528,130 325,565 853,605
Shares outstanding 64,333 38,448 100,794
(000's omitted)
Net asset value $8.21 $8.47 $8.47
per share
(1) Government Fund assets reflect estimated proxy-related costs.
(2) Master Fund assets reflect estimated SEC filing fees.
(3) Pro forma combined net assets reflect estimated legal and accounting
transaction-related costs.
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.
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<PAGE>
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.
Subject to the foregoing limitations, Putnam Management will adjust 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
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greater stability of net asset value over the long term than investing
exclusively in any one of the markets.
Putnam Management will determine 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 the nationally recognized rating agencies, such as Moody's or S&P (or
in unrated securities of equivalent 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 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.
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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:
- 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 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
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securities, although the Master Fund may not invest more than 20% of its assets
in 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.
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.
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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 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
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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 only to the Master Fund.
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
portfolio. Conversely, during periods of rising interests rates, the value of
the Master Fund's portfolio 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.
-30-
<PAGE>
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 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 the Master Fund's
goals is more dependent on Putnam Management's ability than would be the case if
the Master Fund were investing 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 as to which the Master Fund, by
itself or together with other Master Funds and accounts managed by Putnam
Management and its affiliates, holds all or a major portion. Under adverse
market or economic conditions or in the event of adverse changes in the
financial condition of the issuer, it may be more difficult to sell these
securities when Putnam Management believes it advisable to do so or 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 Master Fund operating expenses and adversely
affect its 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
maturity when the entire principal amount comes due, payments on certain
mortgage-backed and asset-backed securities include both interest and partial
payment of principal. Besides the scheduled repayment of principal, payments of
principal may result from voluntary prepayment, refinancing, or foreclosure of
the underlying mortgage loans or other assets.
-31-
<PAGE>
Mortgage-backed and asset-backed securities are less effective than other types
of securities as a means of "locking in" attractive long-term interest rates.
One reason is the need to reinvest prepayments of principal; another is the
possibility of significant unscheduled prepayments resulting from declines in
interest rates. These prepayments would have to be reinvested at lower rates. As
a result, these securities may have less potential for capital appreciation
during periods of declining interest rates than other securities of comparable
maturities, although they may have a similar risk of decline in market value
during periods of rising interest rates. Prepayments may also significantly
shorten the effective maturities of these securities, especially during periods
of declining interest rates. Conversely, during periods of rising interest
rates, a reduction in prepayments may increase the effective maturities of these
securities, subjecting them to a greater risk of decline in market value in
response to rising interest rates than traditional debt securities, and,
therefore, potentially increasing 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 or some classes or
series may bear some or all of the risk of default on the underlying mortgages.
CMOs of different classes or series are generally retired in sequence as the
underlying mortgage loans in the mortgage pool are repaid. If enough mortgages
are repaid ahead of schedule, the classes or series of a CMO with the earliest
maturities generally will be retired prior to their maturities. Thus, the early
retirement of particular classes or series of a CMO would have the same effect
as the prepayment of mortgages underlying other mortgage-backed securities.
Conversely, slower than anticipated prepayments can extend the effective
maturities of CMOs, subjecting them to a greater risk of decline in market value
in response to rising interest rates than traditional debt securities, and,
therefore, potentially increasing 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.
-32-
<PAGE>
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.
There may be less information publicly available about a foreign issuer than
about a U.S. issuer, and foreign issuers are not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. The securities of some foreign issuers are less
liquid and at times more volatile than securities of comparable U.S. issuers.
Foreign brokerage commissions and other fees are also generally higher than
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 domestic investments.
In addition, there may be a possibility of nationalization or expropriation of
assets, confiscatory taxation, political or financial instability and diplomatic
developments which could affect the value of investments in certain foreign
countries. Legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. The laws of some foreign countries
may limit investments in securities of certain issuers located in those foreign
countries. Special tax considerations apply to foreign securities.
The risks described above are typically greater in less developed nations,
sometimes referred to as "emerging markets." For instance, political and
economic structures in these countries may be in their infancy and developing
rapidly, causing instability. High rates of inflation 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 are regarded as speculative.
Income received by the Master Fund from sources within foreign countries may be
reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Any such taxes paid by the Master Fund will reduce its net
income available for distribution to shareholders.
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
-33-
<PAGE>
strategies, primarily seeking 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, the
Master Fund will use these alternative strategies.
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.
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
-34-
<PAGE>
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 Funds' 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.
-35-
<PAGE>
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.
Financial futures and options. The Master Fund may buy 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 Master
Fund's ability to engage in 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
-36-
<PAGE>
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.
-37-
<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>
Year ended September 30 For the
period
April 29,
1988
Six months 1996 1995 1994 1993 1992 1991 1990 1989 (commencement
ended of
March 31, operations)
1997 to
(Unaudited) September 30,
1988*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.58 $8.38 $8.13 $8.91 $8.71 $8.16 $7.60 $8.62 $9.27 $9.29
Investment operations
Net investment income .33 .63 .67 .62 .68 .74 .76 .84 .97 .38
Net realized and
unrealized gain (loss)
on investments (.13) .19 .21 (.71) .29 .63 .67 (.91) (.55) (.06)
Total from investment
operations .20 .82 .88 (.09) .97 1.37 1.43 (.07) .42 .32
Less distributions:
From net investment
income (.31) (.61) (.49) (.55) (.68) (.74) (.76) (.85) (.99) .34
In excess of net
investment income -- -- -- -- (.09) -- -- -- -- --
From net realized gain
on investments -- -- -- (.06) -- -- -- (.08) (.08) --
Return of capital -- (.01) (.14) (.08) -- (.08) (.11) (.02) -- --
Total distributions (.31) (.62) (.63) (.69) (.77) (.82) (.87) (.95) (1.07) (.34)
Net asset value,
end of period $8.47 $8.58 $8.38 $8.13 $8.91 $8.71 $8.16 $7.60 $8.62 $9.27
Market value,
end of period $7.500 $7.500 $7.375 $7.250 $8.375 $8.500 $7.750 $6.375 $8.375 $9.250
Total investment
return at market
value (%) (a) 4.12(c) 10.34 10.90 (5.57) 7.89 21.13 36.82 (13.29) 1.92 (4.05)(c)
Net assets, end of
period (in thousands) $325,735 $332,537 $326,735 $317,296 $347,620 $339,871 $317,747 $301,613 $345,931 $371,282
Ratio of expenses to
average net
assets (%)(b) .46(c) .99 1.03 .92 .96 .98 1.08 1.04 1.04 .39(c)
Ratio of net investment
income to average
net assets (%) 3.79(c) 7.44 8.24 7.18 7.83 8.76 9.65 10.4 10.61 4.13(c)
Portfolio turnover (%) 107.73(c) 232.90 219.63 204.92 237.63 134.43 204.31 211.22 202.47 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.
-38-
<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 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 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
-39-
<PAGE>
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 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.
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."
-40-
<PAGE>
Financial highlights
The following table presents per share financial information for the
Government Fund since inception. This information has been audited and reported
by Price Waterhouse, LLP, the Fund's independent accountants.
<TABLE>
<CAPTION>
For the
period
June 27,
Year ended November 30, 1988
(commencement
of operations)
1996 1995 1994 1993 1992 1991 1990 1989 to
November 30,
1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.70 $8.07 $9.05 $9.32 $9.21 $9.08 $9.11 $9.38 $9.30
Investment operations
Net investment income .54 .58 .56 .55 .60 .68 .73 .79 .35
Net realized and
unrealized gain (loss)
on investments .01 .65 (.84) .21 .28 .34 .22 (.05) .07
Total from investment
operations .55 1.23 (.28) .76 .88 1.02 .95 .74 .42
Less distributions:
From net investment income (.59) (.60) (.39) (.55) (.60) (.68) (.73) (.79) (.34)
In excess of net
investment income (.01) -- -- (.04) -- -- -- -- --
From net realized gain
on investments -- -- (.07) (.44) (.17) (.05) (.08) (.22) --
Return of capital -- --- (.24) -- -- (.16) (.17) -- --
Total distributions (.60) (.60) (.70) (1.03) (.77) (.89) (.98) (1.01) (.34)
Increase in net asset
value from shares
repurchased .01 -- -- -- -- -- -- -- --
Net asset value,
end of period $8.66 $8.70 $8.07 $9.05 $9.32 $9.21 $9.08 $9.11 $9.38
Market value,
end of period $7.625 $7.750 $7.250 $8.125 $9.125 $9.125 $9.00 $9.00 $9.250
Total investment
return at market
value (%) (a) 6.44 15.58 (2.38) (.01) 8.69 11.80 11.90 8.52 (4.11)(c)
Net assets,
end of period
(in thousands) $559,137 $566,049 $525,592 $589,227 $601,573 $585,649 $567,117 $562,115 $569,990
Ratio of expenses
to average net
assets (%)(b) .90 1.00 .87 .89 .92 1.01 1.02 1.00 .42(c)
Ratio of net investment
income to average
net assets (%) 6.31 6.85 6.64 5.98 6.51 7.51 8.19 8.43 3.71(c)
Portfolio turnover (%) 326.92 416.86 242.42 303.68 216.24 255.49 268.42 174.57 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.
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<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.
-42-
<PAGE>
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.
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).
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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 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 54-59 of this Prospectus/Proxy Statement. Information
relating to the compensation of Trustees is contained on pages 65-67 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.
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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:
Business Experience
Year (at least 5 years)
---- -------------------
Gail S. Attridge 1993 Employed as an investment professional
Senior Vice President by Putnam Management since 1993.
Prior to November 1993, Ms. Attridge
was an Analyst at Keystone Custody
International.
D. William Kohli 1994 Employed as an investment professional
Managing Director by Putnam Management since 1994.
Prior to 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* 1987 Employed as an investment professional
Managing Director by Putnam Management since 1987.
Kenneth J. Taubes 1991 Employed as an investment professional
by Putnam Management since 1991.
- ---------------
*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 consider
sales of fund shares (and, if permitted by law, of the other Putnam Management
funds) as a factor in the selection of broker-dealers.
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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 of shares 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 March 31, 1997
(except where otherwise noted):
Master Fund
Title of Class Amount Authorized Amount Held by fund Amount Outstanding
- -------------- ----------------- ------------------- ------------------
Common Shares Unlimited 862.942 shares* 38,448,000 shares
Government Fund
Title of Class Amount Authorized Amount Held by fund Amount Outstanding
- -------------- ----------------- ------------------- ------------------
Common Shares Unlimited 1,452,317 shares* 64,333,000 shares
- ------------------------
*As of March 28, 1997.
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 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
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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.
Portfolio securities for which market quotations are readily available are
valued at market value. Short-term investments that will mature in 60 days or
less are valued at amortized cost, which approximates market value. All other
securities and assets are valued at their fair value following procedures
approved by the Trustees.
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.
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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.
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 pay 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.
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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.
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 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."
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
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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
meeting[s] 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 also traded at an average discount of greater than 10% for the twelve-week
period ended November 30 in each year, requiring submission 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 67.
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
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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 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 required 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
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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:
(UNAUDITED)
Master Fund
Closing
Quarter High Low Market Discount
Ended Price Price Price NAV to NAV
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
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Government Fund
Closing
Quarter High Low Market Discount
Ended Price Price Price NAV to NAV
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 7.375 8.32 -11.36
August 30, 1996 7-5/8 7-1/8 7.5 8.33 - 9.96
November 29, 1996 7-5/8 7-3/8 7.625 8.65 -11.85
February 28, 1997 7-5/8 7-3/8 7.375 8.37 -11.89
May 31, 1997
On July [ ], 1997 the market price, net asset value per share and discount to
net asset value were [$ ], [$ ] and [ %], respectively, for the Master Fund and
[$ ], [$ ] and [ %], 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.
See page ___ for a more detailed description of these policies.
Share ownership
At May 9, 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:
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. 88.96% (record)
7 Hanover Square
New York, NY 10004
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If the transaction were consummated, Cede & Co. would hold of record
approximately 88% of 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 your 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.
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
[Picture: Jameson Adkins Baxter]
Ms. Baxter, age 53, is the President of Baxter Associates, Inc., a management
and financial consulting firm which she 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
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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
[Picture: 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
Corporation Member of The Schepens Eye Research Institute; 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
[Picture: 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.
Prior to acquiring First Reserve in 1983, Mr. Hill held executive 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
[Picture: Ronald J. Jackson]
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Mr. Jackson, age 53, was Chairman of the Board, President and Chief Executive
Officer of Fisher-Price, Inc., a major toy manufacturer, from 1990 to 1993. He
previously served as President and Chief Executive Officer of Stride-Rite, 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 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. He previously served as
a Director of a number of public companies including Fisher-Price, Inc., Kenner
Parker Toys, Inc., Stride-Rite, Inc., and Mattel, Inc., a major toy
manufacturer. Mr. Jackson is a graduate of Michigan State University Business
School.
Elizabeth T. Kennan
[Picture: Elizabeth T. Kennan]
Ms. Kennan, age 59, is President Emeritus and Professor of Mount Holyoke
College. From 1978 through June 1995, she was President of 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, including the Committee on Economic Development and the
Council on Foreign Relations. 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*
[Picture: Lawrence J. Lasser]
Mr. Lasser, age 54, is the Vice President of your fund and the other Putnam
funds. He has been the President, Chief Executive Officer and a Director of
Putnam Investments, Inc. 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
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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
[Picture: Robert E. Patterson]
Mr. Patterson, age 52, is the Executive Vice President and Director of
Acquisitions of Cabot Partners Limited Partnership, a registered investment
adviser which manages real estate investments for 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*
[Picture: Donald S. Perkins]
Mr. Perkins, age 70, is the retired Chairman of the Board of Jewel Companies,
Inc., a diversified retailer, where among other roles he served as President,
Chief Executive Officer 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.
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.
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William F. Pounds
[Picture: William F. Pounds]
Dr. Pounds, age 69, is the Vice Chairman of your fund and of the other Putnam
funds. He has been a Professor of Management at the 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*
[Picture: 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 Director of Putnam Management and Putnam
Mutual funds Corp. 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, General Mills, Inc., 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.
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George Putnam, III*
[Picture: George Putnam, III]
Mr. Putnam, age 45, is the President of New Generation Research, Inc., a
publisher of financial advisory and other research services relating to bankrupt
and distressed companies, and New Generation Advisers, Inc., a registered
investment adviser 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.
A.J.C. Smith*
[Picture: A.J.C. Smith]
Mr. Smith, age 63, is the Chairman and Chief Executive Officer of Marsh &
McLennan Companies, Inc. He has been 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 in Public Practice, 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**
[Picture: W. Nicholas Thorndike]
Mr. Thorndike, age 64, serves as a Director of various corporations and
charitable organizations, including Data General Corporation, a computer and
high technology company, Bradley Real Estate, Inc., a real estate investment
firm, Providence Journal Co., a newspaper publisher and owner of television
stations, 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
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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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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.
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Share Ownership by Trustees
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)
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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
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(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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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 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
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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.
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COMPENSATION TABLE
[Pension or [Estimated
retirement annual
benefits benefits Total
Aggregate accrued from all compensation
compensation as part Putnam funds from all
from the of fund upon Putnam
fund] expenses] retirement] funds
Trustees (1) (2) (3) (4)
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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
(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.
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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 your fund, including further information about
its Trustees and officers, please see "Fund Information," on 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
your 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.
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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
Trustees of 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 your 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:
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Percentage of Voted
--------------------
For Open-ending 25.8%
Against Open-ending 66.9%
Abstain 6.3%
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 your 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
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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 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 would 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.
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[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 your fund performed?
The following table summarizes the annualized total return of your fund for the
periods shown based on the net asset value and the market value of its shares:
Total Return (Annualized) Through May 31, 1997
Since inception
1 year 3 years 5 years (June 27, 1988)
Net Asset
Value
Market
Value
*Market value performance from inception, unlike net asset value performance,
reflects the cost of the dealer commission upon initial sale.
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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 high yield, 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:
Since inception
1 year 3 years 5 years (June 27, 1988)
Percentile*
* 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
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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 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.
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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 [63] 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.
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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.
Finally, the Trustees would also make certain technical and non-material changes
to the Declaration of Trust and conforming changes necessary 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.
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 traded 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 transaction proposed by Proposal 1 of this Prospectus/Proxy
Statement contemplates 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.
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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.
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Further Information About Voting and the Meeting
Required Votes. Proposal 1 (combination transaction) 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 2 (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.
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
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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 17, 1998, to be included in your fund's proxy statement for
the next annual meeting.
Date for receipt of shareholders' proposals for subsequent meetings of
shareholders. Your fund's Agreement and Declaration of Trust does not provide
for annual meetings of shareholders, and your fund does not currently intend to
hold such a meeting in 1998. Shareholder proposals for inclusion in the proxy
statement for any subsequent meeting must be received by your fund within a
reasonable period of time prior to any such 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 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
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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 31,
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.
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.
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Officers and other information. In addition to George Putnam and Lawrence J.
Lasser, the officers of your fund are as follows:
Year first
elected to
Name (age) Office office
- ------------------------------------------------------------------------------
Charles E. Porter (58) Executive Vice President 1989
Patricia C. Flaherty (50) Senior Vice President 1993
John D. Hughes (62) Senior Vice President
& Treasurer 1987
Gordon H. Silver (50) Vice President 1990
Gail S. Attridge* (35) Senior Vice President 1997
Jennifer E. Leichter* (36) Vice President 1997
D. William Kohli* (36) Vice President 1994
Kenneth J. Taubes* (39) Vice President 1997
John R. Verani (58) Vice President 1990
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
- -------------------------------------------------------------------------------
* 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.
Assets and shares outstanding of your fund
as of May 9, 1997
Net assets $534,209,327
Shares outstanding 64,333,052 shares
and authorized to vote
5% beneficial ownership of your fund as of May 9, 1997
Persons beneficially owning more than 5%
of the fund's shares None
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PUTNAM INVESTMENTS
The Putnam funds
One Post Office Square
Boston, Massachusetts 02109
Toll-free 1-800-225-1581
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PUTNAM INVESTMENTS
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
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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!
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Please fold at perforation before detaching
<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 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 Intermediate Government 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>
Appendix A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
July [ ], 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.
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(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.
(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 Government 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, (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
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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; and (iii) 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.
(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
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<PAGE>
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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<PAGE>
(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.
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<PAGE>
(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").
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 Government 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 (excluding any
fractional shares). 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
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<PAGE>
pledge or redeem 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. In the event that a shareholder shall not be
permitted to receive dividends and other distributions on the Master Shares as
provided in the preceding sentence, the Master Fund shall pay any such dividends
or distributions in additional Master Shares, notwithstanding any election such
shareholder shall have made previously with respect to the payment, in cash or
otherwise, of dividends and distributions on shares of the Government Fund. 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.
(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
A-7
<PAGE>
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 as soon as is practicable after the effective date
of the Registration Statement 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.
(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
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<PAGE>
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
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<PAGE>
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 Master 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.
(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 proceedings 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
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<PAGE>
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 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.
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<PAGE>
(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, 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.
(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
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<PAGE>
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 proceedings 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
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<PAGE>
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 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
A-14
<PAGE>
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.
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, 1997, 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."
A-15
<PAGE>
and, further, the Master Fund will issue stop transfer instructions to the
Government Fund's 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.
A-16
<PAGE>
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:
---------------------------
Executive Vice President
PUTNAM INTERMEDIATE
GOVERNMENT INCOME TRUST
By:
---------------------------
Executive Vice President
A-17
<PAGE>
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 other 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.
B-1
<PAGE>
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 differ from the higher rated issues only in small degree.
A -- Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for bonds 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-2
<PAGE>
'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.
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,
B-3
<PAGE>
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.
B-4
<PAGE>
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.
B-5
<PAGE>
PUTNAM MASTER INTERMEDIATE INCOME TRUST
FORM N-14
PART B
STATEMENT OF ADDITIONAL INFORMATION
July [ ], 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 [ ], 1997 relating to the sale of all or substantially
all of the assets of Putnam Intermediate Government Income Fund (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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<PAGE>
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
-3-
<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"))
-4-
<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 Management 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 $528
Government Fund 1996 $17,229
1995 $31,866
1994 $0
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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<PAGE>
Investor Servicing Agent and Custodian
Putnam Investor Services, a division of Putnam Fiduciary Trust Company ("PFTC"),
is each of 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 funds' 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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<PAGE>
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/Proxy Statement.
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
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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 the 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 (54), Vice President. Director and Senior Managing Director
of Putnam Investments, Inc. President and Director of Putnam Mutual Funds.
Gordon H. Silver (49), Vice President. Director and Senior Managing Director of
Putnam Investments, Inc. and Putnam Management.
John R. Verani (57), Vice President. Senior Vice President of Putnam
Investments, Inc. and Putnam Management.
Paul M. O'Neil (43), Vice President. Vice President of Putnam Investments, Inc.
and Putnam Management.
John D. Hughes (61), Senior Vice President and Treasurer.
Beverly Marcus (52), 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),
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 Prospectus/Proxy Statement and this 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>
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
<PAGE>
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 1,124,806 6/18/97 (4,730)
Deutschemarks 16,929,483 16,792,127 6/18/97 (137,356)
French Francs 10,644,852 10,827,140 6/18/97 (17,512)
Japanese Yen 8,354,915 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 18,083,518 6/18/97 (120,001)
French Francs 27,110,630 27,062,559 6/18/97 (48,071)
Japanese Yen 13,079,698 13,284,949 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)
- ----------------------------------------------------------------------------
$(617,668)
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 $(1,185,816)
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 (237,357)
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
<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 $900,075,322) $ 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, 1996 (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 -- 070,033
- -----------------------------------------------------------------------------------------------------------------------------------
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 notes 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) bills 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
U.S. Treasury Obligations (3.8%) (13.3%) (9.7%)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
<PAGE>
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, 2028 350,000 346,500 350,000 346,500
Sears Credit Account Master Trust Ser. 95-5,
Class A, 6.05s, 2008 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.
<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. 811-5556).
Item 16. Exhibits
1. Agreement and Declaration of Trust dated May 10, 1988 -- To be filed
by pre-effective amendment.
2. By-Laws, as amended July 7, 1991 -- To be filed by pre-effective
amendment.
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 -- To be filed by pre-effective amendment.
5b. Portions of By-Laws Relating to Shareholders' Rights -- To be filed by
pre-effective amendment.
6. Management Contract dated July 11, 1991 -- To be filed by pre-effective
amendment.
7. Not applicable.
8. Retirement Plan of the Trustees -- Exhibit 1
9. Custodian Agreement with Putnam Fiduciary Trust Company dated May 3,
1991, as amended July 13, 1992 -- Exhibit 2.
10. Not applicable
11. Opinion of Ropes & Gray -- Exhibit 3.
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 -- Exhibit 4.
13b. Dividend Reinvestment Plan Agency Agreement, dated October 15, 1993 --
Exhibit 5.
14a. Consent of Price Waterhouse LLP Independent Accountants to the Putnam
Intermediate Government Income Trust -- Exhibit 6.
<PAGE>
14b. Consent of Coopers & Lybrand L.L.P. Independent Accountants to the
Putnam Master Intermediate Income Trust -- Exhibit 7.
15. Not applicable.
16a. Power of Attorney -- Exhibit 8.
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 as an 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 2nd day of June, 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
June 2, 1997
-4-
RETIREMENT PLAN
FOR THE
TRUSTEES OF THE PUTNAM FUNDS
1. General; effective date. This Retirement Plan For The Trustees Of
The Putnam Funds is intended to provide, on the terms and conditions specified
below, cash retirement benefits to certain individuals who have served as
trustees ("Trustees") of the Funds. Except as provided at Section 12 below, the
Plan is effective with respect to retirements occurring on or after January 1,
1996.
2. Statement of Purpose. The purpose of this Plan is to assist the
Funds in attracting and retaining highly qualified individuals to serve as
Trustees of the Putnam Funds by providing a form of deferred compensation which
is competitive with compensation practices of other major investment company
complexes as well as those of major business corporations and which recognizes
the benefits to the Funds and of having Trustees with many years of experience
with the affairs of the Funds.
3. Defined terms. When used in the Plan, the following terms shall
have the meanings set forth in this Section:
- "Administrator": such committee, consisting solely of Trustees who
are not "interested persons" of the Funds within the meaning of
Section 2(a)(19) of the Investment Company Act of 1940, as may be
designated from time to time by the Trustees to administer the
Plan.
- "Service": active service as a Trustee for one or more of the
Funds, including service prior to the Effective Date. For purposes
of this definition, service for an entity that was a Fund at the
time of such service shall not be disregarded merely because the
entity later ceases to be a Fund. A Participant who dies prior to
retirement or who retires by reason of total and permanent
disability (as determined by the Administrator) shall be deemed to
have served at least one hundred twenty (120) months of Service
regardless of his or her actual period of service.
- "Effective Date": the date specified in the second sentence of
Section 1.
- "Final Average Remuneration": the quotient obtained by dividing (i)
a Participant's total retainer and meeting fees paid to the
individual by the Funds for the last thirty-six (36) months of the
individual's service as a Trustee, by (ii) three.
<PAGE>
- "Fund": any of the Putnam Funds, other than any such Fund that has
either (i) elected by vote of a majority of its Trustees who are
not "interested persons" of the Fund (as defined above) not to
participate in the Plan, or (ii) terminated its participation in
the Plan in accordance with Section 14(c).
- "Participant": a Trustee with at least sixty (60) months of
Service.
- "Plan": the Retirement Plan For The Trustees Of The Putnam Funds
set forth herein, as the same may from time to time be amended and
in effect.
- "Retirement": ceasing to be an active Trustee (regardless of
whether service to one or more Funds continues in a capacity other
than as a Trustee) for any reason other than (i) termination for
cause as determined by the Administrator, or (ii) death. The terms
"retire," "retires" and "retired" shall be similarly construed.
- "Trustee": a trustee of any of the Funds.
4. Eligibility for retirement benefit. Each Participant shall receive
the normal retirement benefit specified in Section 5 below commencing in the
calendar year next following the date of retirement.
5. Form and amount of retirement benefit. The retirement benefit
payable to a Participant shall be an annual cash payment equal to fifty percent
(50%) of the Participant's Final Average Remuneration. Such retirement benefit
shall be paid on January 15 of each calendar year commencing with the year
specified in Section 4 above and continuing for the lesser of (i) a number of
years equal to the Participant's years of Service (rounded to the nearest whole
year) or (ii) the lifetime of the Participant.
6. Death benefit. The only death benefits payable under
the Plan shall be those described in this Section:
(a) If a Participant dies after retirement but before ten (10)
annual retirement benefit payments have been made, the Participant's
designated beneficiary shall be entitled to receive an annual death
benefit, in the same amount, payable on January 15 of each year for the
lesser of (i) the remainder, if any, of the period specified in clause
(i) of Section 5 above or (ii) the remainder of such 10-year period.
2
<PAGE>
(b) If a Participant dies before retirement, there shall be
paid to his or her designated beneficiary an annual death benefit equal
in amount to the annual retirement benefit specified in Section 5
above. The death benefit described in this paragraph (b) shall be paid
on January 15 of each year commencing in the calendar year next
following the Participant's death for a number of years equal to the
lesser of (i) the period specified in clause (i) of Section 5 above or
(ii) ten (10) years.
(c) The Administrator in its discretion may commute any death
benefit under this Section to an immediate lump sum payment or may
otherwise accelerate such payments, in each case applying such
reasonable discount rates as it deems appropriate.
7. Designation of beneficiary. For purposes of Section 6 above, a
Participant's designated beneficiary shall be such person or persons, including
a trust, as the Participant shall have designated in writing on a form
acceptable to and delivered to the Administrator. In the absence of an effective
beneficiary designation governing the payment of any portion of the death
benefit described in Section 6 above, payment of such portion shall be made to
the Participant's estate, which shall be deemed to be the Participant's
designated beneficiary for all purposes hereunder. If the person designated as
the beneficiary to receive any portion of the death benefit should die prior to
completion of payments to such beneficiary without the Participant having made
effective provision (by a designation delivered to the Administrator as
hereinabove prescribed) for a successor or contingent beneficiary, payment of
such portion or the remainder thereof shall be made to the decedent
beneficiary's estate.
8. Agreement not to compete, etc. Eligibility for and payment of
benefits under the Plan is conditioned on agreement by the Participant (i) to
refrain from engaging in any business activity in competition with the Funds,
and (ii) not to disclose any proprietary or otherwise confidential information
pertaining to the Funds. Any breach by an active or retired Trustee of the
agreement or conditions specified in the preceding sentence shall be grounds for
termination or reduction by the Administrator of benefits under the Plan.
9. Nature of rights. Nothing in the Plan shall be construed as
requiring the Funds, or any of them, to set aside or to segregate any assets of
any kind to meet any of its obligations hereunder or otherwise to fund the Plan.
The rights of persons claiming benefits under the Plan shall be no greater than
those of general unsecured creditors of a Fund, and no such person shall have
any right in or to any specific assets of any Fund. All rights to benefits under
the Plan shall be construed
3
<PAGE>
and interpreted consistent with the continued qualification of each Fund as a
registered investment company under the Investment Company Act of 1940, as
amended.
10. Rights non-assignable. No Participant, beneficiary or other person
shall have any right to assign, pledge, encumber, or otherwise alienate or
transfer any right to receive benefits or payments hereunder or any other
interest under the Plan, in whole or in part, and any attempt by any such person
to effectuate such an assignment, pledge, encumbrance, or other alienation or
transfer shall be null and void.
11. No rights to continuation of status. Nothing in the Plan shall be
construed as giving any individual a right to continue to serve as a Trustee of
the Funds, or any of them, or to receive any particular level of remuneration
for any such service.
12. Application of Plan to certain persons. This Plan supersedes in its
entirety the voluntary retirement program heretofore maintained by the Funds and
any benefits previously authorized under such program but not yet paid for
periods commencing on or after January 1, 1996. Reference is made to those
former Trustees listed on Schedule A hereto who retired prior to the effective
date of this Plan and who are currently receiving benefits under such voluntary
retirement program. In addition, reference is made to a current Trustee listed
on Schedule B hereto who previously received certain retirement benefits under
such voluntary retirement program following such Trustee's initial retirement
from the Funds. Each person listed on Schedules A or B shall be entitled to a
retirement benefit in the amount and payable in accordance with the terms of the
Plan except that, to the extent inconsistent with the generally applicable
provisions of the Plan, the specific provisions of Schedule A and B shall
control.
13. Payment of benefits. Benefits shall be paid by the Funds, in cash,
upon direction by the Administrator. The Administrator shall allocate the
obligation to make payments with respect to a Trustee under the Plan for any
calendar year among the Funds in proportion to their respective cumulative
liabilities accrued with respect to such Trustee's participation in the Plan for
financial reporting purposes or on such other reasonable basis as the
Administrator may determine.
14. Amendment and termination.
(a) Amendment. The Plan may be amended at any time by the
Administrator. No amendment shall reduce the benefits or future benefits of any
Trustee who has retired, and in the case of a participant who is still an active
Trustee no amendment shall reduce the amount such Trustee would have been
entitled to
4
<PAGE>
receive if he or she had ceased to serve as a Trustee immediately
prior to such amendment.
(b) Termination of the Plan as a whole. The Plan as a whole may be
terminated by the Administrator. Upon termination of the plan as a whole,
benefits in pay status shall continue to be paid. Any Participant not yet in pay
status shall continue to be entitled to a benefit equal to the benefit to which
he or she would have been entitled had retirement as a Trustee occurred
immediately prior to such Plan termination. Notwithstanding the foregoing, in
its discretion the Administrator may commute and pay as a single lump sum
payment any benefits remaining payable upon termination of the Plan as a whole,
and in determining such lump sum amounts the Administrator may apply such
reasonable discount factors and mortality assumptions as it determines in its
discretion.
(c) Termination by individual Fund. A Fund may terminate its
participation in the Plan at any time by vote of a majority of its Trustees who
are not "interested persons" of the Fund (as defined under "Administrator" in
Section 3 above), provided that upon any such termination such Fund shall remain
liable for its allocable share of the benefits to which Participants would have
been entitled is the Plan as a whole had been terminated as of the date of such
individual termination, as determined by the Administrator in its sole
discretion.
As Adopted October 4, 1996
5
CUSTODIAN AGREEMENT
AGREEMENT made as of the 3rd day of May, 1991, as amended July 13,
1992, between each of the Putnam Funds listed in Schedule A, each of such Funds
acting on its own behalf separately from all the other Funds and not jointly or
jointly and severally with any of the other Funds (each of the Funds being
hereinafter referred to as the "Fund"), and Putnam Fiduciary Trust Company (the
"Custodian").
WHEREAS, the Custodian represents to the Fund that it is eligible to
serve as a custodian for a management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), and
WHEREAS, the Fund wishes to appoint the Custodian as the Fund's
custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. Appointment of Custodian. The Fund hereby employs and appoints the Custodian
as custodian of its assets for the term and subject to the provisions of this
Agreement. At the direction of the Custodian, the Fund agrees to deliver to the
Sub-Custodians appointed pursuant to Section 2 below (the "Sub-Custodians")
securities, funds and other property owned by it. The Custodian shall have no
responsibility or liability for or on account of securities, funds or other
property not so delivered to the Sub-Custodians. Upon request, the Fund shall
deliver to the Custodian or to such Sub-Custodians as the Custodian may direct
such proxies, powers of attorney or other instruments as may be reasonably
necessary or desirable in connection with the performance by the Custodian or
any Sub-Custodian of their respective obligations under this Agreement or any
applicable Sub-Custodian Agreement.
2. Appointment of Sub-Custodians. The Custodian may at any time and from time to
time appoint, at its own cost and expense, as a Sub-Custodian for the Fund any
bank or trust company which meets the requirements of the 1940 Act and the rules
and regulations thereunder to act as a custodian, provided that the Fund shall
have approved in writing any such bank or trust company and the Custodian gives
prompt written notice to the Fund of any such appointment. The agreement between
the Custodian and any Sub-Custodian shall be substantially in the form of the
Sub-Custodian agreement attached hereto as Exhibit 1 (the "Sub-Custodian
Agreement") unless otherwise approved by the Fund, provided, however, that the
agreement between the Custodian and any Sub-Custodian appointed primarily for
the purpose of holding
1
<PAGE>
foreign securities of the Fund shall be substantially in the form of the
Sub-Custodian Agreement attached hereto as Exhibit 1(A) (the "Foreign
Sub-Custodian Agreement"; the "Sub-Custodian Agreement" and the "Foreign
Sub-Custodian Agreement" are herein referred to collectively and each
individually as the "Sub-Custodian Agreement"). All Sub-Custodians shall be
subject to the instructions of the Custodian and not the Fund. The Custodian
may, at any time in its discretion, remove any bank or trust company which has
been appointed as a Sub-Custodian but shall in such case promptly notify the
Fund in writing of any such action. Securities, funds and other property of the
Fund delivered pursuant to this Agreement shall be held exclusively by
Sub-Custodians appointed pursuant to the provisions of this Section 2.
The Sub-Custodians which the Fund has approved to date are set forth in
Schedule B hereto. Schedule B shall be amended from time to time as
Sub-Custodians are changed, added or deleted. The Fund shall be responsible for
informing the Custodian sufficiently in advance of a proposed investment which
is to be held at a location not listed on Schedule B, in order that there shall
be sufficient time for the Custodian to put the appropriate arrangements in
place with such Sub-Custodian pursuant to such Sub-Custodian Agreement.
With respect to the securities, funds or other property held by a
Sub-Custodian, the Custodian shall be liable to the Fund if and only to the
extent that such Sub-Custodian is liable to the Custodian. The Custodian shall
nevertheless be liable to the Fund for its own negligence in transmitting any
instructions received by it from the Fund and for its own negligence in
connection with the delivery of any securities, funds or other property of the
Fund to any such Sub-Custodian.
In the event that any Sub-Custodian appointed pursuant to the
provisions of this Section 2 fails to perform any of its obligations under the
terms and conditions of the applicable Sub-Custodian Agreement, the Custodian
shall use its best efforts to cause such Sub-Custodian to perform such
obligations. In the event that the Custodian is unable to cause such
Sub-Custodian to perform fully its obligations thereunder, the Custodian shall
forthwith terminate such Sub-Custodian and, if necessary or desirable, appoint
another Sub-Custodian in accordance with the provisions of this Section 2. The
Custodian may with the approval of the Fund commence any legal or equitable
action which it believes is necessary or appropriate in connection with the
failure by a Sub-Custodian to perform its obligations under the applicable
Sub-Custodian Agreement. Provided the Custodian shall not have been negligent
with respect to any such matter, such action shall be at the expense of the
Fund. The Custodian shall keep the Fund fully informed regarding such action and
the Fund may at any time upon notice to the Custodian elect to take
2
<PAGE>
responsibility for prosecuting such action. In such event the Fund shall have
the right to enforce and shall be subrogated to the Custodian's rights against
any such Sub-Custodian for loss or damage caused the Fund by such Sub-Custodian.
At the written request of the Fund, the Custodian will terminate any
Sub-Custodian appointed pursuant to the provisions of this Section 2 in
accordance with the termination provisions of the applicable Sub-Custodian
Agreement. The Custodian will not amend any Sub-Custodian Agreement in any
material manner except upon the prior written approval of the Fund and shall in
any case give prompt written notice to the Fund of any amendment to the
Sub-Custodian Agreement.
3. Duties of the Custodian with Respect to Property of the Fund Held by
Sub-Custodians.
3.1 Holding Securities - The Custodian shall cause one or more
Sub-Custodians to hold and, by book-entry or otherwise, identify as belonging to
the Fund all non-cash property delivered to such Sub-Custodian.
3.2 Delivery of Securities - The Custodian shall cause Sub-Custodians
holding securities of the Fund to release and deliver securities owned by the
Fund held by the Sub-Custodian or in a Securities System account of the
Sub-Custodian only upon receipt of Proper Instructions, which may be continuing
instructions when deemed appropriate by the parties, and only in the following
cases:
3.2.1 Upon sale of such securities for the account
of the Fund and receipt of payment therefor;
provided, however, that a Sub-Custodian may
release and deliver securities prior to the
receipt of payment therefor if (i) in the
Sub-Custodian's judgment, (A) release and
delivery prior to payment is required by the
terms of the instrument evidencing the
security or (B) release and delivery prior
to payment is the prevailing method of
settling securities transactions between
institutional investors in the applicable
market and (ii) release and delivery prior
to payment is in accordance with generally
accepted trade practice and with any
pplicable governmental regulations and the
rules of Securities Systems or other
securities depositories and clearing
agencies in the applicable market. The
Custodian agrees, upon request, to advise
the Fund of all pending transactions in
3
<PAGE>
which release and delivery will be made
prior to the receipt of payment therefor;
3.2.2 Upon the receipt of payment in connection
with any repurchase agreement related to
such securities entered into by the Fund;
3.2.3 In the case of a sale effected through a
Securities System, in accordance with the
provisions of Section 3.12 hereof;
3.2.4 To the depository agent in connection with
tender or other similar offers for portfolio
securities of the Fund; provided that, in
any such case, the cash or other
consideration is thereafter to be delivered
to the Sub-Custodian;
3.2.5 To the issuer thereof or its agent, when
such securities are called, redeemed,
retired or otherwise become payable;
provided that, in any such case, the cash or
other consideration is to be delivered to
the Sub-Custodian;
3.2.6 To the issuer thereof, or its agent for
transfer into the name of the Fund or into
the name of any nominee or nominees of the
Sub-Custodian or into the name or nominee
name of any agent appointed pursuant to
Section 3.11 or any other name permitted
pursuant to Section 3.3; or for exchange for
a different number of bonds, certificates or
other evidence representing the same
aggregate face amount or number of units;
provided that, in any such case, the new
securities are to be delivered to the Sub-
Custodian;
3.2.7 Upon the sale of such securities for the
account of the Fund, to the broker or its
clearing agent, against a receipt, for
examination in accordance with "street
delivery" custom; provided that in any such
case, the Sub-Custodian shall have no
responsibility or liability for any loss
arising from the delivery of such securities
prior to receiving payment for such
securities except as may arise from the Sub-
Custodian's own negligence or willful
misconduct;
4
<PAGE>
3.2.8 For exchange or conversion pursuant to any
plan of merger, consolidation,
recapitalization, reorganization or
readjustment of the securities of the issuer
of such securities, or pursuant to
provisions for conversion contained in such
securities, or pursuant to any deposit
agreement; provided that, in any such case,
the new securities and cash, if any, are to
be delivered to the Sub-Custodian;
3.2.9 In the case of warrants, rights or similar
securities, the surrender thereof in the
exercise of such warrants, rights or similar
securities or the surrender of interim
receipts or temporary securities for
definitive securities; provided that, in any
such case, the new securities and cash, if
any, are to be delivered to the Sub-
Custodian;
3.2.10 For delivery in connection with any loans of
securities made by the Fund, but only
against receipt of adequate collateral as
agreed upon from time to time by the
Custodian and the Fund, which may be in the
form of cash or obligations issued by the
United States government, its agencies or
instrumentalities; except that in connection
with any loan of securities held in a
Securities System for which collateral is to
credited to the Sub-Custodian's account in
another Securities System, the Sub-Custodian
will not be held liable or responsible for
delivery of the securities prior to the
receipt of such collateral.
3.2.11 For delivery as security in connection with
any borrowings by the Fund requiring a
pledge of assets by the Fund, but only
against receipt of amounts borrowed;
3.2.12 Upon receipt of instructions from the
transfer agent ("Transfer Agent") for the
Fund, for delivery to such Transfer Agent or
to the shareholders of the Fund in
connection with distributions in kind, as
may be described from time to time in the
Fund's Declaration of Trust and currently
effective registration statement, if any, in
satisfaction of requests by Fund
shareholders for repurchase or redemption;
5
<PAGE>
3.2.13 For delivery to another Sub-Custodian of the
Fund; and
3.2.14 For any other proper corporate purpose, but
only upon receipt of, in addition to Proper
Instructions, a certified copy of a
resolution of the Trustees or of the
Executive Committee of the Fund signed by an
officer of the Fund and certified by its
Clerk or an Assistant Clerk, specifying the
securities to be delivered, setting forth
the purpose for which such delivery is to be
made, declaring such purposes to be proper
corporate purposes, and naming the person or
persons to whom delivery of such securities
shall be made.
3.3 Registration of Securities. Securities of the Fund held by the
Sub-Custodians hereunder (other than bearer securities) shall be registered in
the name of the Fund or in the name of any nominee of the Fund or of any nominee
of the Sub-Custodians or any 17f-5 Sub-Custodian or Foreign Depository (as each
of those terms is defined in the Foreign Sub-Custodian Agreement, which nominee
shall be assigned exclusively to the Fund, unless the Fund has authorized in
writing the appointment of a nominee to be used in common with other registered
investment companies having the same investment adviser as the Fund, or in the
name or nominee name of any agent appointed pursuant to Section 3.12.
Notwithstanding the foregoing, a Sub-Custodian, agent, 17f-5 Sub-Custodian or
Foreign Depository may hold securities of the Fund in a nominee name which is
used for its other clients provided that such name is not used by the
Sub-Custodian, agent, 17f-5 Sub-Custodian or Foreign Depository for its own
securities and that securities of the Fund are, by book-entry or otherwise, at
all times identified as belonging to the Fund and distinguished from other
securities held for other clients using the same nominee name. In addition, and
notwithstanding the foregoing, a Sub-Custodian or agent thereof or 17f-5
Sub-Custodian or Foreign Depository may hold securities of the Fund in its own
name if such registration is the prevailing method in the applicable market by
which custodians register securities of institutional clients and provided that
securities of the Fund are, by book-entry or otherwise, at all times identified
as belonging to the Fund and distinguished from other securities held for other
clients or for the Sub-Custodian or agent thereof or 17f-5 Sub-Custodian or
Foreign Depository. All securities accepted by a Sub-Custodian under the terms
of a Sub-Custodian Agreement shall be in good delivery form.
6
<PAGE>
3.4 Bank Accounts. The Custodian shall cause one or more Sub-Custodians
to open and maintain a separate bank account or accounts in the name of the Fund
or the Custodian, subject only to draft or order by the Sub-Custodian acting
pursuant to the terms of a Sub-Custodian Contract or by the Custodian acting
pursuant to this Agreement, and shall hold in such account or accounts, subject
to the provisions hereof, all cash received by it from or for the account of the
Fund, other than cash maintained by the Fund in a bank account established and
used in accordance with Rule 17f-3 under the Investment Company Act of 1940.
Funds held by the Sub-Custodian for the Fund may be deposited by it to its
credit as sub-custodian or to the Custodian's credit as custodian in the Banking
Department of the Sub-Custodian or in such other banks or trust companies as it
may in its discretion deem necessary or desirable; provided, however, that every
such bank or trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust company and the
funds to be deposited with each such bank or trust company shall be approved by
vote of a majority of the Trustees of the Fund. Such funds shall be deposited by
the Sub-Custodian or the Custodian in its capacity as sub-custodian or
custodian, respectively, and shall be withdrawable by the Sub-Custodian or the
Custodian only in that capacity. The Sub-Custodian shall be liable for actual
losses incurred by the Fund attributable to any failure on the part of the
Sub-Custodian to report accurate cash availability information with respect to
the Fund's or the Custodian's bank accounts maintained by the Sub-Custodian or
any of its agents.
3.5 Payments for Shares. The Custodian shall cause one or more
Sub-Custodians to deposit into the Fund's account amounts received from the
Transfer Agent of the Fund for shares of the Fund issued by the Fund and sold by
its distributor. The Custodian will provide timely notification to the Fund of
any receipt by the Sub-Custodian from the Transfer Agent of payments for shares
of the Fund.
3.6 Availability of Federal Funds. Upon mutual agreement between the
Fund and the Custodian, the Custodian shall cause one or more Sub-Custodians,
upon the receipt of Proper Instructions, to make federal funds available to the
Fund as of specified times agreed upon from time to time by the Fund and the
Custodian with respect to amounts received by the Sub-Custodians for the
purchase of shares of the Fund.
3.7 Collection of Income. The Custodian shall cause one or more
Sub-Custodians to collect on a timely basis all income and other payments with
respect to registered securities held hereunder, including securities held in a
Securities System, to which the Fund shall be entitled either by law or pursuant
to custom in the securities business, and shall collect on a timely basis all
income and other payments with respect to bearer
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securities if, on the date of payment by the issuer, such securities are held by
the Sub-Custodian or agent thereof and shall credit such income, as collected,
to the Fund's account. Without limiting the generality of the foregoing, the
Custodian shall cause the Sub-Custodian to detach and present for payment all
coupons and other income items requiring presentation as and when they become
due and shall collect interest when due on securities held under the applicable
Sub-Custodian Agreement. Arranging for the collection of income due the Fund on
securities loaned pursuant to the provisions of Section 3.2.10 shall be the
responsibility of the Fund. The Custodian will have no duty or responsibility in
connection therewith, other than to provide the Fund with such information or
data as may be necessary to assist the Fund in arranging for the timely delivery
to the Sub-Custodian of the income to which the Fund is properly entitled.
3.8 Payment of Fund Monies. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the parties, the
Custodian shall cause one or more Sub-Custodians to pay out monies of the Fund
in the following cases only:
3.8.1 Upon the purchase of securities for the
account of the Fund but only (a) against the
delivery of such securities to the Sub-
Custodian (or any bank, banking firm or
trust company doing business in the United
States or abroad which is qualified under
the Investment Company Act of 1940, as
amended, to act as a custodian and has been
designated by the Sub-Custodian as its agent
for this purpose) or any 17f-5 Sub-Custodian
or any Foreign Depository registered in the
name of the Fund or in the name of a nominee
of the Sub-Custodian referred to in Section
3.3 hereof or in proper form for transfer;
provided, however, that the Sub-Custodian
may cause monies of the Fund to be paid out
prior to delivery of such securities if (i)
in the Sub-Custodian's judgment, (A) payment
prior to delivery is required by the terms
of the instrument evidencing the security or
(B) payment prior to delivery is the
prevailing method of settling securities
transactions between institutional investors
in the applicable market and (ii) payment
prior to delivery is in accordance with
generally accepted trade practice and with
any applicable governmental regulations and
the rules of Securities Systems or other
securities depositories and clearing
agencies in the applicable market; the
8
<PAGE>
Custodian agrees, upon request, to advise
the Fund of all pending transactions in
which payment will be made prior to the
receipt of securities in accordance with the
provision to the foregoing sentence; (b) in
the case of a purchase effected through a
Securities System, in accordance with the
conditions set forth in Section 3.13 hereof;
or (c)(i) in the case of a repurchase
agreement entered into between the Fund and
the Sub-Custodian, another bank, or a
broker-dealer against delivery of the
securities either in certificate form or
through an entry crediting the Sub-
Custodian's account at the Federal Reserve
Bank with such securities or (ii) in the
case of a repurchase agreement entered into
between the Fund and the Sub-Custodian,
against delivery of a receipt evidencing
purchase by the Fund of Securities owned by
the Sub-Custodian along with written
evidence of the agreement by the Sub-
Custodian to repurchase such securities from
the Fund; or (d) for transfer to a time
deposit account of the Fund in any bank,
whether domestic or foreign, which transfer
may be effected prior to receipt of a
confirmation of the deposit from the
applicable bank or a financial intermediary;
3.8.2 In connection with conversion, exchange or
surrender of securities owned by the Fund as
set forth in Section 3.2 hereof;
3.8.3 For the redemption or repurchase of Shares
issued by the Fund as set forth in Section
3.10 hereof;
3.8.4 For the payment of any expense or liability
incurred by the Fund, including but not
limited to the following payments for the
account of the Fund: interest, taxes,
management, accounting, transfer agent and
legal fees, including the Custodian's fee;
and operating expenses of the Fund whether
or not such expenses are to be in whole or
part capitalized or treated as deferred
expenses;
3.8.5 For the payment of any dividends or other
distributions declared to shareholders of
the Fund;
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<PAGE>
3.8.6 For transfer to another Sub-Custodian of the
Fund;
3.8.7 For any other proper purpose, but only upon
receipt of, in addition to Proper
Instructions, a certified copy of a
resolution of the Trustees or of the
Executive Committee of the Fund signed by an
officer of the Fund and certified by its
Clerk or an Assistant Clerk, specifying the
amount of such payment, setting forth the
purpose for which such payment is to be
made, declaring such purpose to be a proper
purpose, and naming the person or persons to
whom such payments is to be made.
3.9 Liability for Payment in Advance of Receipt of Securities
Purchased. Except as otherwise provided in this Agreement, in any and every case
where payment for purchase of securities for the account of the Fund is made by
a Sub-Custodian in advance of receipt of the securities purchased in the absence
of specific written instructions from the Fund to so pay in advance, the
Custodian shall cause the Sub-Custodian to be absolutely liable to the Fund in
the event any loss results to the Fund from the payment by the Sub-Custodian in
advance of delivery of such securities.
3.10 Payments for Repurchase or Redemptions of Shares of the Fund. From
such funds as may be available, the Custodian shall, upon receipt Proper
Instructions, cause one or more Sub-Custodians to make funds available for
payment to a shareholder who has delivered to the Transfer Agent a request for
redemption or repurchase of shares of the Fund. In connection with the
redemption or repurchase of shares of the Fund, the Custodian is authorized,
upon receipt of Proper Instructions, to cause one or more Sub-Custodian, to wire
funds to or through a commercial bank designated by the redeeming shareholder.
In connection with the redemption or repurchase of Shares of the Fund, the
Custodian, upon receipt of Proper Instructions, shall cause one or more Sub-
Custodians to honor checks drawn on the Sub-Custodian by a shareholder when
presented to the Sub-Custodian in accordance with such procedures and controls
as are mutually agreed upon from time to time among the Fund, the Custodian and
the Sub-Custodian.
3.11 Appointment of Agents. The Custodian may permit any Sub-Custodian
at any time or times in its discretion to appoint (and may at any time remove)
any other bank or trust company which is itself qualified under the Investment
Company Act of 1940, as amended, to act as a custodian, as its agent to carry
out such of the provisions of this Section 3 as the Sub-Custodian may from time
to time direct; provided, however, that
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the appointment of any agent shall not relieve the Custodian or any
Sub-Custodian of its responsibilities or liabilities hereunder and provided that
any such agent shall have been approved by vote of the Trustees of the Fund. The
Custodian may also permit any Sub-Custodian to which foreign securities of the
Fund have been delivered to direct such securities to be held by 17f-5
Sub-Custodians and to use the facilities of Foreign Depositories, as those terms
are defined in the Foreign Sub-Custodian Agreement, in accordance with the
terms of the Foreign Sub-Custodian Agreement.
The agents which the Fund and the Custodian have approved to date are
set forth in Schedule B hereto. Schedule B shall be amended from time to time as
agents are changed, added or deleted. The Fund shall be responsible for
informing the Custodian, and the Custodian shall be responsible for informing
the appropriate Sub-Custodian, sufficiently in advance of a proposed investment
which is to be held at a location not listed on Schedule B, in order that there
shall be sufficient time for the Sub-Custodian to complete the appropriate
contractual and technical arrangements with such agent. Any Sub-Custodian
Agreement shall provide that the engagement by the Sub-Custodian of one or more
agents shall not relieve the Sub-Custodian of its responsibilities or
liabilities thereunder.
3.12 Deposit of Fund Assets in Securities Systems. The Custodian may
permit any Sub-Custodian to deposit and/or maintain securities owned by the Fund
in a clearing agency registered with the Securities and Exchange Commission
under Section 17A of the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively referred
to herein as "Securities System" in accordance with applicable rules and
regulations (including Rule 17f-4 of the 1940 Act) and subject to the following
provisions:
3.12.1 The Sub-Custodian may, either directly or
through one or more agents, keep securities
of the Fund in a Securities System provided
that such securities are represented in an
account ("Account") of the Sub-Custodian in
the Securities System which shall not
include any assets of the Sub-Custodian
other than assets held as a fiduciary,
custodian or otherwise for customers;
3.12.2 The records of the Sub-Custodian with
respect to securities of the Fund which are
maintained in a Securities System shall
identify by book-entry those securities
belonging to the Fund;
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<PAGE>
3.12.3 The Sub-Custodian shall pay for securities
purchased for the account of the Fund upon
(i) receipt of advice from the Securities
System that such securities have been
transferred to the Account, and (ii) the
making of an entry on the records of the
Sub-Custodian to reflect such payment and
transfer for the account of the Fund. The
Sub-Custodian shall transfer securities sold
for the account of the Fund upon (i) receipt
of advice from the Securities System that
payment for such securities has been
transferred to the Account, and (ii) the
making of an entry on the records of the
Sub-Custodian to reflect such transfer and
payment for the account of the Fund. Copies
of all advices from the Securities System of
transfers of securities for the account of
the Fund shall identify the Fund, be
maintained for the Fund by the Sub-Custodian
or such an agent and be provided to the Fund
at its request. The Sub-Custodian shall
furnish the Fund confirmation of each
transfer to or from the account of the Fund
in the form of a written advice or notice
and shall furnish to the Fund copies of
daily transaction sheets reflecting each
day's transactions in the Securities System
for the account of the Fund on the next
business day;
3.12.4 The Sub-Custodian shall provide the Fund
with any report obtained by the Sub-
Custodian on the Securities System's
accounting system, internal accounting
controls and procedures for safeguarding
securities deposited in the Securities
System;
3.12.5 The Sub-Custodian shall utilize only such
Securities Systems as are approved by the
Board of Trustees of the Fund, and included
on a list maintained by the Custodian;
3.12.6 Anything to the contrary in this Agreement
notwithstanding, the Sub-Custodian shall be
liable to the Fund for any loss or damage to
the Fund resulting from use of the
Securities System by reason of any
negligence, misfeasance or misconduct of the
Sub-Custodian or any of its agents or of any
of its or their employees or from failure of
12
<PAGE>
the Sub-Custodian or any such agent to
enforce effectively such rights as it may
have against the Securities System; at the
election of the Fund, it shall be entitled
to be subrogated to the rights of the
Sub-Custodian with respect to any claim
against the Securities System or any other
person which the Sub-Custodian may have as a
consequence of any such loss or damage if
and to the extent that the Fund has not been
made whole for any such loss or damage.
3.12A Depositary Receipts. Only upon receipt of Proper Instructions,
the Sub-Custodian shall instruct a 17f-5 Sub-Custodian or an agent of the
Sub-Custodian appointed pursuant to the applicable Foreign Sub-Custodian
Agreement (an "Agent") to surrender securities to the depositary used by an
issuer of American Depositary Receipts or International Depositary Receipts
(hereinafter collectively referred to as "ADRs") for such securities against a
written receipt therefor adequately describing such securities and written
evidence satisfactory to the 17f-5 Sub-Custodian or Agent that the depositary
has acknowledged receipt of instructions to issue with respect to such
securities ADRs in the name of the Sub-Custodian, or a nominee of the
Sub-Custodian, for delivery to the Sub-Custodian.
Only upon receipt of Proper Instructions, the Sub-Custodian shall
surrender ADRs to the issuer thereof against a written receipt therefor
adequately describing the ADRs surrendered and written evidence satisfactory to
the Sub-Custodian that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depository to deliver the securities underlying such
ADRs to a 17f-5 Sub-Custodian or an Agent.
3.12B Foreign Exchange Transactions and Futures Contracts. Only upon
receipt of Proper Instructions, the Sub-Custodian shall enter into foreign
exchange contracts or options to purchase and sell foreign currencies for spot
and future delivery on behalf and for the account of the Fund or shall enter
into futures contracts or options on futures contracts. Such transactions may be
undertaken by the Sub-Custodian with such banking institutions, including the
Sub-Custodian and 17f-5 Sub-Custodian(s) appointed pursuant to the applicable
Foreign Sub-Custodian Agreement, as principals, as approved and authorized by
the Fund. Foreign exchange contracts, futures contracts and options, other than
those executed with the Sub-Custodian, shall for all purposes of this Agreement
be deemed to be portfolio securities of the Fund.
3.12C Option Transactions. Only upon receipt of Proper Instructions,
the Sub-Custodian shall enter into option transactions in accordance with the
provisions of any agreement
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<PAGE>
among the Fund, the Custodian and/or the Sub-Custodian and a broker-dealer.
3.13 Ownership Certificates for Tax Purposes. The Custodian shall cause
one or more Sub-Custodians as may be appropriate to execute ownership and other
certificates and affidavits for all federal and state tax purposes in connection
with receipt of income or other payments with respect to securities of the Fund
held by the Sub-Custodian and in connection with transfers of securities.
3.14 Proxies. The Custodian shall, with respect to the securities held
by the Sub-Custodians, cause to be promptly executed by the registered holder of
such securities, if the securities are registered other than in the name of the
Fund or a nominee of the fund, all proxies, without indication of the manner in
which such proxies are to be voted, and shall promptly deliver to the Fund such
proxies, all proxy soliciting materials and all notices relating to such
securities.
3.15 Communications Relating to Fund Portfolio Securities. The
Custodian shall cause the Sub-Custodians to transmit promptly to the Custodian,
and the Custodian shall transmit promptly to the Fund, all written information
(including, without limitation, pendency of calls and maturities of securities
and expirations of rights in connection therewith) received by the Sub-Custodian
from issuers of the securities being held for the account of the Fund. With
respect to tender or exchange offers, the Custodian shall cause the
Sub-Custodian to transmit promptly to the Fund, all written information received
by the Sub-Custodian from issuers of the securities whose tender or exchange is
sought and from the party (or his agents) making the tender or exchange offer.
If the Fund desires to take action with respect to any tender offer, exchange
offer or any other similar transaction, the Fund shall notify the Custodian of
the action the Fund desires such Sub-Custodian to take, provided, however,
neither the Custodian nor the Sub-Custodian shall be liable to the Fund for the
failure to take any such action unless such instructions are received by the
Custodian at least four business days prior to the date on which the
Sub-Custodian is to take such action or, in the case of foreign securities, such
longer period as shall have been agreed upon in writing by the Custodian and the
Sub-Custodian.
3.16 Proper Instructions. Proper Instructions as used throughout this
Agreement means a writing signed or initialed by one or more person or persons
who are authorized by the Trustees of the Fund and the Custodian. Each such
writing shall set forth the specific transaction or type of transaction
involved, including a specific statement of the purpose for which such action is
requested. Oral instructions will be considered Proper Instructions if the
Custodian or Sub-Custodian, as the case may
14
<PAGE>
be, reasonably believes them to have been given by a person authorized to give
such instructions with respect to the transaction involved. All oral
instructions shall be confirmed in writing. Proper Instructions also include
communications effected directly between electro-mechanical or electronic
devices provided that the Trustees have approved such procedures.
Notwithstanding the foregoing, no Trustee, officer, employee or agent of the
Fund shall be permitted access to any securities or similar investments of the
Fund deposited with any Sub-Custodian or any agent of any Sub-Custodian for any
reason except in accordance with the provisions of Rule 17f-2 under the 1940
Act.
3.17 Actions Permitted Without Express Authority. The Custodian may in
its discretion, and may permit one or more Sub-Custodians in their discretion,
without express authority from the Fund to:
3.17.1 make payments to itself or others for minor
expenses of handling securities or other
similar items relating to its duties under
this Agreement, or in the case of a Sub-
Custodian, under the applicable Sub-
Custodian Agreement, provided that all such
payments shall be accounted for to the Fund;
3.17.2 surrender securities in temporary form for
securities in definitive form;
3.17.3 endorse for collection, in the name of the
Fund, checks, drafts and other negotiable
instruments; and
3.17.4 in general, attend to all non-discretionary
details in connection with the sale,
exchange, substitution, purchase, transfer
and other dealings with the securities and
property of the Fund except as otherwise
directed by the Trustees of the Fund.
3.18 Evidence of Authority. The Custodian shall be protected in acting
upon any instructions, notice, request, consent, certificate or other instrument
or paper believed by it to be genuine and to have been properly executed by or
on behalf of the Fund.
3.19 Investment Limitations. In performing its duties generally, and
more particularly in connection with the purchase, sale and exchange of
securities made by or for the Fund, the Custodian may assume, unless and until
notified in writing to the contrary, that Proper Instructions received by it are
not in conflict with or in any way contrary to any provisions of the Fund's
Declaration of Trust or By-Laws (or comparable documents)
15
<PAGE>
or votes or proceedings of the shareholders or Trustees of the Fund. The
Custodian shall in no event be liable to the Fund and shall be indemnified by
the Fund for any violation of any investment limitations to which the Fund is
subject or other limitations with respect to the Fund's powers to expend funds,
encumber securities, borrow or take similar actions affecting its portfolio.
4. Performance Standards. The Custodian shall use its best efforts to perform
its duties hereunder in accordance with the standards set forth in Schedule C
hereto. Schedule C may be amended from time to time as agreed to by the
Custodian and the Trustees of the Fund.
5. Records. The Custodian shall create and maintain all records relating to the
Custodian's activities and obligations under this Agreement and cause all
Sub-Custodians to create and maintain all records relating to the
Sub-Custodian's activities and obligations under the appropriate Sub-Custodian
Agreement in such manner as will meet the obligations of the Fund under the 1940
Act, with particular attention to Sections 17(f) and 31 thereof and Rules 17f-2,
31a-1 and 31a-2 thereunder, applicable federal and state tax laws, and any other
law or administrative rules or procedures which may be applicable to the Fund.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian or during the regular business hours
of the Sub-Custodian, as the case may be, be open for inspection by duly
authorized officers, employees or agents of the Custodian and Fund and employees
and agents of the Securities and Exchange Commission. At the Fund's request, the
Custodian shall supply the Fund and cause one or more Sub-Custodians to supply
the Custodian with a tabulation of securities owned by the Fund and held under
this Agreement. When requested to do so by the Fund and for such compensation as
shall be agreed upon, the Custodian shall include and cause one or more
Sub-Custodians to include certificate numbers in such tabulations.
6. Opinion and Reports of Fund's Independent Accountants. The Custodian shall
take all reasonable actions, as the Fund may from time to time request, to
furnish such information with respect to its activities hereunder as the Fund's
independent public accountants may request in connection with the accountant's
verification of the Fund's securities and similar investments as required by
Rule 17f-2 under the 1940 Act, the preparation of the Fund's registration
statement and amendments thereto, the Fund's reports to the Securities and
Exchange Commission, and with respect to any other requirements of such
Commission.
The Custodian shall also direct any Sub-Custodian to take all
reasonable actions, as the Fund may from time to time request, to furnish such
information with respect to its
16
<PAGE>
activities under the applicable Sub-Custodian Agreement as the Fund's
independent public accountant may request in connection with the accountant's
verification of the Fund's securities and similar investments as required by
Rule 17f-2 under the 1940 Act, the preparation of the Fund's registration
statement and amendments thereto, the Fund's reports to the Securities and
Exchange Commission, and with respect to any other requirements of such
Commission.
7. Reports of Custodian's and Sub-Custodians' Independent Accountants. The
Custodian shall provide the Fund, at such times as the Fund may reasonably
require, with reports by its independent public accountant on its accounting
system, internal accounting controls and procedures for safeguarding securities,
including securities deposited and/or maintained in Securities Systems, relating
to services provided by the Custodian under this Agreement. The Custodian shall
also cause one or more of the Sub-Custodians to provide the Fund, at such time
as the Fund may reasonably require, with reports by independent public
accountants on their accounting systems, internal accounting controls and
procedures for safeguarding securities, including securities deposited and/or
maintained in Securities Systems, relating to services provided by those
Sub-Custodians under their respective Sub-Custody Agreements. Such reports,
which shall be of sufficient scope and in sufficient detail as may reasonably be
required by the Fund, shall provide reasonable assurance that any material
inadequacies would be disclosed by such examinations, and, if there is no such
inadequacies, shall so state.
8. Compensation. The Custodian shall be entitled to reasonable compensation for
its services and expenses as custodian, as agreed upon from time to time between
the Fund and the Custodian. Such expenses shall not include, however, the fees
paid by the Custodian to any Sub-Custodian.
9. Responsibility of Custodian. The Custodian shall exercise reasonable care and
diligence in carrying out the provisions of this Agreement and shall not be
liable to the Fund for any action taken or omitted by it in good faith without
negligence. So long as and to the extent that it is in the exercise of
reasonable care, neither the Custodian nor any Sub-Custodian shall be
responsible for the title, validity or genuineness of any property or evidence
of title thereto received by it or delivered by it pursuant to this Agreement
and shall be held harmless in acting upon any notice, request, consent,
certificate or other instrument reasonably believed by it to be genuine and, if
in writing, reasonably believed by it to be signed by the proper party or
parties. It shall be entitled to rely on and may act upon advice of counsel (who
may be counsel for the Fund) on all matters, and shall be without liability for
any action reasonably taken or omitted pursuant to such advice. Notwithstanding
the foregoing, the responsibility of the Custodian or a Sub-Custodian
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<PAGE>
with respect to redemptions effected by check shall be in accordance with a
separate Agreement entered into between the Custodian and the Fund. It is also
understood that the Custodian shall not be liable for any loss resulting from a
Sovereign Risk. A "Sovereign Risk" shall mean nationalization, expropriation,
devaluation, revaluation, confiscation, seizure, cancellation, destruction or
similar action by any governmental authority, de facto or de jure; or enactment,
promulgation, imposition or enforcement by any such governmental authority of
currency restrictions, exchange controls, taxes, levies or other charges
affecting the Fund's property; or acts of war, terrorism, insurrection or
revolution; or any other similar act or event beyond the Custodian's control.
If the Fund requires the Custodian which in turn may require a
Sub-Custodian to take any action with respect to securities, which action
involves the payment of money or which action may, in the opinion of the
Custodian or the Sub-Custodian result in the Custodian or its nominee or a
Sub-Custodian or its nominee being liable for the payment of money or incurring
liability of some other form, the Fund, as a prerequisite to requiring the
Custodian or the Custodian requiring any Sub-Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
The Fund agrees to indemnify and hold harmless the Custodian and its
nominee from and against all taxes, charges, expenses, assessments, claims and
liabilities (including counsel fees) incurred or assessed against it or its
nominee or any Sub-Custodian or its nominee in connection with the performance
of this Agreement, or any Sub-Custodian Agreement except, as to the Custodian,
such as may arise from its or its nominee's own negligent action, negligent
failure to act or willful misconduct, and as to a Sub-Custodian, such as may
arise from such Sub-Custodian's or its nominee's own negligent action,
negligent failure to act or willful misconduct. The negligent action, negligent
failure to act or willful misconduct of the Custodian shall not diminish the
Fund's obligation to indemnify the Custodian in the amount, but only in the
amount, of any indemnity required to be paid to a Sub-Custodian under its
Sub-Custodian Agreement. The Custodian may assign this indemnity from the Fund
directly to, and for the benefit of, any Sub-Custodian. The Custodian is
authorized, and may authorize any Sub-Custodian, to charge any account of the
Fund for such items and such fees. To secure any such authorized charges and any
advances of cash or securities made by the Custodian or any Sub-Custodian to or
for the benefit of the Fund for any purpose which results in the Fund incurring
an overdraft at the end of any business day or for extraordinary or emergency
purposes during any business day, the Fund (except a Fund specified in Schedule
D to this Agreement) hereby grants to the Custodian a security interest in and
pledges to the Custodian securities up to a maximum of 10% of the value
18
<PAGE>
of the Fund's net assets for the purpose of securing payment of any such
advances and hereby authorizes the Custodian on behalf of the Fund to grant to
any Sub-Custodian a security interest in and pledge of securities held for the
Fund (including those which may be held in a Securities System) up to a maximum
of 10% of the value of the net assets held by such Sub-Custodian. The specific
securities subject to such security interest may be designated in writing from
time to time by the Fund or its investment adviser. In the absence of any
designation of securities subject to such security interest, the Custodian or
the Sub-Custodian, as the case may be, may designate securities held by it.
Should the Fund fail to repay promptly any authorized charges or advances of
cash or securities, the Custodian or the Sub-Custodian shall be entitled to use
such available cash and to dispose of pledged securities and property as is
necessary to repay any such authorized charges or advances and to exercise its
rights as a secured party under the U.C.C. The Fund agrees that a Sub-Custodian
shall have the right to proceed directly against the Fund and not solely as
subrogee to the Custodian with respect to any indemnity hereunder assigned to a
Sub-Custodian, and in that regard, the Fund agrees that it shall not assert
against any Sub-Custodian proceeding against it any defense or right of set-off
the Fund may have against the Custodian arising out of the negligent action,
negligent failure to act or willful misconduct of the Custodian, and hereby
waives all rights it may have to object to the right of a Sub-Custodian to
maintain an action against it.
10. Successor Custodian. If a successor custodian shall be appointed by the
Trustees of the Fund, the Custodian shall, upon termination, cause to be
delivered to such successor custodian, duly endorsed and in the form for
transfer, all securities, funds and other properties then held by the
Sub-Custodians and all instruments held by the Sub-Custodians relative thereto
and cause the transfer to an account of the successor custodian all of the
Fund's securities held in any Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Trustees of
the Fund, cause to be delivered at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Trustees shall have been delivered to the
Custodian on or before the date when such termination shall become effective,
then the Custodian shall have the right to deliver to a bank or trust company,
which meets the requirements of the 1940 Act and the rules and regulations
thereunder, such securities, funds and other properties. Thereafter, such bank
or trust company shall be the successor of the Custodian under this Agreement.
In the event that such securities, funds and other properties remain in
the possession of the Custodian or any Sub-
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Custodian after the date of termination hereof owing to failure of the Fund to
procure the certified copy of the vote referred to or of the Trustees to appoint
a successor custodian, the Custodian shall be entitled to fair compensation for
its services during such period as the Sub-Custodians retain possession of such
securities, funds and other properties and the provisions of this Agreement
relating to the duties and obligations of the Custodian shall remain in full
force and effect.
11. Effective Period, Termination and Amendment. This Agreement shall become
effective as of its execution, shall continue in full force and effect until
terminated as hereinafter provided, may be amended at any time by mutual
agreement of the parties hereto and may be terminated by either party by an
instrument in writing delivered or mailed, postage prepaid to the other party,
such termination to take effect not sooner than thirty (30) days after the date
of such delivery or mailing; provided either party may at any time immediately
terminate this Agreement in the event of the appointment of a conservator or
receiver for the other party or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction. No provision of this Agreement may be amended or terminated except
by a statement in writing signed by the party against which enforcement of the
amendment or termination is sought.
Upon termination of the Agreement, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian and through the Custodian any Sub-Custodian for
its costs, expenses and disbursements.
12. Interpretation. This Agreement constitutes the entire understanding and
agreement of the parties hereto with respect to the subject matter hereof. In
connection with the operation of this Agreement, the Custodian and the Fund may
from time to time agree in writing on such provisions interpretive of or in
addition to the provisions of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement. No interpretive or
additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Agreement.
13. Governing Law. This instrument is executed and delivered in The Commonwealth
of Massachusetts and shall be governed by and construed according to the
internal laws of said Commonwealth, without regard to principles of conflicts of
law.
14. Notices. Notices and other writings delivered or mailed postage prepaid to
the Fund addressed to the Fund attention: John Hughes, or to such other person
or address as the Fund may have designated to the Custodian in writing, or to
the Custodian at One Post Office Square, Boston, Massachusetts 02109 attention:
George Crane, or to such other address as the Custodian may have designated to
the Fund in writing, shall be deemed to have been
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properly delivered or given hereunder to the respective addressee.
15. Binding Obligation. This Agreement shall be binding on and shall inure to
the benefit of the Fund and the Custodian and their respective successors and
assigns, provided that neither party hereto may assign this Agreement or any of
its rights or obligations hereunder without the prior written consent of the
other party.
16. Declaration of Trust. A copy of the Declaration of Trust of each of the
Funds is on file with the Secretary of The Commonwealth of Massachusetts and
notice is hereby given that this instrument is executed on behalf of the
Trustees of each of the Funds as Trustees and not individually and that the
obligations of this instrument are not binding on any of the Trustees or
officers or shareholders individually, but are binding only on the assets and
property of each Fund with respect to its obligations hereunder.
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IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf as of the day and year first above written.
THE PUTNAM FUNDS LISTED
IN SCHEDULE A
/s/ John D. Hughes
By ----------------------------
Vice President and Treasurer
PUTNAM FIDUCIARY TRUST COMPANY
/s/ Robert F. Lucey
By ----------------------------
President
Putnam Investments, Inc. ("Putnam"), the sole owner of the Custodian,
agrees that Putnam shall be the primary obligor with respect to compensation due
the Sub-Custodians pursuant to the Sub-Custodian Agreements in connection with
the Sub-Custodians' performance of their responsibilities thereunder and agrees
to take all actions necessary and appropriate to assure that the Sub-Custodians
shall be compensated in the amounts and on the schedules agreed to by the
Custodian and the Sub-Custodians pursuant to those Agreements.
PUTNAM INVESTMENTS, INC.
/s/ Douglas B. Jamieson
By ----------------------------
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EXHIBIT 1
MASTER SUB-CUSTODIAN AGREEMENT
AGREEMENT made this day of , 199 , between Putnam
Fiduciary Trust Company, a Massachusetts-chartered trust company (the
"Custodian"), and , a (the "Sub-Custodian").
WHEREAS, the Sub-Custodian represents to the Custodian that it is
eligible to serve as a custodian for a management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), and
WHEREAS, the Custodian has entered into a Custodian Agreement between
it and each of the Putnam Funds listed in Schedule A, each of such Funds acting
on its own behalf separately from all the other Funds and not jointly or jointly
and severally with any of the other Funds (each of the Funds being hereinafter
referred to as the "Fund"), and
WHEREAS, the Custodian and the Fund desire to utilize sub-custodians
for the purpose of holding cash and securities of the Fund, and
WHEREAS, the Custodian wishes to appoint the Sub-Custodian as the
Fund's Sub-Custodian,
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. Appointment of Custodian. The Custodian hereby employs and appoints
the Sub-Custodian as a Sub-Custodian for the Fund for the term and subject to
the provisions of this Agreement. Upon request, the Custodian shall deliver to
the Sub-Custodian such proxies, powers of attorney or other instruments as may
be reasonably necessary or desirable in connection with the performance by the
Sub-Custodian of its obligations under this Agreement on behalf of the Fund.
2. Duties of the Sub-Custodian with Respect to Property of the Fund
Held by It. The Custodian may from time to time deposit securities or cash owned
by the Fund with the Sub-Custodian. The Sub-Custodian shall have no
responsibility or liability for or on account of securities, funds or other
property of the Fund not so delivered to it. The Sub-Custodian shall hold and
dispose of the securities hereafter held by or deposited with the Sub-Custodian
as follows:
2.1 Holding Securities. The Sub-Custodian shall hold and physically
segregate for the account of the Fund all non-cash property, including all
securities owned by the Funds, other than
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securities which are maintained pursuant to Section 2.13 in a Securities System.
All such securities are to be held or disposed of for, and subject at all times
to the instructions of, the Custodian pursuant to the terms of this Agreement.
The Sub-Custodian shall maintain adequate records identifying the securities as
being held by it as Sub-Custodian of the Fund.
2.2 Delivery of Securities. The Sub-Custodian shall release and deliver
securities of the Fund held by it hereunder (or in a Securities System account
of the Sub-Custodian) only upon receipt of Proper Instructions (as defined in
Section 2.17), which may be continuing instructions when deemed appropriate by
the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System,
in accordance with the provisions of Section 2.13 hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Sub-Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees of the
Sub-Custodian or into the name or nominee name of any agent appointed pursuant
to Section 2.12; or for exchange for a different number of bonds, certificates
or other evidence representing the same aggregate face amount or number of
units; provided that, in any such case, the new securities are to be delivered
to the Sub-Custodian;
7) Upon the sale of such securities for the account of the
Fund, to the broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided that, in any such case, the
Sub-Custodian shall have no responsibility or liability for any loss arising
from the delivery of such securities prior to receiving payment for such
securities except as may arise from the Sub-Custodian's own negligence or
willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions for
conversion contained in such
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securities, or pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered to the
Sub-Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for definitive
securities; provided that, in any such case, the new securities and cash, if
any, are to be delivered to the Sub-Custodian;
10) For delivery in connection with any loans of securities
made by the Fund, but only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Sub-Custodian, which may be in the
form of cash or obligations issued by the United States government, its agencies
or instrumentalities;
11) For delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Fund, but only against receipt
of amounts borrowed;
12) Upon receipt of instructions from the transfer agent for
the Fund (the "Transfer Agent"), for delivery to such Transfer Agent or to the
shareholders of the Fund in connection with distributions in kind, as may be
described from time to time in the Fund's Declaration of Trust and currently
effective registration statement, if any, in satisfaction of requests by
shareholders for repurchase or redemption;
13) For delivery to another Sub-Custodian of the Fund; and
14) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of the
Trustees or of the Executive Committee of the Fund signed by an officer of the
Fund and certified by its Clerk or an Assistant Clerk, specifying the securities
to be delivered, setting forth the purpose for which such delivery is to be
made, declaring such purposes to be proper corporate purposes, and naming the
person or persons to whom delivery of such securities is to be made.
2.3 Registration of Securities. Securities of the Fund held by the
Sub-Custodian hereunder (other than bearer securities) shall be registered in
the name of the Fund or in the name of any nominee of the Fund or of any nominee
of the Sub-Custodian, which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment of a nominee to be
used in common with other registered investment companies having the same
investment adviser as the Fund, or in the name or nominee name of any agent
appointed pursuant to Section 2.12. Notwithstanding the foregoing, a Sub-
Custodian or agent thereof may hold securities of the Fund in a nominee name
which is used for its other clients provided such
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name is not used by the Sub-Custodian or agent for its own securities and that
securities of the Fund are physically segregated at all times from other
securities held for other clients using the same nominee name. All securities
accepted by the Sub-Custodian under the terms of this Agreement shall be in
"street name" or other good delivery form.
2.4 Bank Accounts. The Sub-Custodian shall open and maintain a separate
bank account or accounts in the name of the Fund, subject only to draft or order
by the Sub-Custodian acting pursuant to the terms of this Agreement, and shall
hold in such account or accounts, subject to the provisions hereof, all cash
received for the account of the Funds, other than cash maintained by the Fund in
a bank account established and used in accordance with Rule 17f-3 under the 1940
Act. Funds held by the Sub-Custodian for the Fund shall be deposited by it to
its credit as Sub-Custodian of the Fund in the Banking Department of the Sub-
Custodian or other banks. Such funds shall be deposited by the Sub-Custodian in
its capacity as Sub-Custodian and shall be withdrawable by the Sub-Custodian
only in that capacity. The Sub-Custodian shall be liable for losses incurred by
the Fund attributable to any failure on the part of the Sub-Custodian to report
accurate cash availability information with respect to the Fund's bank accounts
maintained by the Sub-Custodian or any of its agents, provided that such
liability shall be determined solely on a cost-of-funds basis.
2.5 Payments for Shares. The Sub-Custodian shall receive from any
distributor of the Fund's shares or from the Transfer Agent of the Fund and
deposit into the Fund's account such payments as are received for shares of the
Fund issued or sold from time to time by the Fund. The Sub-Custodian will
provide timely notification to the Custodian, and the Transfer Agent of any
receipt by it of payments for shares of the Fund.
2.6 Investment and Availability of Federal Funds. Upon mutual agreement
between the Custodian and the Sub-Custodian, the Sub-Custodian shall, upon the
receipt of Proper Instructions,
1) invest in such instruments as may be set forth in such
instructions on the same day as received all federal funds received after a time
agreed upon between the Sub-Custodian and the Custodian; and
2) make federal funds available to the Fund as of specified
times agreed upon from time to time by the Custodian and the Sub-Custodian in
the amount of checks, when cleared within the Federal Reserve System, received
in payment for shares of the Fund which are deposited into the Fund's account or
accounts.
2.7 Collection of Income. The Sub-Custodian shall collect on a timely
basis all income and other payments with respect to registered securities held
hereunder to which the Fund shall be entitled either by law or pursuant to
custom in the securities
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<PAGE>
business, and shall collect on a timely basis all income and other payments with
respect to bearer securities if, on the date of payment by the issuer, such
securities are held hereunder and shall credit such income, as collected, to the
Fund's account. Without limiting the generality of the foregoing, the Sub-
Custodian shall detach and present for payment all coupons and other income
items requiring presentation as and when they become due and shall collect
interest when due on securities held hereunder. Arranging for the collection of
income due the Fund on securities loaned pursuant to the provisions of Section
2.2(10) shall be the responsibility of the Custodian. The Sub-Custodian will
have no duty or responsibility in connection therewith, other than to provide
the Custodian with such information or data as may be necessary to assist the
Custodian in arranging for the timely delivery to the Sub-Custodian of the
income to which the Fund is properly entitled.
2.8 Payment of Fund Monies. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the parties, the
Sub-Custodian shall cause monies of a Fund to be paid out in the following cases
only:
1) Upon the purchase of securities for the account of the Fund
but only (a) against the delivery of such securities to the Sub-Custodian (or
any bank, banking firm or trust company doing business in the United States or
abroad which is qualified under the 1940 Act, as amended, to act as a custodian
and has been designated by the Sub-Custodian as its agent for this purpose)
registered in the name of the Fund or in the name of a nominee referred to in
Section 2.3 hereof or in proper form for transfer; (b) in the case of a purchase
effected through a Securities System, in accordance with the conditions set
forth in Section 2.13 hereof; or (c) in the case of repurchase agreements
entered into between the Fund and the Sub-Custodian, or another bank, (i)
against delivery of the securities either in certificate form or through an
entry crediting the Sub-Custodian's account at the Federal Reserve Bank with
such securities or (ii) against delivery of the receipt evidencing purchase by
the Fund of securities owned by the Sub-Custodian along with written evidence of
the agreement by the Sub-Custodian to repurchase such securities from the Fund;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of shares issued by the
Fund as set forth in Section 2.10 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for the account of the
Fund: interest, taxes, management, accounting, custodian and Sub-Custodian,
transfer agent and legal fees, including the Custodian's fee; and operating
expenses of the Fund whether or not such expenses are
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<PAGE>
to be in whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
6) For transfer to another Sub-Custodian of the Fund; and
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of the
Trustees or of the Executive Committee of the Fund signed by an officer of the
Fund and certified by its Clerk or an Assistant Clerk, specifying the amount of
such payment, setting forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming the person or persons
to whom such payment is to be made.
2.9 Liability for Payment in Advance of Receipt of Securities
Purchased. In any and every case where payment for purchase of securities for
the account of a Fund is made by the Sub-Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions from the
Custodian to so pay in advance, the Sub-Custodian shall be absolutely liable to
the Fund and the Custodian in the event any loss results to the Fund or the
Custodian from the failure of the Sub-Custodian to make such payment against
delivery of such securities, except that in the case of repurchase agreements
entered into by the Fund with a bank which is a member of the Federal Reserve
System, the Sub-Custodian may transfer funds to the account of such bank prior
to the receipt of written evidence that the securities subject to such a
repurchase agreement have been transferred by book-entry into a segregated
non-proprietary account of the Sub-Custodian maintained with any Federal Reserve
Bank or of the safe-keeping receipt, provided that such securities have in fact
been so transferred by book-entry.
2.10 Payments for Repurchases or Redemptions of Shares of the Fund.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and By-Laws and any applicable votes of
the Trustees of the Fund pursuant thereto, the Sub-Custodian shall, upon receipt
of instructions from the Custodian, make funds available for payment to
shareholders of the Fund who have delivered to the Transfer Agent a request for
redemption or repurchase of their shares. In connection with the redemption or
repurchase of shares of the Fund, the Sub-Custodian, upon receipt of Proper
Instructions, is authorized to wire funds to or through a commercial bank
designated by the redeeming shareholders. In connection with the redemption or
repurchase of shares of the Fund, the Sub-Custodian, upon receipt of Proper
Instructions, shall honor checks drawn on the Sub-Custodian by a shareholder,
when presented to the Sub-Custodian in accordance with such procedures and
controls as are mutually agreed upon from time to time among the Fund, the
Custodian and the Sub-Custodian.
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2.11 Variances. The Sub-Custodian may accept securities or cash
delivered in settlement of trades notwithstanding variances between the amount
of securities or cash so delivered and the amount specified in the instructions
furnished to it by the Custodian, provided that the variance in any particular
transaction does not exceed (i) $25 in the case of transactions of $1,000,000 or
less, and (ii) $50 in the case of transactions exceeding $1,000,000. The
Sub-Custodian shall maintain a record of any such variances and notify the
Custodian of such variances in periodic transaction reports submitted to the
Custodian. The Sub-Custodian will not advise any party with whom the Fund
effects securities transactions of the existence of these variance provisions
without the consent of the Fund and the Custodian.
2.12 Appointment of Agents. Without limiting its own responsibility for
its obligations assumed hereunder, the Sub-Custodian may at any time and from
time to time engage, at its own cost and expense, as an agent to act for the
Fund on the Sub-Custodian's behalf with respect to any such obligations any
bank or trust company which meets the requirements of the 1940 Act, and the
rules and regulations thereunder, to perform services delegated to the
Sub-Custodian hereunder, provided that the Fund shall have approved in writing
any such bank or trust company and the Sub-Custodian shall give prompt written
notice to the Custodian and the Fund of any such engagement. All agents of the
Sub-Custodian shall be subject to the instructions of the Sub-Custodian and not
the Custodian. The Sub-Custodian may, at any time in its discretion, and shall
at the Custodian's direction, remove any bank or trust company which has been
appointed as an agent, and shall in either case promptly notify the Custodian
and the Fund in writing of the completion of any such action.
The agents which the Fund has approved to date are set forth in
Schedule B hereto. Schedule B shall be amended from time to time as approved
agents are changed, added or deleted. The Custodian shall be responsible for
informing the Sub-Custodian sufficiently in advance of a proposed investment
which is to be held at a location not listed on Schedule B, in order that there
shall be sufficient time for the Fund to give the approval required by the
preceding paragraph and for the Sub-Custodian to complete the appropriate
contractual and technical arrangements with such agent. The engagement by the
Sub-Custodian of one or more agents to carry out such of the provisions of this
Section 2 shall not relieve the Sub-Custodian of its responsibilities or
liabilities hereunder.
2.13 Deposit of Fund Assets in Securities Systems. The Sub-Custodian
may deposit and/or maintain securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of the
Securities Exchange Act of 1934, which acts as a securities depository, or in
the book-entry system authorized by the U.S. Department of the Treasury
(collectively referred to herein as "Securities System") in accordance with
applicable Federal Reserve Board and
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Securities and Exchange Commission rules and regulations (including Rule 17f-4
of the 1940 Act), and subject to the following provisions:
1) The Sub-Custodian may keep securities of the Fund in a
Securities System provided that such securities are represented in an account
("Account") of the Sub-Custodian in the Securities System which shall not
include any assets other than assets held as a fiduciary, custodian or otherwise
for customers;
2) The records of the Sub-Custodian with respect to securities
of the Fund which are maintained in a Securities System shall identify by
book-entry those securities belonging to the Fund;
3) The Sub-Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the Securities System that
such securities have been transferred to the Account, and (ii) the making of an
entry on the records of the Sub-Custodian to reflect such payment and transfer
for the account of the Fund. The Sub-Custodian shall transfer securities sold
for the account of the Fund upon (a) receipt of advice from the Securities
System that payment for such securities has been transferred to the Account, and
(b) the making of an entry on the records of the Sub-Custodian to reflect such
transfer and payment for the account of the Fund. Copies of all advices from the
Securities System of transfers of securities for the account of the Fund shall
identify the Fund, be maintained for the Fund by the Sub-Custodian and be
provided to the Fund or the Custodian at the Custodian's request. The Sub-
Custodian shall furnish the Custodian confirmation of each transfer to or from
the account of the Fund in the form of a written advice or notice and shall
furnish to the Custodian copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the account of the Fund on the
next business day;
4) The Sub-Custodian shall provide the Custodian with any
report obtained by the Sub-Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding securities
deposited in the Securities System;
5) The Sub-Custodian shall have received the initial or annual
certificate, as the case may be, required by Section 2.10 hereof;
6) Anything to the contrary in this Agreement notwithstanding,
the Sub-Custodian shall be liable to the Fund and the Custodian for any loss or
damage to the Fund or the Custodian resulting from use of the Securities System
by reason of any negligence, misfeasance or misconduct of the Sub-Custodian or
any of its agents or of any of its or their employees or from failure of the
Sub-Custodian or any such agent to enforce effectively such rights as it may
have against the Securities
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System; at the election of the Custodian, it shall be entitled to be subrogated
to the rights of the Sub-Custodian with respect to any claim against the
Securities System or any other person which the Sub-Custodian may have as a
consequence of any such loss or damage if and to the extent that the Fund and
the Custodian have not been made whole for any such loss or damage.
2.14 Ownership Certificates for Tax Purposes. The Sub-Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to securities held by it hereunder and in connection with transfers of
securities.
2.15 Proxies. The Sub-Custodian shall, with respect to the securities
held hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of a
Fund, all proxies, without indication of the manner in which such proxies are to
be voted, and shall promptly deliver to the Custodian such proxies, all proxy
soliciting materials and all notices relating to such securities.
2.16 Communications Relating to Fund Portfolio Securities. The
Sub-Custodian shall transmit promptly to the Custodian all written information
(including, without limitation, pendency of calls and maturities of securities
and expirations of rights in connection therewith) received by the Sub-Custodian
from issuers of the securities being held for the account of the Fund. With
respect to tender or exchange offers, the Sub-Custodian shall transmit promptly
to the Custodian all written information received by the Sub-Custodian from
issuers of the securities whose tender or exchange is sought and from the party
(or his agents) making the tender or exchange offer. If the Fund desires to take
action with respect to any tender offer, exchange offer or any other similar
transactions, the Custodian shall notify the Sub-Custodian of the action the
Fund desires the Sub-Custodian to take; provided, however, that the
Sub-Custodian shall not be liable to the Fund or the Custodian for the failure
to take any such action unless such instructions are received by the
Sub-Custodian at least two business days prior to the date on which the
Sub-Custodian is to take such action.
2.17 Proper Instructions. Proper Instructions as used throughout this
Agreement means a writing signed or initialed by one or more persons who are
authorized by the Trustees of the Fund and by vote of the Board of Directors of
the Custodian. Each such writing shall set forth the specific transaction or
type of transaction involved, including a specific statement of the purpose for
which such action is requested. Oral instructions will be considered Proper
Instructions if the Sub-Custodian reasonably believes them to have been given by
a person authorized to give such instructions with respect to the transaction
involved. The Custodian shall cause all oral instructions to be confirmed in
writing. Upon receipt of a
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certificate of the Clerk or an Assistant Clerk as to the authorization by the
Trustees of the Funds accompanied by a detailed description of procedures
approved by the Trustees, Proper Instructions may include communications
effected directly between electro-mechanical or electronic devices, provided
that the Trustees, the Custodian and the Sub-Custodian are satisfied that such
procedures afford adequate safeguards for the Fund's assets. Notwithstanding the
foregoing, no Trustee, officer, employee or agent of the Fund shall be permitted
access to any securities or similar investments of the Fund deposited with the
Sub-Custodian or any agent for any reason except in accordance with the
provisions of Rule 17f-2 under the 1940 Act.
2.18 Actions Permitted without Express Authority. The Sub-Custodian may
in its discretion, without express authority from the Custodian:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the Fund
and the Custodian;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund held by the Sub-Custodian
hereunder except as otherwise directed by the Custodian or the Trustees of the
Fund.
2.19 Evidence of Authority. The Sub-Custodian shall be protected in
acting upon any instruction, notice, request, consent, certificate or other
instrument or paper reasonably believed by it to be genuine and to have been
properly executed by or on behalf of the Fund or the Custodian as custodian of
the Fund. The Sub-Custodian may receive and accept a certified copy of a vote of
the Trustees of the Fund or the Board of Directors of the Custodian, as
conclusive evidence (a) of the authority of any person to act in accordance with
such vote or (b) of any determination or of any action by the Trustees pursuant
to the Declaration of Trust and By-Laws and the Board of Directors of the
Custodian, as the case may be as described in such vote, and such vote may be
considered as in full force and effect until receipt by the Sub-Custodian of
written notice to the contrary.
3. Performance Standards; Protection of the Fund. The Sub-Custodian
shall use its best efforts to perform its duties hereunder in accordance with
the standards set forth in Schedule C hereto. Schedule C may be amended from
time to time as agreed to by the Custodian and the Trustees of the Fund.
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4. Records. The Sub-Custodian shall cooperate with and supply necessary
information to the entity or entities appointed by the Trustees of the Fund to
keep the books of account of the Funds or, if directed in writing to do so by
the Custodian, shall itself keep such books of account. The Sub-Custodian shall
create and maintain all records relating to its activities and obligations under
this Agreement in such manner as will meet the obligations of the Custodian
under its Custodian Agreement with the Fund under the 1940 Act, with particular
attention to Sections 17(f) and 31 thereof and Rules 17f-2, 31a-1 and 31a-2
thereunder, applicable federal and state tax laws, and any other law or
administrative rules or procedures which may be applicable to the Fund or the
Custodian. All such records shall be the property of the Fund and shall at all
times during the regular business hours of the Sub-Custodian be open for
inspection by duly authorized officers, employees or agents of the Custodian and
the Fund and employees and agents of the Securities and Exchange Commission. The
Sub-Custodian shall, at the Custodian's request, supply the Custodian with a
tabulation of securities owned by the Fund and held under this Agreement and
shall, when requested to do so by the Custodian and for such compensation as
shall be agreed upon between the Custodian and Sub-Custodian, include
certificate numbers in such tabulations.
5. Opinion and Reports of the Fund's Independent Accountants. The
Sub-Custodian shall take all reasonable actions, as the Custodian may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent public accountants with respect to its activities hereunder in
connection with the preparation of the Fund's registration statements and
amendments thereto, the Fund's reports to the Securities and Exchange Commission
and with respect to any other requirements of such Commission.
6. Reports of Sub-Custodian's Independent Accountants. The
Sub-Custodian shall provide the Custodian, at such times as the Custodian may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Sub-Custodian under this
Agreement; such reports, which shall be of sufficient scope and in sufficient
detail as may reasonably be required by the Custodian, shall provide reasonable
assurance that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, shall so state.
7. Compensation. The Sub-Custodian shall be entitled to reasonable
compensation for its services and expenses as Sub-Custodian, as agreed upon
from time to time between the Custodian and the Sub-Custodian.
8. Responsibility of Sub-Custodian. The Sub-Custodian shall exercise
reasonable care and diligence in carrying out the provisions of this Agreement
and shall not be liable to the Fund
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or the Custodian for any action taken or omitted by it in good faith without
negligence. So long as and to the extent that it is in the exercise of
reasonable care, the Sub-Custodian shall not be responsible for the title,
validity or genuineness of any property or evidence of title thereto received by
it or delivered by it pursuant to this Agreement and shall be held harmless in
acting upon any notice, request, consent, certificate or other instrument
reasonably believed by it to be genuine and to be signed by the proper party or
parties. It shall be entitled to rely on and may act upon advice of counsel (who
may be counsel for the Fund) on all matters, and shall be without liability for
any action reasonably taken or omitted pursuant to such advice. Notwithstanding
the foregoing, the responsibility of the Sub-Custodian with respect to
redemptions effected by check shall be in accordance with a separate agreement
entered into between the Custodian and the Sub-Custodian.
The Sub-Custodian shall protect the Fund and the Custodian from direct
losses to the Fund resulting from any act or failure to act of the Sub-Custodian
in violation of its duties hereunder or of law and shall maintain customary
errors and omissions and fidelity insurance policies in an amount not less than
$25 million to cover losses to the Fund resulting from any such act or failure
to act.
If the Custodian requires the Sub-Custodian to take any action with
respect to securities, which action involves the payment of money or which
action may, in the opinion of the Sub-Custodian, result in the Sub-Custodian's
being liable for the payment of money or incurring liability of some other form,
the Custodian, as a prerequisite to requiring the Sub-Custodian to take such
action, shall provide indemnity to the Sub-Custodian in an amount and form
satisfactory to it.
The Custodian agrees to indemnify and hold harmless the Sub-Custodian
from and against all taxes, charges, expenses, assessments, claims and
liabilities (including counsel fees) incurred or assessed against it or its
nominee in connection with the performance of this Agreement, except such as may
arise from its own negligent action, negligent failure to act or willful
misconduct. To secure any such authorized charges and any advances of cash or
securities made by the Sub-Custodian to or for the benefit of the Fund for any
purpose which results in the Fund's incurring an overdraft at the end of any
business day or for extraordinary or emergency purposes during any business day,
the Custodian on behalf of the Fund, unless prohibited from doing so by one or
more of the Fund's fundamental investment restrictions, hereby represents that
it has obtained from the Fund authorization to apply available cash in any
account maintained by the Sub-Custodian on behalf of the Fund and a security
interest in and pledge to it of securities held for the Fund by the
Sub-Custodian, in an amount not to exceed the amount not prohibited by such
restrictions, for the purposes of securing payment of any such advances, and
that the Fund has agreed, from time to time, to designate in writing, or to
cause its investment
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adviser to designate in writing, the specific securities subject to such
security interest and pledge. The Custodian hereby assigns the benefits of such
security interest and pledge to the Sub-Custodian, and agrees that, should the
Fund or the Custodian fail to repay promptly any advances of cash or securities,
the Sub-Custodian shall be entitled to use such available cash and to dispose of
such pledged securities as is necessary to repay any such advances.
9. Successor Sub-Custodian. If a successor Sub-Custodian shall be
appointed by the Custodian, the Sub-Custodian shall, upon termination, cause to
be delivered to such successor Sub-Custodian, duly endorsed and in the form for
transfer, all securities then held by it, shall cause the transfer to an account
of the successor Sub-Custodian all of the Fund's securities held in a Securities
System and shall cause to be delivered to such successor Sub-Custodian all funds
and other property held by it or any of its agents.
If no such successor Sub-Custodian shall be appointed, the
Sub-Custodian shall, in like manner, upon receipt of a certified copy of a vote
of the Trustees of the Fund, cause to be delivered at the office of the
Sub-Custodian and transfer such securities, funds and other properties in
accordance with such vote.
In the event that no written order designating a successor
Sub-Custodian or certified copy of a vote of the Trustees shall have been
delivered to the Sub-Custodian on or before the date when such termination shall
become effective, then the Sub-Custodian shall have the right to deliver to a
bank or trust company, which is a "bank" as defined in the 1940 Act, doing
business in Boston, Massachusetts, of its own selection, having an aggregate
capital, surplus, and undivided profits, as shown by its last published report,
of not less than $25,000,000, all securities, funds and other properties held by
the Sub-Custodian and its agents and all instruments held by the Sub-Custodian
and its agents relative thereto and all other property held by it and its agents
under this Agreement and to cause to be transferred to an account of such
successor Sub-Custodian all of the Fund's securities held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Sub-Custodian under this Agreement.
In the event that securities, funds and other properties remain in the
possession of the Sub-Custodian after the date of termination hereof owing to
failure of the Custodian to obtain the certified copy of vote referred to or of
the Trustees to appoint a successor Sub-Custodian, the Sub-Custodian shall be
entitled to fair compensation for its services during such period as the
Sub-Custodian retains possession of such securities, funds and other properties
and the provisions of this Agreement relating to the duties and obligations of
the Sub-Custodian shall remain in full force and effect.
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Upon termination, the Sub-Custodian shall, upon receipt of a certified
copy of a vote of the Trustees of the Fund, cause to be delivered to any other
Sub-Custodian designated in such vote such assets, securities and other property
of the Fund as are designated in such vote, or pursuant to Proper Instructions,
cause such assets, securities and other property of the Fund as are designated
by the Custodian to be delivered to one or more of the sub-custodians designated
on Schedule D hereto, as from time to time amended.
10. Effective Period; Termination and Amendment. This Agreement shall
become effective as of its execution, shall continue in full force and effect
until terminated as hereinafter provided, may be amended at any time by mutual
agreement of the parties hereto and may be terminated by either party by an
instrument in writing delivered or mailed, postage prepaid, to the other party,
such termination to take effect not sooner than thirty (30) days after the date
of mailing; provided, however, that the Sub-Custodian shall not act under
Section 2.13 hereof in the absence of receipt of an initial certificate of the
Clerk or an Assistant Clerk that the Trustees of the Fund have approved the
initial use of a particular Securities System and the receipt of an annual
certificate of the Clerk or an Assistant Clerk that the Trustees have reviewed
the use by the Fund of such Securities System, as required in each case by Rule
17f-4 under the Investment Company Act of 1940; and provided, further, however,
that the Custodian shall not amend or terminate this Agreement in contravention
of any applicable federal or state regulations or any provision of the
Declarations of Trust or By-Laws of the Fund; and provided, further, that the
Custodian may at any time, by action of its Board of Directors, or the Trustees
of the Fund, as the case may be, immediately terminate this Agreement in the
event of the appointment of a conservator or receiver for the Sub-Custodian by
the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of this Agreement, the Custodian shall pay to the
Sub-Custodian such compensation as may be due as of the date of such termination
and shall likewise reimburse the Sub-Custodian for its reimbursable costs,
expenses and disbursements.
11. Amendment and Interpretation. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof. No provision of this Agreement may be amended or terminated
except by a statement in writing signed by the party against which enforcement
of the amendment or termination is sought.
In connection with the operation of this Agreement, the Sub-Custodian
and the Custodian may from time to time agree in writing on such provisions
interpretive of or in addition to the provisions of this Agreement as may in
their joint opinion be consistent with the general tenor of this Agreement. No
interpretive or additional provisions made as provided in the
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preceding sentence shall be deemed to be an amendment of this Agreement.
12. Governing Law. This Agreement is executed and delivered in The
Commonwealth of Massachusetts and shall be governed by and construed according
to the laws of said Commonwealth.
13. Notices. Notices and other writings delivered or mailed postage
prepaid to the Custodian addressed to the Custodian attention: , or to such
other person or address as the Custodian may have designated to the
Sub-Custodian in writing, or to the Sub-Custodian at , or to such other address
as the Sub-Custodian may have designated to the Custodian in writing, shall be
deemed to have been properly delivered or given hereunder to the respective
addressee.
14. Binding Obligation. This Agreement shall be binding on and shall
inure to the benefit of the Custodian and the Sub-Custodian and their respective
successors and assigns, provided that neither party hereto may assign this
Agreement or any of its rights or obligations hereunder without the prior
written consent of the other party.
15. Prior Agreements. This Agreement supersedes and terminates, as of
the date hereof, all prior contracts between the Fund or the Custodian and the
Sub-Custodian relating to the custody of the Fund's assets.
16. Declaration of Trust. A copy of the Agreement and Declaration of
Trust of the Fund is on file with the Secretary of The Commonwealth of
Massachusetts, and notice is hereby given that the obligations of or arising out
of this instrument are not binding upon any of the Trustees or beneficiaries
individually but binding only upon the assets and property of the Funds.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the day of , 199 .
PUTNAM FIDUCIARY TRUST COMPANY
By ---------------------------
(SUB-CUSTODIAN)
By ---------------------------
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<PAGE>
EXHIBIT 1(A)
MASTER FOREIGN SUB-CUSTODIAN AGREEMENT
AGREEMENT made this day of , 199 , between Putnam
Fiduciary Trust Company, a Massachusetts-chartered trust company (the
"Custodian"), and , (the "Sub-Custodian").
WHEREAS, the Sub-Custodian represents to the Custodian that it is
eligible to serve as a custodian for a management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), and
WHEREAS, the Custodian has entered into a Custodian Agreement between
it and each of the Putnam Funds listed in Schedule A to this Agreement, each of
such Funds acting on its own behalf separately from all the other Funds and not
jointly or jointly and severally with any of the other Funds (each of the Funds
being hereinafter referred to as the "Fund"), and
WHEREAS, the Custodian and the Fund desire to utilize sub-custodians
for the purpose of holding cash and securities of the Fund, and
WHEREAS, the Custodian wishes to appoint the Sub-Custodian as the
Fund's Sub-Custodian,
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. Appointment of Sub-Custodian. The Custodian hereby employs and appoints the
Sub-Custodian as a sub-custodian for safekeeping of securities and other assets
of the Fund for the term and subject to the provisions of this Agreement. Upon
request, the Custodian shall deliver to the Sub-Custodian such proxies, powers
of attorney or other instruments as may be reasonably necessary or desirable in
connection with the performance by the Sub-Custodian of its obligations under
this Agreement on behalf of the Fund.
2. Duties of the Sub-Custodian with Respect to Property of the Fund
Held by It. The Custodian may from time to time deposit or direct the deposit of
securities or cash owned by the Fund with the Sub-Custodian. The Sub-Custodian
shall have no responsibility or liability for or on account of securities, funds
or other property of the Fund not so delivered to it. Except for securities and
funds held by 17f-5 Sub-Custodians (as defined in Section 2.11(b)) the
Sub-Custodian shall hold and dispose of the securities or cash hereafter held by
or deposited with the Sub-Custodian as follows:
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<PAGE>
2.1. Holding Securities. The Sub-Custodian shall hold and, by
book-entry or otherwise, identify as belonging to the Fund all non-cash property
which has been delivered to the Sub-Custodian. All such securities are to be
held or disposed of for, and subject at all times to the instructions of, the
Custodian pursuant to the terms of this Agreement. The Sub-Custodian shall
maintain adequate records identifying the securities as being held by it as
sub-custodian of the Fund.
2.2. Delivery of Securities. The Sub-Custodian shall release
and deliver securities of the Fund held by it hereunder (or in a Securities
System account of the Sub-Custodian) only upon receipt of Proper Instructions
(as defined in Section 2.19), which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the
Fund and receipt of payment therefor, provided, however, that the Sub-Custodian
may release and deliver securities prior to the receipt of payment therefor if
(i) in the Sub-Custodian's judgment, (A) release and delivery prior to payment
is required by the terms of the instrument evidencing the security or (B)
release and delivery prior to payment is the prevailing method of settling
securities transactions between institutional investors in the applicable market
and (ii) release and delivery prior to payment is in accordance with generally
accepted trade practice and with any applicable governmental regulations and the
rules of Securities Systems or other securities depositories and clearing
agencies in the applicable market. The Sub-Custodian agrees, upon request, to
advise the Custodian of all pending transactions in which release and delivery
will be made prior to the receipt of payment therefor;
2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities
System, in accordance with the provisions of Section 2.12 hereof;
4) To the depository agent in connection with tender
or other similar offers for such securities; provided that, in any such case,
the cash or other consideration is thereafter to be delivered to the
Sub-Custodian;
5) To the issuer thereof or its agent when such
securities are called, redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is thereafter to be
delivered to the Sub-Custodian;
6) To the issuer thereof, or its agent, for transfer
into the name of the Fund or into the name of any nominee or nominees of the
Sub-Custodian or into the name or nominee name of any agent appointed pursuant
to Section 2.11 or any other name permitted pursuant to Section 2.3; or for
exchange for a different
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<PAGE>
number of bonds, certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such case, the new
securities are thereafter to be delivered to the Sub-Custodian;
7) Upon the sale of such securities for the account of
the Fund, to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom; provided that, in any
such case, the Sub-Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving payment for
such securities except as may arise from the Sub-Custodian's own negligence or
willful misconduct;
8) For exchange or conversion pursuant to any plan of
merger, consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions for
conversion contained in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash, if any, thereafter
are to be delivered to the Sub-Custodian;
9) In the case of warrants, rights or similar
securities, the surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or temporary securities
for definitive securities; provided that, in any such case, the now securities
and cash, if any, are thereafter to be delivered to the Sub-Custodian;
10) For delivery in connection with any loans of
securities made by the Fund, but only against receipt of collateral the adequacy
and timing of receipt of which shall be as agreed upon from time to time in
writing by the Custodian and the Sub-Custodian, which may be in the form of cash
or obligations issued by the United States government, its agencies or
instrumentalities;
11) For delivery as security in connection with any
borrowings by the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) Upon receipt of instructions from the transfer
agent for the Fund (the "Transfer Agent"), for delivery to such Transfer Agent
or to the shareholders of the Fund in connection with distributions in kind, in
satisfaction of requests by shareholders for repurchase or redemption;
13) For delivery to the Custodian or another
sub-custodian of the Fund; and
14) For any other proper purpose, but only upon
receipt of, in addition to Proper Instructions, a certified copy of a resolution
of the Trustees or of the Executive Committee of the Fund signed by an officer
of the Fund and certified by its Clerk or an Assistant Clerk, specifying the
securities to be
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<PAGE>
delivered, setting forth the purpose for which such delivery is to be made,
declaring such purposes to be proper corporate purposes, and naming the person
or persons to whom delivery of such securities is to be made.
2.3. Registration of Securities. Securities of the Fund held
by the Sub-Custodian hereunder (other than bearer securities) shall be
registered in the name of the Fund or in the name of any nominee of the Fund or
of any nominee of the Sub-Custodian or any 17f-5 Sub-Custodian or Foreign
Depository (as each of those terms is defined in Section 2.11(b)), which nominee
shall be assigned exclusively to the Fund, unless the Fund has authorized in
writing the appointment of a nominee to be used in common with other registered
investment companies having the same investment adviser as the Fund, or in the
name or nominee name of any agent appointed pursuant to Section 2.11(a).
Notwithstanding the foregoing, the Sub-Custodian or agent thereof or any 17f-5
Sub-Custodian or Foreign Depository may hold securities of the Fund in a nominee
name which is used for its other clients provided that such name is not used by
the Sub-Custodian, agent, 17f-5 Sub-Custodian or Foreign Depository for its own
securities and that securities of the Fund are, by book-entry or otherwise, at
all times identified as belonging to the Fund and distinguished from other
securities held for other clients using the same nominee name. In addition, and
notwithstanding the foregoing, the Sub-Custodian or agent thereof or 17f-5
Sub-Custodian or Foreign Depository may hold securities of the Fund in its own
name if such registration is the prevailing method in the applicable market by
which custodians register securities of institutional clients and provided that
securities of the Fund are, by book-entry or otherwise, at all times identified
as belonging to the Fund and distinguished from other securities held for other
clients or for the Sub-Custodian or agent thereof or 17f-5 Sub-Custodian or
Foreign Depository. All securities accepted by the Sub-Custodian under the terms
of this Agreement shall be in good delivery form.
2.4. Bank Accounts. The Sub-Custodian shall open and maintain
a separate bank account or accounts in the name of the Fund or of the Custodian
for the benefit of the Fund, subject only to draft or order by the Sub-Custodian
acting pursuant to the terms of this Agreement or by the Custodian acting
pursuant to the Custodian Agreement, and shall hold in such account or accounts,
subject to the provisions hereof, to the Sub-Custodian's credit as sub-custodian
of the Fund or the Custodian's credit as custodian for the Fund, cash received
for the account of the Fund other than cash maintained by the Fund in a bank
account established and used in accordance with Rule 17f-3 under the 1940 Act or
cash held as deposits with 17f-5 Sub-Custodians in accordance with the following
paragraph. The responsibilities of the Sub-Custodian for cash, including foreign
currency, of the Fund accepted on the Sub-Custodian's books as a deposit shall
be that of a U.S. bank for a similar deposit.
The Sub-Custodian may open a bank account on the books of a 17f-5
Sub-Custodian in the name of the Fund or of the Sub-
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Custodian as a sub-custodian for the Fund, and may deposit cash, including
foreign currency, of the Fund in such account, and such funds shall be
withdrawable only pursuant to draft or order of the Sub-Custodian. The records
for such account will be maintained by the Sub-Custodian but such account shall
not constitute a deposit liability of the Sub-Custodian. The responsibilities of
the Sub-Custodian for deposits maintained in such account shall be the same as
and no greater than the Sub-Custodian's responsibility in respect of other
portfolio securities of the Fund.
The Sub-Custodian shall be liable for actual losses incurred by the
Fund attributable to any failure on the part of the Sub-Custodian to report
accurate cash availability information with respect to the bank accounts
referred to in this Section 2.4.
2.5. Payments for Shares. The Sub-Custodian shall maintain
custody of amounts received from the Transfer Agent of the Fund for shares of
the Fund issued by the Fund and sold by its distributor and deposit such amounts
into the Fund's account. The Sub-Custodian will provide timely notification to
the Custodian and the Transfer Agent of any receipt by it of payments for shares
of the Fund.
2.6. Availability of Federal Funds. Upon mutual agreement
between the Custodian and the Sub-Custodian, the Sub-Custodian shall, upon the
receipt of Proper Instructions, make federal funds available to the Custodian
for the account of the Fund as of specified times agreed upon from time to time
by the Custodian and the Sub-Custodian with respect to amounts received by the
Sub-Custodian for the purchase of shares of the Fund.
2.7. Collection of Income. The Sub-Custodian shall collect on
a timely basis all income and other payments with respect to registered
securities held hereunder, including securities held in a Securities System, to
which the Fund shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and other
payments with respect to bearer securities if, on the date of payment by the
issuer, such securities are held hereunder and shall credit such income, as
collected, to the Fund's account. Without limiting the generality of the
foregoing, the Sub-Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due and
shall collect interest when due on securities held hereunder. Arranging for the
collection of income due the Fund on securities loaned pursuant to the
provisions of Section 2.2(10) shall be the responsibility of the Custodian. The
Sub-Custodian will have no duty or responsibility in connection therewith, other
than to provide the Custodian with such information or data as may be necessary
to assist the Custodian in arranging for the timely delivery to the
Sub-Custodian of the income to which the Fund is properly entitled.
2.8. Payment of Fund Monies. Upon receipt of Proper
Instructions, which may be continuing instructions when deemed
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<PAGE>
appropriate by the parties, the Sub-Custodian shall cause monies of the Fund to
be paid out in the following cases only:
1) Upon the purchase of securities for the account of
the Fund but only (a) against the delivery of such securities to the
Sub-Custodian (or any bank, banking firm or trust company doing business in the
United States or abroad which is qualified under the 1940 Act, as amended, to
act as a custodian and has been designated by the Sub-Custodian as its agent for
this purpose) or any 17f-5 Sub-Custodian or any Foreign Depository (as each of
those terms is defined in Section 2.11(b)) registered in the name of the Fund or
in the name of a nominee referred to in Section 2.3 hereof or in proper form for
transfer, provided, however, that the Sub-Custodian may cause monies of the Fund
to be paid out prior to delivery of such securities if (i) in the
Sub-Custodian's judgment, (A) payment prior to delivery is required by the terms
of the instrument evidencing the security or (B) payment prior to delivery is
the prevailing method of settling securities transactions between institutional
investors in the applicable market and (ii) payment prior to delivery is in
accordance with generally accepted trade practice and with any applicable
governmental regulations and the rules of Securities Systems or other securities
depositories and clearing agencies in the applicable market. The Sub-Custodian
agrees, upon request, to advise the Custodian of all pending transactions in
which payment will be made prior to the receipt of securities in accordance with
the proviso to the foregoing sentence; (b) in the case of a purchase effected
through a Securities System, in accordance with the conditions set forth in
Section 2.12 hereof; or (c) (i) in the case of a repurchase agreement entered
into between the Fund and the Sub-Custodian, another bank or a broker-dealer,
against delivery of the securities either in certificate form or through an
entry crediting the Sub-Custodian's or its agent's non-proprietary account at
any Federal Reserve Bank with such securities or (ii) in the case of a
repurchase agreement entered into between the Fund and the Sub-Custodian,
against delivery of a receipt evidencing purchase by the Fund of securities
owned by the Sub-Custodian along with written evidence of the agreement by the
Sub-Custodian to repurchase such securities from the Fund; or (d) for transfer
to a time deposit account of the Fund in any bank, whether domestic or foreign,
which transfer may be effected prior to receipt of a confirmation of the deposit
from the applicable bank or a financial intermediary;
2) In connection with conversion, exchange or
surrender or tender or exercise of securities owned by the Fund as set forth in
Section 2.2 hereof;
3) For the redemption or repurchase of shares issued
by the Fund as set forth in Section 2.10 hereof;
4) For the payment of any expense or liability
incurred by the Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management, accounting, custodian and
sub-custodian, transfer agent and legal
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fees, including the Custodian's fee; and operating expenses of the Fund whether
or not such expenses are to be in whole or part capitalized or treated as
deferred expenses;
5) For the payment of any dividends or other
distributions declared to shareholders of the Fund;
6) For transfer to the Custodian or another
sub-custodian of the Fund; and
7) For any other proper purpose, but only upon receipt
of, in addition to Proper Instructions, a certified copy of a resolution of the
Trustees or of the Executive Committee of the Fund signed by an officer of the
Fund and certified by its Clerk or Assistant Clerk, specifying the amount of
such payment, setting forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming the person or persons
to whom such payment is to be made.
2.9. Liability for Payment in Advance of Receipt of Securities
Purchased. Except as otherwise provided in this Agreement, in any and every case
where payment for purchase of securities for the account of the Fund is made by
the Sub-Custodian in advance of receipt of the securities purchased in the
absence of Proper Instructions from the Custodian to so pay in advance, the
Sub-Custodian shall be absolutely liable to the Fund and the Custodian in the
event any loss results to the Fund or the Custodian from the payment by the
Sub-Custodian in advance of delivery of such securities.
2.10. Payments for Repurchases or Redemptions of Shares of the
Fund. From such funds as may be available, the Sub-custodian shall, upon receipt
of Proper Instructions, make funds available for payment to a shareholder of the
Fund who has delivered to the Transfer Agent a request for redemption or
repurchase of shares of the Fund. In connection with the redemption or
repurchase of shares of the Fund, the Sub-Custodian, upon receipt of Proper
Instructions, is authorized to wire funds to or through a commercial bank
designated by the redeeming shareholder. In connection with the redemption or
repurchase of shares of the Fund, the Sub-Custodian, upon receipt of Proper
Instructions, shall honor checks drawn on the Sub-Custodian by a shareholder,
when presented to the Sub-Custodian in accordance with such procedures and
controls as are mutually agreed upon from time to time among the Fund, the
Custodian and the Sub-Custodian.
2.11. Appointment of Agents and Sub-Custodians Pursuant
to Rule 17f-5.
(a) Agents. Without limiting its own responsibility for its
obligations assumed hereunder, the Sub-Custodian may at any time and from time
to time engage, at its own cost and expense, as an agent to act for the Fund on
the Sub-Custodian's behalf with respect to any such obligations any bank or
trust company which meets the requirements of the 1940 Act, and the
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rules and regulations thereunder, to perform services delegated to the
Sub-Custodian hereunder, provided that the Fund and the Custodian shall have
approved in writing any such bank or trust company. All agents of the
Sub-Custodian shall be subject to the instructions of the Sub-Custodian and not
the Custodian. The Sub-Custodian may, at any time in its discretion, and shall
at the Custodian's direction, remove any bank or trust company which has been
appointed as an agent, and shall in either case promptly notify the Custodian
and the Fund in writing of the completion of any such action.
The agents which the Fund has approved to date are set forth in
Schedule B hereto. Schedule B shall be amended from time to time as approved
agents are changed, added or deleted. The Custodian shall be responsible for
informing the Sub-Custodian sufficiently in advance of a proposed investment
which is to be held at a location not listed on Schedule B, in order that there
shall be sufficient time for the Fund to give the approval required by the
preceding paragraph and for the Sub-Custodian to complete the appropriate
contractual and technical arrangements with such agent. The engagement by the
Sub-Custodian of one or more agents shall not relieve the Sub-Custodian of its
responsibilities or liabilities hereunder.
(b) 17f-5 Sub-Custodians. Securities, funds and other property
of the Fund may be held by sub-custodians appointed pursuant to the provisions
of this Section 2.11 (each, a "17f-5 Sub-Custodian"). The Sub-Custodian may, at
any time and from time to time, appoint any bank or trust company (that meets
the requirements of a custodian or a foreign custodian under the Investment
Company Act of 1940 and the rules and regulations thereunder, including without
limitation Rule 17f-5 thereunder, or that has received an order of the
Securities and Exchange Commission ("SEC") exempting it from any of such
requirements that it does not meet) to act as a 17f-5 Sub-Custodian for the
Fund, provided that the Fund shall have approved in writing (1) any such bank or
trust company and the sub-custodian agreement to be entered into between such
bank or trust company and the Sub-Custodian, and (2) the 17f-5 Sub-Custodian's
offices or branches at which the 17f-5 Sub-Custodian is authorized to hold
securities, cash and other property of the Fund. Upon such approval by the Fund,
the Sub-Custodian is authorized on behalf of the Fund to notify each 17f-5
Sub-Custodian of its appointment as such. The Sub-Custodian may, at any time in
its discretion, remove any bank or trust company that has been appointed as a
17f-5 Sub-Custodian.
Those 17f-5 Sub-Custodians and their offices or branches which the Fund
has approved to date are set forth on Schedule C hereto. Such Schedule C shall
be amended from time to time as 17f-5 Sub-Custodians, branches or offices are
changed, added or deleted. The Custodian shall be responsible for informing the
Sub-Custodian sufficiently in advance of a proposed investment which is to be
held at a location not listed on Schedule C, in order that there shall be
sufficient time for the Fund to give the approval required by the preceding
paragraph and for the Sub-
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Custodian to put the appropriate arrangements in place with such 17f-5
Sub-Custodian pursuant to such sub-custodian agreement.
With respect to the securities and funds held by a 17f-5 Sub-
Custodian, either directly or indirectly, including demand and interest bearing
deposits, currencies or other deposits and foreign exchange contracts, the
Sub-Custodian shall be liable to the Custodian and the Fund if and only to the
extent that such 17f-5 Sub-Custodian is liable to the Sub-Custodian and the Sub-
Custodian recovers under the applicable sub-custodian agreement, provided,
however, that the foregoing limitation shall not apply if such 17f-5
Sub-Custodian's liability to the Sub-Custodian is limited because the applicable
sub-custodian agreement does not contain provisions substantially similar to the
provisions of Section 2 (but not including Section 2.12) of this Agreement. The
Sub-Custodian shall also be liable to the Custodian and the Fund for its own
negligence in transmitting any instructions received by it from the Fund or the
Custodian and for its own negligence in connection with the delivery of any
securities or funds held by it to any such 17f-5 Sub-Custodian.
The Custodian or the Fund may authorize the Sub-Custodian or one or
more of the 17f-5 Sub-Custodians to use the facilities of one or more foreign
securities depositories or clearing agencies (each, a "Foreign Depository") that
is permitted to be used by registered investment companies by a Rule or Rules of
the SEC or that has received an order of the SEC exempting it from any of such
requirements that it does not meet. The records of the Sub-Custodian or a 17f-5
Sub-Custodian employing a Foreign Depository or clearing agency shall identify
those securities belonging to the Fund which are maintained in such a Foreign
Depository. The engagement by the Sub-Custodian of one or more Foreign
Depositories shall not relieve the Sub-Custodian of its responsibilities or
liabilities hereunder. The Foreign Depositories which the Fund has approved to
date are set forth in Schedule C hereto. Schedule C shall be amended from time
to time as approved Foreign Depositories are changed, added or deleted. The
Custodian shall be responsible for informing the Sub-Custodian sufficiently in
advance of a proposed investment which is to be held at a location not listed on
Schedule C, in order that there shall be sufficient time for the Fund to give
the approval required by the preceding paragraph and for the Sub-Custodian to
complete the appropriate contractual and technical arrangements with such
Foreign Depository.
In the event that any 17f-5 Sub-Custodian appointed pursuant to the
provisions of this Section 2.11 fails to perform any of its obligations under
the terms and conditions of the applicable sub-custodian agreement, the
Sub-Custodian shall use its best efforts to cause such 17f-5 Sub-Custodian to
perform such obligations. In the event that the Sub-Custodian is unable to cause
such 17f-5 Sub-Custodian to perform fully its obligations thereunder, the
Sub-Custodian shall forthwith upon the Custodian's request terminate such 17f-5
Sub-Custodian as a sub-custodian for the Fund and, if necessary or desirable,
appoint another 17f-5 Sub-
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Custodian in accordance with the provisions of this Section 2.11. At the
election of the Custodian, it shall have the right to enforce and shall be
subrogated to the Sub-Custodian's rights against any such 17f-5 Sub-Custodian
for loss or damage caused the Fund by such 17f-5 Sub-Custodian.
At the written request of the Fund, the Sub-Custodian will terminate as
a sub-custodian for the Fund any 17f-5 Sub-Custodian appointed pursuant to the
provisions of this Section 2.11 in accordance with the termination provisions
under the applicable sub-custodian agreement. The Sub-Custodian will not amend
any sub-custodian agreement or agree to change or permit any changes thereunder
except upon the prior written approval of the Fund.
In the event the Sub-Custodian makes any payment to a 17f-5
Sub-Custodian under the indemnification provisions of any sub-custodian
agreement, no more than thirty days after written notice to the Custodian of the
Sub-Custodian's having made such payment, the Custodian will reimburse the
Sub-Custodian the amount of such payment except in respect of any negligence or
misconduct of the Sub-Custodian.
2.12. Deposit of Fund Assets in Securities Systems. The
Sub-Custodian may deposit and/or maintain securities owned by the Fund in a
clearing agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department of the
Treasury or by a federal agency (collectively referred to herein as "Securities
System") in accordance with applicable rules and regulations (including Rule
17f-4 of the 1940 Act), and subject to the following provisions:
1) The Sub-Custodian may, either directly or through
one or more agents, keep securities of the Fund in a Securities System provided
that such securities are represented in an account ("Account") of the
Sub-Custodian or such an agent in the Securities System which shall not include
any assets other than assets held as a fiduciary, custodian or otherwise for
customers;
2) The records of the Sub-Custodian with respect to
securities of the Fund which are maintained in a Securities System shall
identify by book-entry those securities belonging to the Fund;
3) The Sub-Custodian shall pay for securities
purchased for the account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred to the Account, and
(ii) the making of an entry on the records of the Sub-Custodian to reflect such
payment and transfer for the account of the Fund. The Sub-Custodian shall
transfer securities sold for the account of the Fund upon (i) receipt of advice
from the Securities System that payment for such securities has been transferred
to the Account, and (ii) the making of an
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entry on the records of the Sub-Custodian to reflect such transfer and payment
for the account of the Fund. Copies of all advices from the Securities System of
transfers of securities for the account of the Fund shall identify the Fund, be
maintained for the Fund by the Sub-Custodian or such an agent and be provided to
the Fund or the Custodian at the Custodian's request. The Sub-Custodian shall
furnish the Custodian confirmation of each transfer to or from the account of
the Fund in the form of a written advice or notice and shall furnish to the
Custodian copies of daily transaction statements reflecting each day's
transactions in the Securities System for the account of the Fund on the next
business day;
4) The Sub-Custodian shall provide the Custodian with
any report obtained by the Sub-Custodian on the Securities System's accounting
system, internal accounting controls and procedures for safeguarding securities
deposited in the Securities System;
5) The Sub-Custodian shall utilize only such
Securities Systems as are set forth in a list provided by the Custodian of
Securities Systems approved for use by the Board of Trustees of the Fund, which
list will be amended from time to time by the Custodian as may be necessary to
reflect any subsequent action taken by the Trustees of the Fund;
6) Anything to the contrary in this Agreement
notwithstanding, the Sub-Custodian shall be liable to the Fund and the Custodian
for any loss or damage to the Fund or the Custodian resulting from use of the
Securities System by reason of any negligence, misfeasance or misconduct of the
Sub-Custodian or any of its agents or of any of its or their employees or from
failure of the Sub-Custodian or any such agent or employee to enforce
effectively such rights as it may have against the Securities System. At the
election of the Custodian, it shall be entitled to be subrogated to the rights
of the Sub-Custodian with respect to any claim against the Securities System or
any other person which the Sub-Custodian may have as a consequence of any such
loss or damage if and to the extent that the Fund and the Custodian have not
been made whole for any such loss or damage.
2.13. Depositary Receipts. Only upon receipt of Proper
Instructions, the Sub-Custodian shall instruct a 17f-5 Sub-Custodian appointed
pursuant to Section 2.11(b) hereof or an agent of the Sub-Custodian appointed
pursuant to Section 2.11(a) hereof (an "Agent") to surrender securities to the
depositary used by an issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter collectively referred to as "ADRs") for such
securities against a written receipt therefor adequately describing such
securities and written evidence satisfactory to the 17f-5 Sub-Custodian or Agent
that the depositary has acknowledged receipt of instructions to issue with
respect to such securities ADRs in the name of the Sub-Custodian, or a nominee
of the Sub-Custodian, for delivery to the Sub-Custodian in Boston,
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Massachusetts, or at such other place as the Sub-Custodian may from time to time
designate.
Only upon receipt of Proper Instructions, the Sub-Custodian shall
surrender ADRs to the issuer thereof against a written receipt therefor
adequately describing the ADRs surrendered and written evidence satisfactory to
the Sub-Custodian that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depository to deliver the securities underlying such
ADRs to a 17f-5 Sub-Custodian or an Agent.
2.14. Foreign Exchange Transactions and Futures Contracts.
Only upon receipt of Proper Instructions, the Sub-Custodian shall enter into
foreign exchange contracts or options to purchase and sell foreign currencies
for spot and future delivery on behalf and for the account of the Fund or shall
enter into futures contracts or options on futures contracts. Such transactions
may be undertaken by the Sub-Custodian with such banking institutions, including
the Sub-Custodian and 17f-5 Sub-Custodian(s) appointed pursuant to Section
2.11(b), as principals, as approved and authorized by the Fund. In connection
with such transaction, the Sub-Custodian is authorized to make free outgoing
payments of cash in the form of U.S. Dollars or foreign currency without
receiving confirmation of a foreign exchange contract, futures contract or
option thereon or confirmation that the countervalue currency completing the
foreign exchange contract or futures contract has been delivered or received or
that the option has been delivered or received. Foreign exchange contracts,
futures contracts and options, other than those executed with the Sub-Custodian
as principal, shall for all purposes of this Agreement be deemed to be portfolio
securities of the Fund.
2.15. Option Transactions. Only upon receipt of Proper
Instructions, the Sub-Custodian shall enter into option transactions in
accordance with the provisions of any agreement among the Fund, the Custodian,
and/or the Sub-Custodian and a broker-dealer.
2.16. Ownership Certificates for Tax Purposes. The
Sub-Custodian shall execute ownership and other certificates and affidavits for
all federal and state tax purposes in connection with receipt of income or other
payments with respect to securities held by it hereunder and in connection with
transfers of securities.
2.17. Proxies. The Sub-Custodian shall, with respect to the
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered other than in the
name of the Fund, all proxies that are received by the Sub-Custodian, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Custodian such proxies, all proxy soliciting materials
and all notices relating to such securities.
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2.18. Communications Relating to Fund Portfolio Securities.
The Sub-Custodian shall transmit promptly to the Custodian all written
information (including, without limitation, pendency of calls and maturities of
securities and expirations of rights in connection therewith) received by the
Sub-Custodian from issuers of the securities being held for the account of the
Fund. With respect to tender or exchange offers, the Sub-Custodian shall
transmit promptly to the Custodian all written information received by the
Sub-Custodian from issuers of the securities whose tender or exchange is sought
and from the party (or his agents) making the tender or exchange offer. If the
Fund desires to take action with respect to any tender offer, exchange offer or
any other similar transactions, the Custodian shall notify the Sub-Custodian of
the action the Fund desires the Sub-Custodian to take; provided, however, that
the Sub-Custodian shall not be liable to the Fund or the Custodian for the
failure to take any such action unless Proper Instructions are received by the
Sub-Custodian at least two business days prior to the date on which the
Sub-Custodian is to take such action, or in the case of foreign securities, such
longer periods as shall have been agreed upon in writing by the Custodian and
the Sub-Custodian, which may be in the form of written operating procedures or
standards.
2.19. Proper Instructions. Proper Instructions as used
throughout this Agreement means a writing signed or initialed by one or more
persons who are authorized by the Trustees of the Fund and by the Custodian.
Each such writing shall set forth the specific transaction or type of
transaction involved. Oral instructions will be considered Proper Instructions
if the Sub-Custodian reasonably believes them to have been given by a person
authorized to give such instructions with respect to the transaction involved.
The Custodian shall cause all oral instructions to be confirmed in writing.
Proper Instructions shall also include communications effected directly between
the Custodian and Sub-Custodian by electro-mechanical or electronic devices,
provided that the Custodian and the Sub-Custodian have approved such procedures.
Notwithstanding the foregoing, no Trustee, officer, employee or agent of the
Fund shall be permitted access to any securities or similar investments of the
Fund deposited with the Sub-Custodian or any agent for any reason except in
accordance with the provisions of Rule 17f-2 under the 1940 Act.
2.20. Actions Permitted without Express Authority. The
Sub-Custodian may in its discretion, without express authority from the
Custodian:
1) make payments to itself or others for minor
expenses of handling securities or other similar items relating to its duties
under this Agreement, provided that all such payments shall be accounted for to
the Custodian;
2) surrender securities in temporary form for
securities in definitive form;
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3) endorse for collection, in the name of the Fund,
checks, drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details
in connection with the sale, exchange, substitution, purchase, transfer and
other dealings with the securities and property of the Fund held by the
Sub-Custodian hereunder except as otherwise directed by the Custodian.
2.21. Evidence of Authority. The Sub-Custodian shall be
protected in acting upon any instruction, notice, request, consent, certificate
or other instrument or paper reasonably believed by it to be genuine and to have
been properly executed by or on behalf of the Fund or the Custodian as custodian
of the Fund.
2.22. Performance Standards. The Sub-Custodian shall use its
best efforts to perform its duties hereunder in accordance with such standards
as are agreed upon from time to time by the Custodian and the Sub-Custodian.
3. Records. The Sub-Custodian shall cooperate with and supply necessary
information to the entity or entities appointed by the Trustees of the Fund to
keep the books of account of the Fund or, if directed in writing to do so by the
Custodian, shall itself keep such books of account. The Sub-Custodian shall
create and maintain all records relating to its activities and obligations under
this Agreement in such manner as will meet the obligations of the Fund under the
1940 Act, with particular attention to Sections 17(f) and 31 thereof and Rules
17f-2, 31a-1 and 31a-2 thereunder; the Sub-Custodian shall also create and
maintain such records as are required by applicable federal and state tax laws,
and any other law or administrative rules or procedures which may be applicable
to the Fund or the Custodian, such laws, rules or procedures to be specified by
the Custodian from time to time. All such records shall be the property of the
Fund and shall at all times during the regular business hours of the
Sub-Custodian be open for inspection by duly authorized officers, employees or
agents of the Custodian and the Fund and employees and agents of the Securities
and Exchange Commission. The Sub-Custodian shall, at the Custodian's request,
supply the Custodian with a tabulation of securities owned by the Fund and held
under this Agreement and shall, when requested to do so by the Custodian and for
such compensation as shall be agreed upon between the Custodian and
Sub-Custodian, include certificate numbers in such tabulations.
4. Opinion and Reports of the Fund's Independent Accountant. The
Sub-Custodian shall take all reasonable actions, as the Custodian may from time
to time request, to furnish such information with respect to its activities
hereunder as the Fund's independent public accountant may request in connection
with the accountant's verification of the Fund's securities and similar
investments as required by Rule 17f-2 under the 1940 Act, the preparation of the
Fund's registration statement and amendments
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thereto, the Fund's reports to the Securities and Exchange Commission and with
respect to any other requirements of such Commission.
5. Reports of Sub-Custodian's Independent Accountant. The Sub-Custodian
shall provide the Custodian, at such times as the Custodian may reasonably
require, with reports by an independent public accountant on the accounting
system, internal accounting controls and procedures for safeguarding securities,
including securities deposited and/or maintained in a Securities System,
relating to the services provided by the Sub-Custodian under this Agreement;
such reports, which shall be of sufficient scope and in sufficient detail as may
reasonably be required by the Custodian, shall provide reasonable assurance that
any material inadequacies would be disclosed by such examination, and if there
are no such inadequacies, shall so state.
6. Compensation. The Sub-Custodian shall be entitled to reasonable
compensation for its services and expenses as sub-custodian, as agreed upon from
time to time between the Custodian and the Sub-Custodian.
7. Responsibility of Sub-Custodian. The Sub-Custodian shall exercise
reasonable care and diligence in carrying out the provisions of this Agreement
and shall not be liable to the Fund or the Custodian for any action taken or
omitted by it in good faith without negligence or willful misconduct. So long as
and to the extent that it is in the exercise of reasonable care, the
Sub-Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and, if in writing, reasonably believed to be signed by the proper
party or parties. It shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for the Fund) on all matters and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
Notwithstanding the foregoing, the responsibility of the Sub-Custodian with
respect to redemptions effected by check shall be in accordance with a separate
agreement entered into between the Custodian and the Sub-Custodian. It is also
understood that the Sub-Custodian shall not be liable for any loss resulting
from a Sovereign Risk. A "Sovereign Risk" shall mean nationalization,
expropriation, devaluation, revaluation, confiscation, seizure, cancellation,
destruction or similar action by any governmental authority, de facto or de
jure; or enactment, promulgation, imposition or enforcement by any such
governmental authority of currency restrictions, exchange controls, taxes,
levies or other charges affecting the Fund's property; or acts of war,
terrorism, insurrection or revolution; or any other similar act or event beyond
the Sub-Custodian's control.
The Sub-Custodian shall protect the Fund and the Custodian from losses
to the Fund resulting from any act or failure to act
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of the Sub-Custodian in violation of its duties hereunder or of any law
applicable to the Sub-Custodian's duties hereunder.
If the Custodian requires the Sub-Custodian to take any action with
respect to securities, which action involves the payment of money or which
action may, in the opinion of the Sub-Custodian, result in the Sub-Custodian's
being liable for the payment of money or incurring liability of some other form,
the Custodian, as a prerequisite to requiring the Sub-Custodian to take such
action, shall provide indemnity to the Sub-Custodian in an amount and form
satisfactory to the Sub-Custodian.
The Custodian agrees to indemnify and hold harmless the Sub-Custodian
from and against all taxes, charges, expenses, assessments, claims and
liabilities (including counsel fees) (collectively, "Authorized Charges")
incurred or assessed against it or its nominee in connection with the
performance of this Agreement, except such as may arise from its own negligent
action, negligent failure to act or willful misconduct. The Sub-Custodian is
authorized to charge any account of the Fund for such items and such fees. To
secure any such Authorized Charges and any advances of cash or securities made
by the Sub-Custodian to or for the benefit of the Fund for any purpose which
results in the Fund's incurring an overdraft at the end of any business day or
for extraordinary or emergency purposes during any business day, the Custodian
on behalf of the Fund hereby represents that it has obtained from the Fund
authorization to apply available cash in any account maintained by the
Sub-Custodian on behalf of the Fund and a security interest in and pledge to the
Sub-Custodian of securities of the Fund held by the Sub-Custodian (including
those which may be held in a Securities System) up to a maximum of 10% of the
value of the net assets held by the Sub-Custodian for the purposes of securing
payment of any Authorized Charges and any advances of cash or securities, and
that the Fund has agreed, from time to time, to designate in writing, or to
cause its investment adviser to, or permit the Custodian to, designate in
writing, the securities subject to such security interest and pledge with such
specificity and detail as the Sub-Custodian may reasonably request (and in the
absence of such designation to permit the Sub-Custodian so to designate
securities). The Custodian hereby grants on behalf of the Fund a security
interest and pledge to the Sub-Custodian, as aforesaid, in securities and
available cash, as security for any Authorized Charges and any advances of cash
or securities and agrees that, should the Fund or the Custodian fail to repay
promptly any Authorized Charges and any advances of cash or securities, the
Sub-Custodian shall be entitled to use such available cash and to dispose of
such pledged securities as is necessary to repay any such Authorized Charges or
any advances of cash or securities and to exercise the rights of a secured party
under the Uniform Commercial Code.
The Custodian agrees not to amend the third paragraph of Section 9 of
the Custodian Agreement unless it provides the Sub-Custodian with at least
thirty (30) days' prior written notice of the substance of any proposed
amendments, provided that the
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foregoing shall not be construed to in any way to provide that the
Sub-Custodian's consent shall be required to make such an amendment effective or
that the Sub-Custodian's failure to give such consent shall in any way affect
its obligations under this Agreement.
8. Successor Sub-Custodian. If a successor sub-custodian shall be
appointed by the Custodian, the Sub-Custodian shall, upon termination and upon
receipt of Proper Instructions, cause to be delivered to such successor
sub-custodian, duly endorsed and in the form for transfer, all securities, funds
and other property of the Fund then held by it and all instruments held by the
Sub-Custodian related thereto and cause the transfer to an account of the
successor sub-custodian all of the Fund's securities held in any Securities
Systems.
If no such successor sub-custodian shall be appointed, the
Sub-Custodian shall, in like manner, upon receipt of a certified copy of a vote
of the Trustees of the Fund, cause to be transferred such securities, funds and
other property in accordance with such vote.
In the event that no written order designating a successor
sub-custodian or certified copy of a vote of the Trustees shall have been
delivered to the Sub-Custodian on or before the date when such termination shall
become effective, then the Sub-Custodian shall have the right to deliver to a
bank or trust company, which meets the requirements of the 1940 Act and the
rules and regulations thereunder, all securities, funds and other properties of
the Fund. Thereafter, such bank or trust company shall be the successor of the
Sub-Custodian under this Agreement.
In the event that securities, funds and other property remain in the
possession of the Sub-Custodian after the date of termination hereof owing to
failure of the Custodian to obtain a certified copy of the Trustees appointing a
successor sub custodian, the Sub-Custodian shall be entitled to fair
compensation for its services during such period as the Sub Custodian retains
possession of such securities, funds and other property and the provisions of
this Agreement relating to the duties and obligations of the Sub-Custodian shall
remain in full force and affect.
9. Effective Period; Termination and Amendment. This Agreement shall
become effective as of its execution, shall continue in full force and effect
until terminated as hereinafter provided, may be amended at any time by mutual
agreement of the parties hereto and may be terminated by either party by an
instrument in writing delivered or mailed, postage prepaid, to the other party,
such termination to take effect not sooner than thirty (30) days after the date
of mailing; provided, that either party may at any time immediately terminate
this Agreement in the event of the appointment of a conservator or receiver for
the other party or upon the happening of a like event at the direction
54
<PAGE>
of an appropriate regulatory agency or court of competent jurisdiction. No
provision of this Agreement may be amended or terminated except by a statement
in writing signed by the party against which enforcement of the amendment or
termination is sought.
Upon termination of this Agreement, the Custodian shall pay to the
Sub-Custodian such compensation as may be due as of the date of such termination
and shall likewise reimburse the Sub-Custodian for its reimbursable costs,
expenses and disbursements. The provisions of Section 7, including, until any
Authorized Charges and any advances of cash or securities referred to therein
are repaid, all liens and security interests created pursuant thereto, and all
rights to indemnification, shall survive any termination of this Agreement.
10. Interpretation. This Agreement constitutes the entire understanding
and agreement of the parties hereto with respect to the subject matter hereof.
In connection with the operation of this Agreement, the Sub-Custodian and the
Custodian may from time to time agree in writing on such provisions interpretive
of or in addition to the provisions of this Agreement as may in their joint
opinion be consistent with the general tenor of this Agreement. No interpretive
or additional provisions made as provided in the preceding sentence shall be
deemed to be an amendment of this Agreement.
11. Governing Law. This Agreement is executed and delivered in The
Commonwealth of Massachusetts and shall be governed by and construed according
to the internal laws of said Commonwealth, without regard to principles of
conflicts of law.
12. Notices. Notices and other writings delivered or mailed postage
prepaid to the Custodian addressed to the Custodian attention: George H. Crane,
Senior Vice President, The Putnam Companies, 99 High Street, Boston, MA 02109 or
to such other person or address as the Custodian may have designated to the Sub
Custodian in writing, or to the Sub-Custodian attention:
or to such other address as the SubCustodian may have designated to the
Custodian in writing, shall be deemed to have been properly delivered or given
hereunder to the respective addressee.
13. Binding Obligation. This Agreement shall be binding on and shall
inure to the benefit of the Custodian and the Sub Custodian and their respective
successors and assigns, provided that neither party hereto may assign this
Agreement or any of its rights or obligations hereunder without the prior
written consent of the other party.
14. Prior Agreements. This Agreement supersedes and terminates, as of
the date hereof, all prior contracts between the Fund or the Custodian and the
Sub-Custodian relating to the custody of the Fund's assets.
55
<PAGE>
15. Declaration of Trust. A copy of the Declaration of Trust of the
Fund is on file with the Secretary of The Commonwealth of Massachusetts, and
notice is hereby given that the obligations of or arising out of this instrument
are not binding upon any of the Trustees or beneficiaries individually but
binding only upon the assets and property of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the day of , 199 .
PUTNAM FIDUCIARY TRUST COMPANY
By--------------------------------
Name:
Title:
(Sub-Custodian)
By--------------------------------
Name:
Title:
The Sub-Custodian and Putnam Investments, Inc. ("Putnam"), the sole owner
of the Custodian, agree that Putnam shall be the primary obligor with respect to
compensation due the Sub-Custodian pursuant to Section 6 of this Agreement in
connection with the Sub-Custodian's performance of its responsibilities
hereunder. The Custodian and Putnam agree to take all actions necessary and
appropriate to assure that the Sub-Custodian shall be compensatedin the amounts
and on the schedule agreed to by the Custodian and the Sub-Custodian pursuant to
Section 6.
PUTNAM INVESTMENTS, INC.
By--------------------------------
Name:
Title:
PUTNAM FIDUCIARY TRUST COMPANY
By--------------------------------
Name:
Title:
(Sub-Custodian)
By--------------------------------
Name:
Title:
56
<PAGE>
SCHEDULE A
Putnam Adjustable Rate U.S. Government Fund
Putnam American Government Income Fund
Putnam Arizona Tax Exempt Income Fund
Putnam Asia Pacific Growth Fund
Putnam Asset Allocation Funds
- Balanced Portfolio
- Conservative Portfolio
- Growth Portfolio
Putnam Balanced Retirement Fund
Putnam California Investment Grade Municipal Trust
Putnam California Tax Exempt Income Trust
-California Tax Exempt Income Fund
-California Intermediate Tax Exempt Fund
Putnam California Tax Exempt Money Market Fund
Putnam Capital Appreciation Fund
Putnam Capital Manager Trust
-PCM Voyager Fund
-PCM Growth & Income Fund
-PCM Money Market Fund
-PCM High Yield Fund
-PCM U.S. Government and High Quality Bond Fund
-PCM Global Asset Allocation Fund
-PCM Global Growth Fund
-PCM Utilities Growth & Income Fund
-PCM Diversified Income Fund
-PCM New Opportunities Fund
-PCM Asia Pacific Growth Fund
Putnam Convertible Income-Growth Trust
Putnam Convertible Opportunities and Income Trust
Putnam Diversified Equity Trust
Putnam Diversified Income Trust
Putnam Diversified Income Trust II
Putnam Dividend Income Fund
Putnam Equity Income Fund
Putnam Europe Growth Fund
Putnam Federal Income Trust
Putnam Florida Tax Exempt Income Fund
Putnam Funds Trust
-Putnam International Growth and Income Fund
The George Putnam Fund of Boston
Putnam Global Governmental Income Trust
Putnam Global Growth Fund
The Putnam Fund for Growth and Income
Putnam Growth and Income Fund II
Putnam Health Sciences Trust
Putnam High Income Convertible and Bond Fund
Putnam High Yield Advantage Fund
Putnam High Yield Trust
Putnam High Yield Municipal Trust
Putnam Income Fund
Putnam Intermediate Government Income Trust
Putnam Intermediate Tax Exempt Fund
Putnam Intermediate U.S. Government Fund
Putnam International Growth Fund
Putnam Investment Funds
-Putnam Balanced Fund
57
<PAGE>
-Putnam American Renaissance Fund
-Putnam Emerging Growth Fund
-Putnam Genesis Fund
-Putnam Global Growth and Income Fund
-Putnam Global Utilities Fund
-Putnam International Fund
-Putnam Japan Fund
-Putnam New Value Fund
-Putnam Real Estate Opportunities Fund
-Putnam Research Fund
Putnam Investment Grade Municipal Trust
Putnam Investment Grade Municipal Trust II
Putnam Investment Grade Municipal Trust III
Putnam Investors Fund
Putnam Managed High Yield Trust
Putnam Managed Municipal Income Trust
Putnam Massachusetts Tax Exempt Income Fund
Putnam Master Income Trust
Putnam Master Intermediate Income Trust
Putnam Michigan Tax Exempt Income Fund
Putnam Minnesota Tax Exempt Income Fund
Putnam Money Market Fund
Putnam Municipal Income Fund
Putnam Municipal Opportunities Trust
Putnam Global Natural Resources Fund
Putnam New Jersey Tax Exempt Income Fund
Putnam New Opportunities Fund
Putnam New York Investment Grade Municipal Trust
Putnam New York Tax Exempt Income Trust
-New York Tax Exempt Income Fund
-New York Intermediate Tax Exempt Fund
Putnam New York Tax Exempt Money Market Fund
Putnam New York Tax Exempt Opportunities Fund
Putnam Ohio Tax Exempt Income Fund
Putnam OTC Emerging Growth Fund
Putnam Pennsylvania Tax Exempt Income Fund
Putnam Preferred Income Fund
Putnam Premier Income Trust
Putnam Tax Exempt Income Fund
Putnam Tax Exempt Money Market Fund
Putnam Tax-Free Health Care Fund
Putnam Tax-Free Income Trust
-Tax-Free High Yield Fund
-Tax-Free Insured Fund
Putnam U.S. Government Income Trust
Putnam Utilities Growth and Income Fund
Putnam Vista Fund
Putnam Voyager Fund
Putnam Voyager Fund II
Dated: 9/96
58
<PAGE>
SCHEDULE B
State Street Bank and Trust Company
Boston Safe Deposit and Trust Company
The Northern Trust Company
Bankers Trust Company
59
<PAGE>
SCHEDULE C
Performance Standards
Income Collection
[bullet] Income will be paid to the Funds or its agents as follows if
no mitigating circumstances exist:
Federal Reserve Book Entry Securities Payable Date
Depository Trust Company Securities Payable Date + 1
Participant Trust Company Securities Payable Date + 1
Physical Mortgaged-Backed Securities Payable Date + 5
Physical Municipal Securities
Registered Outside the Eastern
Seaboard Area Payable Date + 5
Other Physical Securities Payable Date + 3
[bullet] In the event that income is not received within timeframes indicated
above because of improper or untimely actions by the custodian, the
Funds will receive an earnings credit for the value of these funds
beginning with the dates indicated on the above schedule. The credit
will be reflected on the custody invoice.
[bullet] In the event that Income is not received within the indicated
timeframes because of claims against third parties, where the custodian
is not at fault, the Funds will be paid upon actual receipt of income
but no later than 60 calendar days after payable date.
[bullet] If any particular situations occur that render the standards as
inappropriate, the circumstances will be reviewed on a case-by-case
basis to determine due diligence by the custodian with respect to its
responsibility.
Trade Settlements
[bullet] All trade fails will be reported to the Funds or its agents
within one business day of the fail.
[bullet] All purchase fails will accrue an earnings credit to the
Funds to be applied against the custody invoice.
[bullet] The Funds will receive compensation for sell fails that occur because
of custodian error. This will be accomplished by crediting the Fund
with sale proceeds on contractual settlement date.
60
<PAGE>
SCHEDULE C
Reporting
[bullet] The Funds or its agents will receive Reports monthly as
indicated below:
[bullet] Principal and Interest
Reconcilement Report 2nd Business Day
[bullet] Trade Fail Report 5th Business Day
[bullet] Cash Transactions Report 10th Business Day (1)
[bullet] Open Trades Report 10th Business Day
[bullet] Position Reconciliation Report 10th Business Day
[bullet] Past Due Income Report 15th Business Day
[bullet] Dividend Reinvestment Report 20th Business Day
(1) With the exception of the Government Funds which will be the
15th Business Day.
Capital Changes
[bullet] The Funds will be notified of pending corporate actions within 5
business days of receipt by the custodian or its agent, but no later
than 5 business days prior to expiration date.
[bullet] In the event that the custodian receives information less than 5 days
prior to expiration date, the Funds will be immediately informed.
[bullet] Preliminary Bond Call Notices will be received prior to call
date.
[bullet] Final Bond Call Notices will be received by the 5th business
day after call date.
[bullet] If the Bond Call Notice is received after the 5th business day
following the call date, the custodian will reimburse the Funds for
accrued interest lost.
[bullet] If the Bond Call Notice is received after 30 days following the call
date, the custodian will reimburse the Funds for accrued interest lost
plus the face amount of the called bond at the current price or the
call price, whichever is greater.
[bullet] If any particular situations occur that render the standards as
inappropriate, the circumstances will be reviewed on a case-by-case
basis to determine due diligence by the custodian with respect to its
responsibility.
61
Ropes & Gray
One International Place
Boston, Massachusetts 02110
May 28, 1997
Putnam Master Intermediate Income Trust
One Post Office Square
Boston, Massachusetts 02109
Ladies and Gentlemen:
We have acted as counsel to Putnam Master Intermediate Income Trust
(the "Fund") in connection with the Registration Statement of the Fund on Form
N-14 (the "Registration Statement"), under the Securities Act of 1933, as
amended (the "Act"), relating to the proposed combination of the Fund with
Putnam Intermediate Government Income Trust (the "Government Fund"), and the
issuance of shares of the Fund in connection therewith (the "Shares"), all in
accordance with the terms of the Agreement and Plan of Reorganization between
the Fund and the Government Fund (the "Agreement").
We have examined the Fund's Agreement and Declaration of Trust on file
in the office of the Secretary of State of The Commonwealth of Massachusetts and
the Clerk of the City of Boston and the Fund's By-Laws, as amended, and are
familiar with the actions taken by the Fund's Trustees in connection with the
issuance and sale of the Shares. We have also examined such other documents and
records as we have deemed necessary for the purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. The Fund is a duly organized and validly existing unincorporated
association under the laws of The Commonwealth of Massachusetts and is
authorized to issue an unlimited number of its shares of beneficial
interest.
2. The Shares have been duly authorized and, when issued in accordance
with the Agreement, will be validly issued, fully paid, and
nonassessable by the Fund.
<PAGE>
Putnam Master Intermediate
Income Trust -2- May 28, 1997
The Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Fund and requires that notice of such disclaimer
be given in each note, bond, contract, instrument, certificate, or undertaking
entered into or executed by the Fund or its Trustees. The Agreement and
Declaration of Trust provides for indemnification out of the property of the
Fund for all loss and expense of any shareholder of the Fund held personally
liable solely by reason of his being or having been a shareholder. Thus, the
risk of a shareholder's incurring financial loss on account of being a
shareholder is limited to circumstances in which the Fund itself would be unable
to meet its obligations.
Very truly yours,
Ropes & Gray
CLOSED-END FUND
INVESTOR SERVICING AGREEMENT
AGREEMENT made as of the 1st day of July, 1991, between each of the
closed-end Putnam Funds listed in Appendix A hereto (as the same may from time
to time be amended to add one or more additional closed-end Putnam Funds or to
delete one or more of such Funds), each of such Funds acting severally on its
own behalf and not jointly with any of such other Funds (each of such Funds
being hereinafter referred to as the "Fund"), and The Putnam Management Company,
Inc. (the "Manager"), a Delaware corporation, and Putnam Fiduciary Trust Company
(the "Agent"), a Massachusetts trust company.
W I T N E S S E T H:
WHEREAS, the Fund is a closed-end investment company registered under
the Investment Company Act of 1940; and
WHEREAS, the Fund desires to engage the Manager and the Agent to
provide all services required by the Fund in connection with the establishment,
maintenance and recording of shareholder accounts, including without limitation
all related tax and other reporting requirements, and the administration of any
dividend reinvestment and/or cash purchase plans from time to time offered in
connection with the Fund's shares; and
WHEREAS, the Agent, an affiliate of the Manager, provides similar
services for the open-end investment companies in the Putnam family of funds and
is willing to provide such services to the Funds on the terms and subject to the
conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants set forth herein, the parties hereto agree as follows:
1. APPOINTMENT.
The Fund hereby appoints the Agent as its "Investor Servicing Agent" on
the terms and conditions set forth herein. In such capacity the Agent shall act
as transfer agent, registrar and distribution disbursing agent for the Fund and
shall act as agent for the Fund in connection with the administration of any
dividend reinvestment and/or cash share purchase plans from time to time made
available to shareholders. The Agent hereby accepts such appointment and agrees
to perform the respective duties and functions of such offices in accordance
with the terms of this Agreement and in a manner generally consistent with the
practices and standards customarily followed by other high quality investor
servicing agents for registered investment companies.
Notwithstanding such appointment, however, the parties agree that the
Manager may, upon thirty (30) days prior written notice to the Fund, assume such
appointment and perform such duties and functions itself. Pending any such
assumption, however, the
1
<PAGE>
Manager hereby guarantees the performance of the Agent hereunder and shall be
fully responsible to the Fund, financially and otherwise, for the performance by
the Agent of its agreements contained herein.
2. GENERAL AUTHORITY AND DUTIES.
By its acceptance of the foregoing appointment, the Agent shall be
responsible for performing all functions and duties which, in the reasonable
judgment of the Fund, are necessary or desirable in connection with the
establishment, maintenance and recording of the Fund's shareholder accounts and
the conduct of its relations with shareholders with respect to their accounts.
Without limiting the generality of the foregoing, the Agent shall be
responsible:
(a) as transfer agent, for performing all functions customarily
performed by transfer agents for closed-end registered investment
companies, including without limitation all functions necessary or
desirable to establish and maintain accounts evidencing the ownership
of securities issued by the Fund and, to the extent applicable, the
issuance of certificates representing such securities, the recording of
all transactions pertaining to such accounts, and effecting the
issuance and redemption of securities is sued by the Fund;
(b) as registrar, for performing all functions customarily performed by
registrars for closed-end registered investment companies;
(c) as distribution disbursing agent, for performing all functions
customarily performed by distribution disbursing agents for closed-end
registered investment companies, including without limitation all
functions necessary or desirable to effect the payment to shareholders
of distributions declared from time to time by the Trustees of the
Fund;
(d) as agent for the Fund, performing all administrative and
bookkeeping functions necessary or desirable to maintain any dividend
reinvestment and/or cash share purchase plans from time to time made
available to shareholders to facilitate the purchase of shares of the
Fund, including without limitation the supervision of any independent
bank or brokerage firm engaged by the Fund to act as agent for the
shareholders of the Fund in connection with such plans, if and to the
extent required by the federal securities laws.
In performing its duties hereunder, in addition to the provisions set
forth herein, the Agent shall comply with the terms of the Declaration of Trust,
the Bylaws, the Registration Statement filed with the Securities and Exchange
Commission, and with the terms of votes adopted from time to time by the
Trustees and shareholders of the Fund, relating to the subject matters of this
Agreement, all as the same may be amended from time to time.
2
<PAGE>
3. STANDARD OF SERVICE; COMPLIANCE WITH LAWS.
The Agent will use its best efforts to provide high quality services to
the Fund's shareholders and in so doing will seek to take advantage of such
innovations and technological improvements as may be appropriate or desirable
with a view to improving the quality and, where possible, reducing the cost of
its services to the Fund. In performing its duties hereunder, the Agent shall
comply with the provisions of all applicable laws and regulations and shall
comply with the requirements of any governmental authority having jurisdiction
over the Agent or the Fund with respect to the duties of the Agent hereunder and
the requirements of any national securities exchange on which shares of the Fund
are listed for trading.
4. COMPENSATION.
The Fund shall pay to the Agent, for its services rendered and its
costs incurred in connection with the performance of its duties hereunder, such
compensation and reimbursements as may from time to time be approved by vote of
the Trustees of the Fund.
5. DUTY OF CARE; INDEMNIFICATION.
The Agent will at all times act in good faith and exercise reasonable
care in performing its duties hereunder. The Agent will not be liable or
responsible for delays or errors resulting from circumstances beyond its
control, including acts of civil or military authorities, national emergencies,
labor difficulties, fire, mechanical breakdown beyond its control, flood or
catastrophe, acts of God, insurrection, war, riots or failure beyond its control
of transportation, communication or power supply.
The Agent may rely on certifications of the Clerk, the President, the
Vice Chairman, the Executive Vice President, the Senior Vice President or the
Treasurer of the Fund as to any action taken by the shareholders or trustees of
the Fund, and upon instructions not inconsistent with this Agreement received
from the President, Vice Chairman, the Executive Vice President, the Senior Vice
President or the Treasurer of the Fund. If any officer of the Fund shall no
longer be vested with authority to sign for the Fund, written notice thereof
shall forthwith be given to the Agent by the Fund and, until receipt of such
notice by it, the Agent shall be entitled to recognize and act in good faith
upon certificates or other instruments bearing the signatures or facsimile
signatures of such officers. The Agent may request advice of counsel for the
Fund, at the expense of the Fund, with respect to the performance of its duties
hereunder.
The Fund will indemnify and hold the Agent harmless from any and all
losses, claims, damages, liabilities and expenses (including reasonable fees and
expenses of counsel) arising out of (i) any action taken by the Agent in good
faith consistent with the exercise of reasonable care in accordance with such
certifications, instructions or advice, (ii) any action taken by
3
<PAGE>
the Agent in good faith consistent with the exercise of reasonable care in
reliance upon any instrument or certificate for securities believed by it (a) to
be genuine, and (b) to be executed by any person or persons authorized to
execute the same; provided, however, that the Agent shall not be so indemnified
in the event of its failure to obtain a proper signature guarantee to the extent
the same is required by the Declaration of Trust, Bylaws, or Registration
Statement of the Fund or a vote of the Trustees of the Fund, and such
requirement has not been waived by vote of the Trustees of the Fund, or (iii)
any other action taken by the Agent in good faith consistent with the exercise
of reasonable care in connection with the performance of its duties hereunder.
In the event that the Agent proposes to assert the right to be
indemnified under this Section 5 in connection with any action, suit or
proceeding against it, the Agent shall promptly after receipt of notice of
commencement of such action, suit or proceeding notify the Fund of the same,
enclosing a copy of all papers served. In such event, the Fund shall be entitled
to participate in such action, suit or proceeding, and, to the extent that it
shall wish, to assume the defense thereof, and after notice from the Fund to the
Agent of its election so to assume the defense thereof the Fund shall not be
liable to the Agent for any legal or other expenses. The parties shall cooperate
with each other in the defense of any such action, suit or proceeding. In no
event shall the Fund be liable for any settlement of any action or claim
effected without its consent.
6. MAINTENANCE OF RECORDS.
The Agent will maintain and preserve all records relating to its duties
under this Agreement in compliance with the requirements of applicable statutes,
rules and regulations, including without limitation Rule 31a-1 under the
Investment Company Act of 1940, and with the requirements of any national
securities exchange on which shares of the Fund are listed for trading. Such
records shall be the property of the Fund and shall at all times be available
for inspection and use by the officers and agents of the Fund. The Agent shall
furnish to the Fund such information pertaining to the shareholder accounts of
the Fund and the performance of its duties hereunder as the Fund may from time
to time request. The Agent shall notify the Fund promptly of any request or
demand by any third party to inspect the records of the Fund maintained by it
and will act upon the instructions of the Fund in permitting or refusing such
inspection.
7. FUND ACCOUNTS.
All moneys of the Fund from time to time made available for the payment
of distributions to shareholders, or otherwise coming into the possession or
control of the Agent or its officers, shall be deposited and held in one or more
accounts maintained by the Agent solely for the benefit of the Funds.
4
<PAGE>
8. INSURANCE.
The Agent will at all times maintain in effect insurance coverage,
including without limitation Errors and Omissions, Fidelity Bond and Electronic
Data Processing coverages, at levels of coverage consistent with those
customarily maintained by other high quality investor servicing agents for
registered investment companies and with such guidelines as the Trustees of the
Fund may from time to time adopt.
9. EMPLOYEES.
The Agent shall be responsible for the employment, control and conduct
of its agents and employees and for injury to such agents or employees or to
others caused by such agents or employees. The Agent shall assume full
responsibility for its agents and employees under applicable statutes and agrees
to pay all applicable employer taxes thereunder with respect to such agents and
employees, and such agents and employees shall in no event be considered to be
agents or employees of the Fund.
10. EFFECTIVE DATE; TERMINATION.
This Agreement shall take effect on July 1, 1991 and shall continue
indefinitely thereafter until terminated by not less than ninety (90) days prior
written notice given by the Fund to the Agent, or by not less than six months
prior written notice given by the Agent to the Fund.
In the event that in connection with any such termination a successor
to any of the Agent's duties or responsibilities hereunder is designated by the
Fund by written notice to the Agent, the Agent will cooperate fully in the
transfer of such duties and responsibilities, including provision for assistance
by the Agent's personnel in the establishment of books, records and other data
by such successor. The Fund will reimburse the Agent for all expenses incurred
by the Agent in connection with such transfer.
11. MISCELLANEOUS.
This Agreement shall be construed and enforced in accordance with and
governed by the laws of The Commonwealth of Massachusetts.
The captions in this Agreement are included for convenience of
reference only and in no way define or limit any of the provisions of this
Agreement or otherwise affect their construction or effect. This Agreement may
be executed simultaneously in two or more counterparts, each of which shall be
deemed an original, but all of which taken together shall constitute one and the
same instrument.
A copy of the Declaration of Trust (including any amendments thereto)
of the Fund is on file with the Secretary of The Commonwealth of Massachusetts,
and notice is hereby given that this instrument is executed on behalf of the
Trustees of the Fund
5
<PAGE>
as Trustees and not individually and that the obligations of or arising out of
this instrument are not binding upon any of the Trustees or officers or
shareholders individually, but binding only upon the assets and property of the
Fund.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date and year first above
written.
THE PUTNAM FUNDS, listed
on Appendix A
/s/Charles E. Porter
By --------------------------
Charles E. Porter
Executive Vice President
PUTNAM FIDUCIARY TRUST COMPANY
/s/John R. Verani
By ---------------------------
John R. Verani
President
THE PUTNAM MANAGEMENT COMPANY, INC.
/s/Gordon H. Silver
By ----------------------------
Gordon H. Silver
Senior Managing Director
6
<PAGE>
Appendix A
List of Closed-End Putnam
Funds Executing Investor
Servicing Agreement dated
as of April , 1995
Putnam High Income Convertible and Bond Fund
Putnam Master Income Trust
Putnam Premier Income Trust
Putnam Master Intermediate Income Trust
Putnam Intermediate Government Income Trust
Putnam Managed Municipal Income Trust
Putnam High Yield Municipal Trust
Putnam Dividend Income Fund
Putnam Investment Grade Municipal Trust
Putnam Tax-Free Health Care Fund
Putnam Investment Grade Municipal Trust II
Putnam California Investment Grade Municipal Trust
Putnam New York Investment Grade Municipal Trust
Putnam Managed High Yield Trust
Putnam Municipal Opportunities Trust
Putnam Investment Grade Intermediate Municipal Trust
Putnam Investment Grade Municipal Trust III
Putnam Convertible Opportunities and Income Trust
7
DIVIDEND REINVESTMENT PLAN AGENCY AGREEMENT
THIS AGREEMENT is made as of the 15th day of October, 1993, by and
among each of the closed-end Putnam Funds listed in Appendix A hereto (as the
same may from time to time be amended to add one or more additional closed-end
Putnam Funds or to delete one or more of such Funds), each of such Funds acting
severally and not jointly with any of such other Funds, and each of such Funds
having its principal office and place of business at One Post Office Square,
Boston, Massachusetts 02109 (each Fund being referred to herein as the "Fund"),
Putnam Fiduciary Trust Company, a Massachusetts trust company having its
principal office and place of business at One Post Office Square, Boston,
Massachusetts 02109 (the "Agent"), and The First National Bank of Boston, a
national banking association having its principal office and place of business
at 100 Federal Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund desires to make available to its shareholders an
opportunity to reinvest their Fund distributions in additional shares of the
Fund pursuant to the terms and conditions of a Dividend Reinvestment Plan in the
form heretofore furnished to the Bank, as the same may be amended from time to
time by the Trustees of the Fund (the "Plan");
WHEREAS, the Fund has engaged the Agent to act as its "Investor
Servicing Agent", including in such capacity acting as its transfer agent,
registrar and distribution disbursing agent;
WHEREAS, the Fund desires to employ the Bank to act as agent for
shareholders of the Fund pursuant to the terms and conditions of the Plan and
the Bank desires to accept such employment; and
WHEREAS, the Agent will provide certain administrative services in
connection with the Plan;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of the Bank and the Agent.
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs the Bank to act as, and the Bank agrees to
act as, Dividend Reinvestment Plan Agent for the Fund's shareholders pursuant to
the terms and conditions of the Plan.
1
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1.02 Upon receipt of the cash distributions payable to
shareholders of the Fund participating in the Plan, the Bank will apply such
monies to the purchase of shares of the Fund in accordance with the terms and
conditions of the Plan. The Bank shall thereafter deliver shares purchased as
instructed by the Agent.
1.03 Pending purchase of shares of the Fund, the Bank shall
invest all of the cash deposited with the Bank in an interest bearing account
for the benefit of the Fund at the Bank, unless otherwise directed by the Fund.
1.04 The Bank shall provide monthly a complete statement of
transactions in Fund shares on behalf of shareholders in the Plan and a
statement of interest earned under Section 1.03.
1.05 The Agent, pursuant to the terms and conditions of its
Investor Servicing Agreement with the Funds, shall perform all administrative
and bookkeeping services required in connection with the operation of the Plan.
Article 2 Fees and Expenses
2.01 For the performance by the Bank pursuant to this
Agreement, the Agent agrees to pay the Bank such fees and out-of-pocket expenses
as may from time to time be specified by mutual written agreement between the
Agent and the Bank.
2.02 The Agent agrees to pay all fees and reimbursable
expenses within 30 days following the mailing of the respective billing notice.
Article 3 Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.01 It is a national banking association duly organized and
existing and in good standing under the laws of the United States of America.
3.02 It is duly qualified to carry on its business in the
United States of America.
3.03 It is empowered under applicable laws and by its charter
and by-laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
2
<PAGE>
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
3.06 It will take and accept instructions from persons duly
authorized by the Fund, as certified to the Bank from time to time.
Article 4 Representations and Warranties of the Fund and the Agent.
4.01 The Fund represents and warrants to the Bank that:
(a) It is a business trust duly organized and existing under
the laws of Massachusetts.
(b) It is empowered under applicable laws and by its
Declaration of Trust and By-Laws to enter into and perform this Agreement.
(c) All proceedings required by said Declaration of Trust and
By-Laws have been taken to authorize it to enter into and perform this
Agreement.
(d) It is a closed-end investment company registered under the
Investment Company Act of 1940.
(e) It shall make all filings required to be made by it under
federal and state securities laws.
4.02 The Agent represents and warrants to the Bank that:
(a) It is a trust company duly organized and existing and in
good standing under the laws of Massachusetts.
(b) It is empowered under applicable laws and by its Articles
of Organization and Bylaws to enter into and perform this Agreement.
(c) All proceedings required by said Articles of Organization
and Bylaws have been taken to authorize it to enter into and perform this
Agreement.
(d) It is duly registered as a transfer agent with the Federal
Deposit Insurance Corporation and the New York and American Stock Exchanges.
(e) It shall make all filings required to be made by it under
federal and state securities laws.
3
<PAGE>
Article 5 Indemnification
5.01 The Bank shall not be responsible for, and the Fund shall
indemnify and hold the Bank harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability arising
out of or attributable to:
(a) All actions of the Bank or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith consistent with the exercise of reasonable care.
(b) The Fund's refusal or failure to comply with the terms of
this Agreement, or which arise out of the Fund's lack of good faith, negligence
or willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records and documents which (i) are received by
the Bank or its agents or subcontractors and furnished to it by or on behalf of
the Fund, and (ii) have been prepared and/or maintained by the Fund or any other
person or firm on behalf of the Fund. Such other person or firm shall include
any former transfer agent or former registrar, or co-transfer agent or
co-registrar.
(d) The reliance on, or the carrying out by the Bank or its
agents or subcontractors of, any instructions or requests of the Fund's
representative as certified from time to time by the Fund.
(e) The offer or sale of shares of the Fund in violation of
any requirement under the federal securities laws or regulations or the
securities laws or regulations of any state that such shares be registered in
such state or in violation of any stop order or other determination or ruling by
any federal agency or any state with respect to the offer or sale of such shares
in such state.
5.02 The Bank shall indemnify and hold the Fund and the Agent
harmless from and against any and all losses, damages, costs, charges, counsel
fees, payments, expenses and liability arising out of or attributable to any
action or failure or omission to act by the Bank as a result of the Bank's lack
of good faith or failure to exercise reasonable care.
4
<PAGE>
5.03 At any time the Bank may apply to any officer of the Fund
or the Agent for instructions, and may consult with legal counsel with respect
to any matter arising in connection with the services to be performed by the
Bank under this Agreement, and the Bank and its agents or subcontractors shall
not be liable and shall be indemnified by the Fund for any action in good faith
taken or omitted by it in reliance upon such instructions or upon the written
opinion of such counsel. The Bank, its agents and subcontractors shall be
protected and indemnified in acting upon any paper or document furnished by or
on behalf of the Fund or the Agent, reasonably believed to be genuine and to
have been signed by the proper person or persons, or upon any instruction,
information, data, records or documents provided to the Bank or its agents or
subcontractors by telephone, in person, machine readable input, telex, CRT data
entry or other similar means authorized by the Fund or the Agent, and shall not
be held to have notice of any change of authority of any person, until receipt
of written notice thereof from the Fund or the Agent.
5.04 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes.
5.05 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement or
for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in
this Article 5 shall apply, upon the assertion of a claim for which either party
may be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
Article 6 Covenants of the Fund, the Agent and the Bank
6.01 The Fund and the Agent shall promptly furnish to the Bank
the following:
5
<PAGE>
(a) A certified copy of the resolution of the Board of
Trustees of the Fund authorizing the employment of the Bank and the execution
and delivery of this Agreement.
(b) A copy of the Declaration of Trust and By-Laws of the Fund
and a copy of the Articles of Organization and Bylaws of the Agent and all
amendments thereto.
6.02 The Bank and the Agent shall keep records relating to the
services to be performed hereunder, in the form and manner as they may deem
advisable. To the extent required by Section 31 of the Investment Company Act of
1940, as amended, and the Rules thereunder, the Bank and the Agent agree that
all such records prepared or maintained by the Bank relating to the services to
be performed by the Bank hereunder are the property of the Fund and will be
preserved, maintained and made available in accordance with such Section and
Rules, and will be surrendered promptly to the Fund on and in accordance with
its request.
6.03 The Bank, the Agent and the Fund agree that all books,
records, information and data pertaining to the business of the other party
which are exchanged or received pursuant to the negotiation or the carrying out
of this Agreement shall remain confidential, and shall not be voluntarily
disclosed to any other person, except as may be required by law.
6.04 In case of any requests or demands for the inspection of
the records of the Fund or the Agent, the Bank will endeavor to notify the Fund
or the Agent and to secure instructions from an authorized officer of the Fund
or the Agent as to such inspection. The Bank reserves the right, however, to
exhibit such records to any person whenever it is advised by its counsel that it
may be held liable for the failure to exhibit such records to such person.
6.05 The Agent agrees to notify the Bank immediately of any
declaration of dividends by the Fund.
Article 7 Effective Date; Termination of Agreement
7.01 This Agreement shall take effect on October 15, 1993.
7.02 This Agreement may be terminated thereafter by either the
Fund or the Bank upon sixty (60) days written notice to the other.
7.03 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material will
be borne by the Agent. Additionally, the Bank reserves the right to charge the
Agent for any other reasonable expenses associated with such termination.
6
<PAGE>
Article 8 Assignment
8.01 Neither this Agreement nor any rights or obligations
hereunder may be assigned by any party without the written consent of the other
parties.
8.02 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective permitted successors and assigns.
Article 9 Amendment
9.01 This Agreement may be amended or modified by a written
agreement executed by all parties.
Article 10 Massachusetts Law to Apply
10.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
Article 11 Merger of Agreement
11.01 This Agreement constitutes the entire agreement between
the parties hereto and supersedes any prior agreement with respect to the
subject hereof whether oral or written.
Article 12 Declaration of Trust
12.01 A copy of the Agreement and Declaration of Trust of the
Fund 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 or shareholders individually but binding only upon the assets and
property of the Fund.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf by and through their
duly authorized officers, as of the day and year first above written.
THE PUTNAM FUNDS LISTED ON APPENDIX A
/s/Charles E. Porter
BY: ---------------------------------
Charles E. Porter
Executive Vice President
PUTNAM FIDUCIARY TRUST COMPANY
/s/ Robert F. Lucey
BY: -----------------------------------
Robert F. Lucey
President
THE FIRST NATIONAL BANK OF BOSTON
/s/ Janice Chanbonnier
BY: -------------------------------------
8
<PAGE>
Appendix A
List of Closed-End Putnam Funds Executing
Dividend Reinvestment Plan Agency Agreement
dated as of March 30, 1995
Putnam High Income Convertible and Bond Fund
Putnam Master Income Trust
Putnam Premier Income Trust
Putnam Master Intermediate Income Trust
Putnam Intermediate Government Income Trust
Putnam Managed Municipal Income Trust
Putnam High Yield Municipal Trust
Putnam Dividend Income Fund
Putnam Investment Grade Municipal Trust
Putnam Tax-Free Health Care Fund
Putnam Investment Grade Municipal Trust II
Putnam Investment Grade Municipal Trust III
Putnam California Investment Grade Municipal Trust
Putnam New York Investment Grade Municipal Trust
Putnam Municipal Opportunities Trust
Putnam Investment Grade Intermediate Municipal Trust
Putnam Managed High Yield Trust
Putnam Convertible Opportunities and Income Trust
9
<PAGE>
BANK OF BOSTON
Dividend Reinvestment Plan Agent
Fee Schedule
For
PUTNAM INVESTMENTS
Annual Administrative Fee for Omnibus Account:
$3,000.00
Transactions: $12.00 Each for DTC
$10.00 Each for DWAC
Out-of Pocket Expenses as incurred including but not limited to:
Insurance, Expedited Mail, Duplicating, Fax Charges, Wires
in and out, Microfiche, etc.
Overdraft Recovery
Overdraft charge will be calculated on the actual overdraft incurred
plus Federal Reserve requirements and F.D.I.C.
assessments.
Term of Contract
Three years
THE PUTNAM FUNDS LISTED ON APPENDIX A
/s/ Charles E. Porter
BY:---------------------------------
PUTNAM FIDUCIARY TRUST COMPANY
/s/ Robert F. Lucey
BY:---------------------------------
THE FIRST NATIONAL BANK OF BOSTON
/s/ Janice Chanbonnier
BY:---------------------------------
10
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this 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, and to the incorporation by reference
of such report into the Prospectus/Proxy Statement which constitutes part of
this Registration Statement. 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
May 28, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Registration Statement on Form N-14 (the "Registration
Statement") of Putnam Master Intermediate Income Trust of our report dated
November 14, 1996 relating to the financial statements and financial highlights
appearing in the September 30, 1996 Annual Report to the Shareholders of Putnam
Master Intermediate Income Trust, which is incorporated by reference into such
Statement of Additional Information, and to the incorporation by reference of
such report into the Prospectus/Proxy Statement which constitutes part of this
Registration Statement. 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/ Coopers & Lybrand L.L.P.
Boston, Massachusetts Coopers & Lybrand L.L.P.
May 29, 1997
POWER OF ATTORNEY
We, the undersigned Officers and Trustees of Putnam Master Intermediate
Income Trust, hereby severally constitute and appoint George Putnam, Charles E.
Porter, Gordon H. Silver, Edward A. Benjamin, Timothy W. Diggins and John W.
Gerstmayr, and each of them singly, our true and lawful attorneys, with full
power to them and each of them, to sign for us, and in our names and in the
capacities indicated below, the Registration Statement on Form N-14 of Putnam
Master Intermediate Income Trust and any and all amendments (including
post-effective amendments) to said Registration Statement and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto our said attorneys, and each
of them acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in the premises, as fully to all
intents and purposes as he might or could do in person, and hereby ratify and
confirm all that said attorneys or any of them may lawfully do or cause to be
done by virtue thereof.
WITNESS our hands and common seal on the date set forth below.
Signature Title Date
/s/ George Putnam
- --------------------- Principal Executive May 23, 1997
George Putnam Officer; President
and Chairman of the
Trustees
/s/ John D. Hughes
- --------------------- Principal Financial May 23, 1997
John D. Hughes Officer; Treasurer
/s/ Paul G. Bucuvalas
- --------------------- Principal Accounting
Paul G. Bucuvalas Officer; Assistant May 23, 1997
Treasurer
/s/ Jameson A. Baxter
- --------------------- Trustee May 23, 1997
Jameson A. Baxter
/s/ Hans H. Estin
- --------------------- Trustee May 23, 1997
Hans H. Estin
/s/ John A. Hill
- --------------------- Trustee May 23, 1997
John A. Hill
<PAGE>
/s/ Ronald J. Jackson
- ---------------------
Ronald J. Jackson Trustee May 23, 1997
/s/ Elizabeth T. Kennan
- --------------------- Trustee May 23, 1997
Elizabeth T. Kennan
/s/ Lawrence J. Lasser
- --------------------- Trustee May 23, 1997
Lawrence J. Lasser
/s/ Robert E. Patterson
- --------------------- Trustee May 23, 1997
Robert E. Patterson
/s/ Donald S. Perkins
- --------------------- Trustee May 23, 1997
Donald S. Perkins
/s/ William F. Pounds
- --------------------- Trustee May 23, 1997
William F. Pounds
/s/ George Putnam, III
- --------------------- Trustee May 23, 1997
George Putnam, III
/s/ A.J.C. Smith
- --------------------- Trustee May 23, 1997
A.J.C. Smith
/s/ W. Nicholas Thorndike
- --------------------- Trustee May 23, 1997
W. Nicholas Thorndike
