As filed with the Securities and Exchange Commission on
September 22, 1997
Registration No. 333-28271
File No. 811-5498
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 1 [X]
(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
Approximate Date of Proposed Offering:
As soon as practicable after this Registration Statement becomes effective.
It is proposed this filing will become effective when declared effective
pursuant to Section 8(c).
<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 Master Intermediate
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 acquisition;
Information about the acquisition
5. Front Cover
6. Front Cover
7. Introduction; Proposal regarding approval or disapproval of Agreement and
Plan of Reorganization; Information about the acquisition; Further Information
About voting and the meeting
8. Not Applicable
9. Not Applicable
Part B Caption in Statement of Additional Information
10. Cover Page
11. Cover Page
12. Cover Page; Appendix B
13. Cover Page; Appendix B
14. Independent Accountants and Financial Statements
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.
<PAGE>
IMPORTANT INFORMATION
FOR SHAREHOLDERS IN
PUTNAM MASTER INTERMEDIATE 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 8.
We urge you to review carefully the prospectus/proxy statement, fill out
your proxy card, and return it to us. When shareholders don't return their
proxies in sufficient numbers, we have to make follow-up solicitations, which
can cost your fund money.
We want to know how you would like to vote and welcome your comments.
Please take a few minutes with these materials and return your proxy to us.
[encircled scales]
BOSTON [bullet] LONDON [bullet] TOKYO
<PAGE>
Table of Contents
A Message from the Chairman .............. 5
Notice of Shareholder Meeting ............ 6
Combined Prospectus/Proxy Statement ...... 7
Proxy card enclosed
If you have any questions, please contact us at the special toll-free number we
have set up for you (1-800-225-1581) or call your financial adviser.
- ----------------
<PAGE>
A Message from the Chairman [photo of George Putnam]
Dear Shareholder:
I am writing you to ask you for your vote on important questions that affect
your investment in Putnam Master Intermediate Income Trust (the "Master Fund").
While you are, of course, welcome to join us at the Master Fund's meeting, most
shareholders cast their vote by filling out and signing the enclosed proxy
card.
We are holding the annual meeting earlier than normal in the fiscal year so
that we can ask for your vote on a special matter. In addition to the annual
selection of Trustees and approval of auditors, we are asking for your vote on
a proposed combination of your fund with Putnam Intermediate Government Income
Trust (the "Government Fund"). In this transaction, the Master Fund will
acquire all the assets and assume the liabilities of the Government Fund at net
asset value in exchange for shares of the Master Fund (the "Master Shares").
The Master Shares will then be distributed to Government Fund shareholders. As
a result, your fund will become significantly larger, and will continue to
operate under its existing investment objectives and policies. Although this
transaction will not materially affect the operation of your fund, we are
required by the Rules of the New York Stock Exchange to solicit your vote on
this matter. Shareholders of the Government Fund approved the transaction on
October 9, 1997.
The Trustees of your fund are recommending the acquisition because the addition
of the assets of the Government Fund will create a substantially larger fund,
and thereby offer the prospect of lower expenses. The Trustees also believe
that the larger fund may result in increased liquidity for shareholders due to
the substantial increase in the number of shares outstanding, which may attract
greater investor interest. In turn, this may also lead to lower share trading
discount levels in the market price of the Master Fund's shares, but there can
be no assurances in this regard since discount levels appear to be influenced
by many different factors.
Although we would like very much to have each shareholder attend his or her
fund's meeting, we realize this is not possible. Whether or not you plan to be
present, we need your vote. We urge you to complete, sign, and return the
enclosed proxy card promptly. A postage-paid envelope is enclosed.
I'm sure that you, like most people, lead a busy life and are tempted to put
this proxy aside for another day. Please don't. When shareholders don't return
their proxies, their fund may have to incur the expense of follow-up
solicitations. All shareholders benefit from the speedy return of proxies.
Your vote is important to us. We appreciate the time and consideration I am
sure you will give this important matter. If you have questions about these
proposals, please call 1-800-225-1581, or call your financial advisor.
Sincerely yours,
/s/ George Putnam
George Putnam, Chairman
<PAGE>
PUTNAM MASTER INTERMEDIATE 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 Master Intermediate Income Trust:
An Annual Meeting of Shareholders of Putnam Master Intermediate Income Trust
(the "Master Fund") will be held December 18, 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 acquisition by the Master Fund of all the assets and assumption of all
the liabilities of Putnam Intermediate Government Income Trust (the "Government
Fund") at net asset value in exchange for shares of the Master Fund . See page
9.
2. Fixing the number of Trustees and electing Trustees. See page 17.
3. Ratifying the selection by the Trustees of the independent auditors of your
fund for its current fiscal year. See page 26.
4. 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. Thomas Stephens
Lawrence J. Lasser W. Nicholas Thorndike
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.
October 31, 1997
<PAGE>
Prospectus/Proxy Statement
October 31, 1997
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 (the "Proxy Statement") relates to the proposed
acquisition by Putnam Master Intermediate Income Trust (the "Master Fund") of
all of the assets of Putnam Intermediate Government Income Trust (the
"Government Fund") in exchange for shares of the Master Fund (the "Master
Shares") and the assumption by the Master Fund of all of the liabilities of the
Government Fund. (The Master Fund and the Government Fund are collectively
referred to herein as the "funds," and each is referred to individually as a
"fund.") As a result of the proposed transaction, each shareholder of the
Government Fund will receive a number of Master Shares equal in net asset value
at the date of the exchange to the aggregate net asset value of the
shareholder's Government Fund shares. This Proxy Statement also includes
proposals with respect to electing Trustees for the Master Fund and
ratification of auditors for the Master Fund. The address and telephone number
of each fund is One Post Office Square, Boston Massachusetts 02109, (617)
292-1000.
This Proxy Statement explains concisely what you should know about the Master
Fund, a diversified, closed-end management investment company. Please read it
and keep it for future reference.
The following document has been filed with the Securities and Exchange
Commission and is incorporated into this Proxy Statement by reference: a
Statement of Additional Information, dated October 31, 1997, relating to the
proposed transaction (the "SAI"). For a free copy of the SAI, please contact us
at the special toll-free number we have set up for you (1-800-225-1581).
The Master Fund and the Government Fund are listed on the New York Stock
Exchange (the "NYSE") under the symbols "PIM" and "PGT", respectively. Proxy
materials, information statements and other information filed by the funds can
be inspected and copied at the Public Reference Facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and may be inspected at
the offices of the NYSE, 11 Wall Street, New York, New York 10005. Copies of
such material can also be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
Washington, D.C. 20549 at prescribed rates.
THE SECURITIES OFFERED BY THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
SUCH PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SHARES OF THE MASTER FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
Who is asking for my vote?
The enclosed proxy is solicited by the Trustees of Putnam Master Intermediate
Income Trust for use at the Annual Meeting of Shareholders of the fund to be
held on December 18, 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 acquisition of the assets and assumption of the liabilities of the
Government Fund at net asset value in exchange for shares of the Master Fund .
2. FOR fixing the number of Trustees as proposed and the election of all
nominees; and
3. FOR ratifying the selection of Coopers & Lybrand L.L.P. as the independent
auditors of your fund.
Who is eligible to vote?
Shareholders of record at the close of business on October 17, 1997, are
entitled to be present and to vote at the meeting or any adjourned meeting. On
October 17, 1997, there were outstanding shares of beneficial
interest of the Master Fund. The Notice of Annual Meeting, the Proxy Statement
and the enclosed form of proxy are being mailed to shareholders of record on or
about October 31, 1997.
<PAGE>
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 Master 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 Master 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.
<PAGE>
Table of Contents
1. Proposal regarding approval or disapproval of Agreement and Plan of
Reorganization ...................................................... 9
Synopsis ............................................................ 9
Risk factors ........................................................ 12
Introduction ........................................................ 12
Background and reasons for the proposed acquisition .................. 13
Information about the acquisition .................................... 14
2. Proposal regarding election of trustees .......................... 17
3. Proposal regarding ratification of auditors ...................... 26
Voting information .................................................. 26
Appendix A: Agreement and Plan of Reorganization .................... 30
Appendix B: Additional Information about the Master Fund and Government
Fund ................................................................ 44
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 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
acquisition of the assets and assumption of the liabilities of the Government
Fund, which will result in an increase in the size of your fund. Under this
proposal, the Master Fund will acquire all of the assets of the Government 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. Shares of the Master Fund
currently outstanding will not be affected by the transaction.
2. Why are the Trustees proposing the transaction?
The acquisition of the assets of the Government Fund will create a
substantially larger fund of approximately $870 million in assets, as compared
to the fund's current size of approximately $325 million in assets. The
Trustees believe that a larger fund offers the prospect of a lower expense
ratio. In addition, the Trustees believe that a larger fund may result in
increased liquidity for shareholders through the substantial increase in the
number of shares outstanding. This may in turn attract greater investor
interest and lead to lower share trading discount levels in the market price of
the Master Fund's shares, although no assurances can be given in this regard
since discount levels appear to be influenced by many factors.
3. What will happen to my shares of the Master Fund as a result of the
transaction?
Your shares of the Master Fund will not be affected by the transaction, but
will represent interests in a substantially larger fund pursuing the same
investment objectives and policies.
4. Why is a shareholder vote on this proposal being solicited at this time?
Although this transaction will not affect the operations of your fund in any
way, we are required by the Rules of the New York Stock Exchange to solicit
your vote in this matter.
[The shareholders of the Government Fund approved the transaction on October 9,
1997.]
5. What is the Government Fund?
The Government Fund is a closed-end investment company with the same Trustees
and investment adviser as your fund. As of September 30, 1997 it had $
in assets. The Government Fund invests in the U.S. government and foreign
government sectors of the fixed income securities markets. Unlike the Master
Fund, the Government Fund does not invest in the high yield sector.
After a series of meetings held earlier this year, the Trustees concluded that
it would be in the interests of the Government Fund to add the capability to
invest significantly in the high yield sector. This decision was based, in
part, on a comparison of the performance of the Government Fund to funds such
as the Master Fund which have the capability to invest significantly in the
high yield sector. The Trustees also decided that, in light of the substantial
<PAGE>
similarity of the Government Fund and the Master Fund, it was in the interests
of both funds' shareholders to consolidate the operations of the two funds
rather than operating them in parallel fashion.
Since the assets of the Government Fund will be repositioned in connection with
the transaction to reflect the policies of the Master Fund and the combined
fund will operate under the Master Fund's policies, the policies of the
Government Fund are not relevant to the operations of the Master Fund after the
transaction. For further background information about the Government Fund, see
Appendix B.
6. 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 Master Fund currently has higher
management fees and total fund operating expenses than the Government Fund due
to asset size. Following the transaction, the Master Fund is expected to have
lower management fees and total fund operating expenses than are currently
being paid by either fund.
The following table summarizes expenses that each of the funds incurred for the
12-month period beginning April 1, 1996 and ending March 31, 1997, and expenses
that Putnam Management believes the combined fund would have incurred for that
period, assuming that the transaction had taken place on the first day of that
period. The estimated expenses of the combined fund do not reflect the expenses
of either fund in carrying out its obligations under the Agreement and Plan of
Reorganization.
<TABLE>
<CAPTION>
Master Master Fund
Government Fund Fund (Pro Forma Combined)
----------------- --------- ----------------------
<S> <C> <C> <C>
Shareholder transaction expenses
Maximum sales charge imposed on purchases (as a
percentage of offering price None(a) None(a) None(a)
Dividend Reinvestment and Cash Purchase Plan None(b) None(b) None(b)
Annual fund operating expenses (as a percentage of
average net assets)
Management fees .74% .75% .69%
Other expenses .16% .20% .19%
Total fund operating expenses .90% .95% .88%
</TABLE>
(a)Shares of either fund purchased on the secondary market are not subject to
sales charges but may be subject to brokerage commissions or other charges. The
table does not include an underwriting commission of 7% paid by shareholders in
initial offering of each fund.
(b)Each participant in a fund's dividend reinvestment plan pays a proportionate
share of the brokerage commissions incurred with respect to open market
purchases in connection with such plan.
The tables are provided to help you understand the expenses of investing in the
funds and your share of the operating expenses which each fund incurred for the
period and which Putnam Management believes the combined fund would have
incurred for the period. The expenses shown in the table do not reflect the
application of credits related to expense offset arrangements that reduce
certain fund expenses.
Examples
An investment of $1,000 would incur the following expenses, assuming 5% annual
return.
1 3 5 10
year years years years
------ ------- ------- -------
Government Fund $ 9 $29 $50 $111
Master Fund $10 $30 $53 $117
Master Fund (Pro forma combined) $ 9 $28 $49 $108
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.
7. What are the federal income tax consequences of the proposed transaction?
For federal income tax purposes, no gain or loss will be recognized by either
fund or its shareholders as a result of the transaction.
8. Will my dividend be affected by the transaction?
The transaction will not result in a change in the dividend policy or any
immediate change in dividend payments of the Master Fund. Over the longer term
the level of dividends will depend on market conditions and the ability of
Putnam Investment Management, Inc., the investment adviser to the Master Fund
("Putnam Management"), to
<PAGE>
invest the fund's assets, including those received in the transaction, in
securities meeting the Master Fund's investment guidelines with the same or
greater level of income as the current investments of the fund.
9. Will the transaction effect the procedures for purchasing and selling shares?
The procedure for purchasing and selling shares of the Master Fund is identical
to that of the Government Fund, and will remain unchanged. As closed-end funds,
the funds do not redeem outstanding shares or continuously offer shares. The
funds' shares currently may be bought and sold at prevailing market prices on
the New York Stock Exchange. The Master Fund will apply to list the shares to
be issued to the Government Fund shareholders on the NYSE. It is a condition to
the closing of the transaction that the additional shares be accepted for
listing.
10. Will these transactions affect the discount on my shares?
In recent years, shares of the Master Fund have traded at a discount . While
discount levels appear to be influenced by many factors and no assurances can
be given in this regard, the increased liquidity expected to result from a
substantially larger fund could help reduce future discount levels. Increased
liquidity may result from the substantial increase in the number of shares
outstanding, which may attract greater investor interest and in turn lead to
lower share trading discount levels in the market price of the Master Fund's
shares.
RISK FACTORS
What are the principal risk factors associated with the transaction?
The following discussion concerning the Master Fund is provided for
informational purposes. If the proposal is approved and the closing of the
transaction is consummated, shares of the Master Fund currently outstanding
will not be affected, except that they will represent interests in a
substantially larger fund. The investment objectives and policies of the Master
Fund and its general operations will not be affected by the transaction. In
connection with the transaction, the portfolio of the Government Fund will be
repositioned to conform substantially to the investment objectives and policies
of the Master Fund. Accordingly, the following information, which has been
provided to shareholders of the Government Fund and primarily addresses issues
of concern to those shareholders, will be of limited relevance to shareholders
of the Master Fund in deciding whether to approve the proposed transaction.
Although both funds seek, with equal emphasis, high current income and relative
stability of net asset value through a portfolio of short and intermediate term
fixed income securities, the fund's investment policies differ. The most
substantial difference between the fund's investment policies is that the
Government Fund may make quite limited investments in below investment grade
securities, while the Master Fund has significant capacity to make such
investments. Since as noted above, the Master Fund's policies will govern
investments after the transaction, these policy differences and the varying
investment risks of the two portfolios are not relevant to a decision by a
Master Fund shareholder on whether to vote for or against the acquisition. For
further background information about the Government Fund, see Appendix B.
Consummation of the transaction will be subject to the ability of Putnam
Management to reposition the portfolio of the Government Fund to reflect the
investment policies of the Master Fund. This will require the Government Fund
to shift a significant portion of its investments into lower rated, high yield
securities, which are generally less liquid than other sectors of the fixed
income markets in which the Master Fund invests. Putnam Management believes
that the markets for lower rated high yield securities are of sufficient
breadth and liquidity to permit such repositioning to be completed without
impairing the current investment position of the Master Fund, but this will
depend on market conditions at the time. Accordingly there can be no assurance
that the transaction will be completed or that, if completed, Putnam Management
will continue to be able to invest and reinvest the assets of the larger,
surviving fund as effectively as it has in the past.
INTRODUCTION
The shareholders of the Master Fund are being asked to approve or disapprove a
transaction between the Government Fund and the Master Fund pursuant to an
Agreement and Plan of Reorganization between the funds, dated as of July 23,
1997, as amended October , 1997 (the "Agreement"), which is attached to this
Proxy Statement as Appendix A.
The Agreement provides, among other things, for the acquisition of all of the
assets of the Government Fund by the Master Fund in exchange (i) for the
assumption by the Master Fund of all of the liabilities of the Government Fund
and (ii) for shares of the Master Fund (the "Master Shares") with an aggregate
net asset value equal to the net asset value of the assets of the Government
Fund acquired by the Master Fund, as more fully described below under
"Information about the acquisition."
After receipt of the Master Shares, the Government Fund will distribute the
Master Shares to its shareholders in complete liquidation of the Government
Fund, and the legal existence of the Government Fund as a separate business
<PAGE>
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.
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 votes cast on this proposal, provided that a majority of the
Master Fund's shares outstanding and entitled to vote are cast on the proposal,
is necessary for the consummation of the proposed transaction. The transaction
was approved by shareholders of the Government Fund on October 9, 1997.
In the event that this proposal is not approved by the shareholders of the
Master Fund, each fund will continue to be managed as a separate closed-end
fund in accordance with its current investment objectives and policies. 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 ACQUISITION
The Trustees of both funds, including all Trustees who are not "interested
persons" of the funds, have determined that the transaction would be in the
best interests of the funds' 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.
At meetings held earlier this year, the Trustees 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. The Trustees concluded that a combination of the
Government Fund with 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. The Trustees
believe the transaction will have the following benefits for shareholders of
the Master Fund:
Reduced expenses. The transaction will result in a combined fund with lower
expense ratios than either fund prior to the transaction. Based on the
management fee schedules for the funds, which are identical, the management fee
rate for both funds will be lower immediately following the transaction due to
the application of fee breakpoints. Further, Putnam Management expects that the
combined fund, with approximate net assets of $850 million, will experience
lower overall expenses due to efficiencies resulting from operating a fund of
that size. The total fund operating expenses of the Master Fund and the
Government Fund for the 12-month period ended March 31, 1997 were .95% and .90%
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 may result from the significant increase in the number of
shares outstanding for the combined fund, which Putnam Management believes may
attract greater investor interest and create a more liquid market for
shareholders in the combined fund.
INFORMATION ABOUT THE ACQUISITION
Agreement and Plan of Reorganization. The Agreement 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 December 22, 1997 (that date being the "Exchange Date"). The value of
the acquired assets of the Government Fund and the net asset value of the
Master Shares would be determined as of 4:00 p.m. Boston time on the business
day immediately prior to the Exchange Date. The following discussion of the
Agreement is qualified in its entirety by the full text of the Agreement, which
is attached as Appendix A to this 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. Shares of the Master Fund currently outstanding
will not be affected by the transaction.
The consummation of the acquisition is subject to the conditions set forth in
the Agreement. The Agreement may be terminated and the acquisition abandoned at
any time, before or after approval by the shareholders, prior to the Exchange
Date by mutual consent of the Master Fund and the Government Fund or, if any
condition set forth in the Agreement has not been fulfilled and has not been
waived by the party entitled to its benefits, by such party.
<PAGE>
If shareholders of each fund approve the acquisition, 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. The Agreement requires that all or a substantial
portion of this repositioning will be completed prior to the consummation of
the transaction. Government Fund shareholders will bear the portfolio trading
costs associated with this repositioning to the extent that it is completed
prior to the Exchange Date.
Except for the trading costs associated with the repositioning described above,
the fees and expenses for the transaction are estimated to be approximately
$671,000. Each fund will bear the costs of its own proxy materials and proxy
solicitations . The Master Fund will bear the cost of SEC filing fees to
register the Master Shares to be issued in the transaction, estimated to be
$170,000, and the costs of this proxy solicitation, $121,000. 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.
Federal income tax consequences. The funds have received a ruling from the
Internal Revenue Service stating that, as a result of the transaction, (i) the
Master Fund will not recognize gain or loss on the transaction, (ii) the Master
Fund's basis in the assets acquired from the Government Fund will be the same
as the Government Fund's basis in such assets, and (iii) the Master Fund's
holding period in the assets acquired from the Government Fund will include the
Government Fund's holding period in such assets. In addition, this ruling
states that as a result of the transaction, (iv) no gain or loss will be
recognized by the Government Fund or the shareholders of the Government Fund,
(v) the Government Fund's shareholders' basis in the Master Fund shares
received will be the same as such shareholders' basis in the Government Fund
shares exchanged, and (vi) the Government Fund's shareholders' holding period
in the Master Fund shares received will include such shareholders' holding
period in the Government Fund shares exchanged.
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) $528,330 $325,735 $853,885
Shares outstanding (000's omitted) 64,333 38,448 100,812
Net asset value per share $ 8.21 $ 8.47 $ 8.47
(1) Government Fund assets do not reflect estimated proxy-related costs of
$200,000.
(2) Master Fund assets do not reflect estimated proxy-related costs of $121,000
and SEC filing fees of $170,000.
(3) Pro forma combined net assets reflect estimated legal and accounting
transaction-related costs of $180,000.
Unaudited pro forma combining financial statements of the funds as of March 31,
1997 and for the twelve-month period then ended are included in the SAI.
Because the Agreement provides that the Master Fund will be the surviving fund
following the transaction and because the Master Fund's investment objectives
and policies will remain unchanged, the pro forma combining financial
statements reflect the transfer of the assets and liabilities of the Government
Fund to the Master Fund as contemplated by the Agreement.
<PAGE>
Trading information
The following chart shows quarterly per share trading information for the past
two fiscal years and the current fiscal year of the funds, as listed on the
NYSE:
<TABLE>
<CAPTION>
Master Fund (Unaudited)
Closing
Quarter High Low Market Closing Discount
Ended Price ($) Price ($) Price ($) NAV ($) to NAV (%)
- -------------------- ----------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
September 29, 1995 7-1/2 7-1/4 7-3/4 8.38 -11.99
December 29, 1995 7-3/4 7-3/8 7-1/2 8.60 -12.79
March 29, 1996 7-7/8 7-1/4 7-3/8 8.46 -12.83
June 28, 1996 7-1/2 7-1/4 7-3/8 8.46 -12.83
September 30, 1996 7-5/8 7-1/4 7-1/2 8.58 -12.58
December 31, 1996 7-3/4 7-1/2 7-1/2 8.68 -13.59
March 31, 1997 7-7/8 7-1/2 7-1/2 8.47 -11.45
June 30, 1997 8-1/8 7-3/8 7-29/32 8.62 - 8.28
September 30, 1997 [ ] [ ] [ ] [ ] [ ]
</TABLE>
<TABLE>
<CAPTION>
Government Fund (Unaudited)
Closing
Quarter High Low Market Closing Discount
Ended Price ($) Price ($) Price ($) NAV ($) to NAV (%)
- ------------------- ----------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
November 30, 1995 7-3/4 7-1/2 7-3/4 8.70 -10.91
February 28, 1996 8 7-1/2 7-7/8 8.37 - 5.91
May 31, 1996 7-7/8 7-1/4 7-3/8 8.32 -11.36
August 30, 1996 7-5/8 7-1/8 7-1/2 8.33 - 9.96
November 29, 1996 7-5/8 7-3/8 7-5/8 8.65 -11.85
February 28, 1997 7-5/8 7-3/8 7-3/8 8.37 -11.89
May 31, 1997 7-1/2 7-1/8 7-1/2 8.26 - 9.20
August 30, 1997 7-3/8 7-5/16 7-3/8 8.20 -10.06
</TABLE>
On 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.
Share ownership
At September 30, 1997, the officers and Trustees of each fund as a group owned
less than 1% of the outstanding shares of each fund, and, except as noted
below, to the knowledge of each fund no person owned of record or beneficially
5% or more of the shares of that fund:
Master Fund Shareholder name and address Percentage owned
Cede & Co. % (record)
7 Hanover Square
New York, NY 10004
Government Fund Shareholder name and address Percentage owned
Cede & Co. % (record)
7 Hanover Square
New York, NY 10004
If the transaction were consummated, Cede & Co. would hold of record
approximately ___% of the shares of the Master Fund.
The Trustees of the Master Fund, including the independent trustees,
unanimously recommend approval of the Agreement and Plan of Reorganization and
the transactions contemplated thereby.
<PAGE>
2. ELECTION OF TRUSTEES
Who are the nominees for Trustees?
The Nominating Committee of the Trustees recommends that the number of Trustees
be fixed at fourteen 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
[photo of Jameson Adkins Baxter]
Ms. Baxter, age 54, 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 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
[photo of Hans H. Estin]
Mr. Estin, age 69, 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
[photo of 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
[photo of Ronald J. Jackson]
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. Mr. Jackson is a
graduate of Michigan State University Business School.
<PAGE>
Elizabeth T. Kennan
[photo of 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. 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*
[photo of 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 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
[photo of Robert E. Patterson]
Mr. Patterson, age 52, is the Executive Vice President and Director of
Acquisitions of Cabot Partners Limited Partnership, a registered Robert E.
investment adviser which manages real estate investments for Patterson]
institutional investors. Prior to 1990, he was the Executive Vice President of
Cabot, Cabot & Forbes Realty Advisors, Inc., the predecessor company of Cabot
Partners. Prior to that, he was a Senior Vice President of the Beal Companies,
a real estate management, investment and development company. He has also
worked as an attorney and held various positions in state government, including
the founding Executive Director of the Massachusetts Industrial Finance Agency.
Mr. Patterson currently also serves as Chairman of the Joslin Diabetes Center
and as a Director of Brandywine Trust Company. Mr. Patterson is a graduate of
Harvard College and Harvard Law School.
Donald S. Perkins*
[photo of 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.
<PAGE>
William F. Pounds
[photo of 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*
[photo of George Putnam]
Mr. Putnam, age 71, 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 and Houghton Mifflin Company, a major publishing company.
He is also a Trustee of Massachusetts General Hospital, McLean Hospital,
Vincent Memorial Hospital, WGBH Educational Foundation and the Museum of Fine
Arts and the Museum of Science in Boston; the New England Aquarium; an Overseer
of Northeastern University; and a Fellow of The American Academy of Arts and
Sciences. Mr. Putnam is a graduate of Harvard College and Harvard Business
School and holds honorary doctorates from Bates College and Harvard University.
George Putnam, III*
[photo of George Putnam III)
Mr. Putnam, age 46, 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 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*
[photo of 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, 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. Thomas Stephens
[photo of W. Thomas Stephens]
Mr. Stephens, age 55, is the Chief Executive Officer and President of MacMillan
Bloedel, Ltd. He retired in 1996 as Chairman of the Board of Directors,
President and Chief Executive Officer of Johns Manville Corporation, an
insulation and roofing systems company. He also
<PAGE>
served as Executive Vice President and Chief Financial Officer of Manville and
in total had 27 years of experience with Manville and its predecessor
companies.
Mr. Stephens serves as a Director for Mail-Well Inc., a supplier of envelopes
and high-quality printing services, Qwest Communications, a fiber optics
manufacturer, The Eagle Picher Trust, a trust established to fund the
settlement of asbestos-related claims, and New Century Energies, a public
utility company. Mr. Stephens is a Member of the Colorado Forum and Trustee of
the Denver Art Museum and The University of Arkansas Advisory Council. He is
currently a Visiting Professor at the Graduate School of Business at the
University of Colorado. Mr. Stephens is a graduate of the University of
Arkansas.
W. Nicholas Thorndike**
[photo of 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 Courier Corporation, a
book binding and printing company. He is also a Trustee of Eastern Utilities
Associates, Massachusetts General Hospital, where he previously served as
chairman and president, and Northeastern University.
Prior to December 1988, he was the Chairman of the Board and Managing Partner
of Wellington Management Company/Thorndike, Doran, Paine & Lewis, a registered
investment adviser which manages mutual funds and institutional assets. He also
previously served as a Trustee of the Wellington Group of funds (now The
Vanguard Group) and was the Chairman and a Director of Ivest Fund, Inc. Mr.
Thorndike is a graduate of Harvard College.
*Nominees who are or may be deemed to be "interested persons" (as defined in
the Investment Company Act of 1940) of your fund, Putnam Management, and Putnam
Mutual Funds Corp. ("Putnam Mutual Funds"), the principal underwriter for all
the open-end Putnam funds and an affiliate of Putnam Management. Messrs.
Putnam, Lasser, and Smith are deemed "interested persons" by virtue of their
positions as officers or shareholders of your fund, or directors of Putnam
Management, Putnam Mutual Funds, or Marsh & McLennan Companies, Inc., the
parent company of Putnam Management and Putnam Mutual Funds. Mr. George Putnam,
III, Mr. Putnam's son, is also an "interested person" of your fund, Putnam
Management, and Putnam Mutual Funds. Mr. Perkins may be deemed to be an
"interested person" of your fund because of his service as a director of a
certain publicly held company that includes registered broker-dealer firms
among its subsidiaries. Neither your fund nor any of the other Putnam funds
currently engages in any transactions with such firms except that certain of
such firms act as dealers in the retail sale of shares of certain Putnam funds
in the ordinary course of their business. The balance of the nominees are not
"interested persons."
**In February 1994 Mr. Thorndike accepted appointment as a successor trustee of
certain private trusts in which he has no beneficial interest. At that time he
also became Chairman of the Board of two privately owned corporations
controlled by such trusts, serving in that capacity until October 1994. These
corporations filed voluntary petitions for relief under Chapter 11 of the U.S.
Bankruptcy Code in August 1994.
Except as indicated above, the principal occupations and business experience of
the nominees for the last five years have been with the employers indicated,
although in some cases they have held different positions with those employers.
Except for Messrs. Jackson and Stephens, all the nominees were elected by the
shareholders in July 1996. Messrs. Jackson and Stephens were elected by the
other Trustees in May 1996 and September 1997, respectively. The 14 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 14
for your fund.
- - 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 $60 million. The
table below lists each Trustee's current invest-
<PAGE>
ments in the fund and in the Putnam funds as a group based on beneficial
ownership. Except as otherwise noted, each Trustee has sole voting power and
sole investment power with respect to his or her shares.
Share Ownership by Trustees
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 7/31/97 as of 7/31/97(1)
------------ --------------- ------------------
Jameson A. Baxter 1994 121 49,801
Hans H. Estin 1972 683 29,717
John A. Hill 1985 100 143,259
Ronald J. Jackson 1996 200(2) 125,593
Elizabeth T. Kennan 1992 226(3) 26,649
Lawrence J. Lasser 1992 100 566,424
Robert E. Patterson 1984 300 64,242
Donald S. Perkins 1982 1,180 177,271
William F. Pounds 1971 500 327,673
George Putnam 1957 2,372 1,770,231
George Putnam, III 1984 500 312,262
A.J.C. Smith 1986 200(4) 51,946
W. Thomas Stephens(5) 1997 0 0
W. Nicholas Thorndike 1992 159 82,082
(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 126 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.
(5)Mr. Stephens was elected a Trustee in September 1997.
As of July 31 , 1997, the Trustees and officers of the fund owned a total of
6,640 shares of the fund, comprising less than 1% of its outstanding shares on
that date.
- - What are some of the ways in which the Trustees represent shareholder
interests?
The Trustees believe that, as substantial investors in the Putnam funds, their
interests are closely aligned with those of individual shareholders. Among
other ways, the Trustees seek to represent shareholder interests:
[bullet] by carefully reviewing your fund's investment performance on an
individual basis with your fund's managers;
[bullet] by also carefully reviewing the quality of the various other services
provided to the funds and their shareholders by Putnam Management and
its affiliates;
[bullet] by discussing with senior management of Putnam Management steps being
taken to address any performance deficiencies;
[bullet] by reviewing the fees paid to Putnam Management to ensure that such
fees remain reasonable and competitive with those of other mutual
funds, while at the same time providing Putnam Management sufficient
resources to continue to provide high quality services in the future;
[bullet] by monitoring potential conflicts between the funds and Putnam
Management and its affiliates to ensure that the funds continue to be
managed in the best interests of their shareholders; and
[bullet] by also monitoring potential conflicts among funds to ensure that
shareholders continue to realize the benefits of participation in a
large and diverse family of funds.
- - How often do the Trustees meet?
The Trustees meet each month (except August) over a two-day period to review
the operations of your fund and of the other Putnam funds. A portion of these
meetings is devoted to meeting of various Committees of the board which focus
on particular matters. These currently include: the Committee of Independent
Trustees, which conducts an annual review of all contractual arrangements with
Putnam Management and its affiliates; the Contract Committee, which reviews
such matters on an interim basis during the course of the year; the
Communication and Service Committee, which reviews the quality of services
provided by your fund's investor servicing agent, custodian and distributor;
the Pricing, Brokerage and Special Investments Committee, which reviews matters
relating to valuation of securities, best execution, brokerage costs and
allocations and new investment techniques; the Audit Committee, which reviews
accounting policies and the adequacy of internal controls and supervises the
engagement of the funds' auditors; the Compensation, Administration and Legal
Affairs Committee, which reviews the compensation of the Trustees and their
administrative staff and supervises the engagement of the funds' independent
counsel; the Nominating Committee, which is responsible for selecting nominees
for election as Trustees, and the Closed-end fund Committee, which is
responsible for reviewing special issues applicable to closed-end funds such as
your fund.
<PAGE>
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 1997 and the fees paid to each Trustee by all of the Putnam funds
during calendar year 1996.
Compensation Table
<TABLE>
<CAPTION>
Estimated
annual
Pension or benefits
retirement from all Total
Aggregate benefits Putnam compensation
compensation accrued as funds from all
from the part of fund upon Putnam
Trustees fund(1) expenses(2) retirement(3) funds(4)
- ------------------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Jameson A. Baxter $[ ] $ 0 $85,646 $172,291(5)
Hans H. Estin [ ] 0 85,646 171,291
John A. Hill (5) [ ] 0 85,646 170,791
Ronald J. Jackson(5)(6) [ ] 0 85,646 94,807
Elizabeth T. Kennan [ ] 0 85,646 171,291
Lawrence J. Lasser [ ] 0 85,646 169,791
Robert E. Patterson [ ] 0 85,646 182,291
Donald S. Perkins [ ] 0 85,646 170,291
William F. Pounds(7) [ ] 0 98,146 197,291
George Putnam [ ] 0 85,646 171,291
George Putnam, III [ ] 0 85,646 171,291
A.J.C. Smith [ ] 0 85,646 169,791
W. Thomas Stephens(8) [0] [0] [0] [0]
W. Nicholas Thorndike [ ] 0 85,646 181,291
</TABLE>
(1)Includes an annual retainer and an attendance fee for each meeting attended.
(2)The Trustees approved a Retirement Plan for Trustees of the Putnam funds on
October 1, 1996. Prior to that date, voluntary retirement benefits were paid
to certain retired Trustees.
(3)Assumes that each Trustee retires at the normal retirement date. Estimated
benefits for each Trustee are based on Trustee fee rates in effect during
calendar 1996.
(4)As of December 31, 1996, there were 96 funds in the Putnam family.
(5)Includes compensation deferred pursuant to a Trustee Compensation Deferral
Plan. The total amounts of deferred compensation payable by the fund to Mr.
Hill and Mr. Jackson as of November 30, 1996 were $2,411 and $700,
respectively, including income earned on such amounts.
(6)Elected as a Trustee in May 1996.
(7)Includes additional compensation for service as Vice Chairman of the Putnam
funds.
(8)Elected as a Trustee in September 1997.
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.
<PAGE>
For additional information about the Master Fund, including further information
about its Trustees and officers, please see "Master Fund Information," on page
28.
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
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts,
independent accountants, has been selected by the Trustees as the independent
auditor of the Master Fund for the current fiscal year. Among the country's
preeminent accounting firms, this firm also serves as the auditor for
approximately half of the other funds in the Putnam family. It was selected
primarily on the basis of its expertise as auditors of investment companies,
the quality of its audit services, and the competitiveness of its fees.
A majority of the votes on the matter is necessary to ratify the selection of
auditors. A representative of the independent auditors is expected to be
present at the meeting to make statements and to respond to appropriate
questions.
The Trustees recommend that you vote "FOR" ratification of the independent
auditors.
FURTHER INFORMATION ABOUT VOTING AND THE MEETING
Required Votes. Proposal 1 (acquisition proposal) requires the affirmative vote
of a majority of the votes cast on the proposal provided that a majority of the
Master Fund's shares outstanding and entitled to vote are voted on the
proposal. For the election of Trustees for Proposal 2, the 14 nominees who
receive the greatest number of votes will be elected as Trustees. Proposal 3
(ratification of auditors) requires the affirmative vote of a majority of the
shares present at the meeting and entitled to vote on the matter.
Quorum and Methods of Tabulation. A majority of the shares entitled to
vote--present in person or represented by proxy--constitutes a quorum for the
transaction of business with respect to any proposal at the meeting (unless
otherwise noted in the proxy statement). Shares represented by proxies that
reflect abstentions and "broker non-votes" (i.e., shares held by brokers or
nominees as to which (i) instructions have not been received from the
beneficial owners or the persons entitled to vote and (ii) the broker or
nominee does not have the discretionary voting power on a particular matter)
will be counted as shares that are present and entitled to vote on the matter
for purposes of determining the presence of a quorum. Votes cast by proxy or in
person at the meeting will be counted by persons appointed by your fund as
tellers for the meeting.
The tellers will count the total number of votes cast "for" approval of the
proposals for purposes of determining whether sufficient affirmative votes have
been cast. With respect to the election of Trustees and selection of auditors,
neither abstentions nor broker non-votes have any effect on the outcome of the
proposal. With respect to the acquisition proposal, 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 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
<PAGE>
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 $6,500 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 July 1999. Shareholder proposals must be received by your fund
before _______________, 1999, to be included in your fund's proxy statement for
the next annual meeting.
Adjournment. If sufficient votes in favor of any of the proposals set forth in
the Notice of the Meeting are not received by the time scheduled for the
meeting, the persons named as proxies may, at their discretion, propose
adjournments of the meeting for a period or periods of not more than 60 days in
the aggregate to permit further solicitation of proxies with respect to those
proposals. Any adjournment will require the affirmative vote of a majority of
the votes cast on the question in person or by proxy at the session of the
meeting to be adjourned. The persons named as proxies will vote in favor of
adjournment those proxies which they are entitled to vote in favor of such
proposals. They will vote against adjournment those proxies required to be
voted against such proposals. Your fund pays the costs of any additional
solicitation and of any adjourned session. Any proposals for which sufficient
favorable votes have been received by the time of the meeting may be acted upon
and considered final regardless of whether the meeting is adjourned to permit
additional solicitation with respect to any other proposal.
Financial information. A copy of the fund's annual report for the most recent
fiscal year will be mailed to shareholders on or about November __, 1997.
Requests for additional annual reports may be directed to Putnam Investor
Services, P.O. Box 41203, Providence, RI 02940-1203 or 1-800-225-1581.
Master 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.
<PAGE>
Officers and other information. In addition to George Putnam and Lawrence J.
Lasser, the officers of your fund are as follows:
Year first
elected
Name (age) Office Office
- --------------------------- ----------------------------------- ------------
Charles E. Porter (59) Executive Vice President 1989
Patricia C. Flaherty (50) Senior Vice President 1993
John D. Hughes (62) Senior Vice President & Treasurer 1988
Gordon H. Silver (50) Vice President 1990
Gail S. Attridge*(35) Vice President 1997
David L. Waldman (31) Vice President 1997
D. William Kohli*(36) Vice President 1994
Kenneth J. Taubes*(39) Vice President 1997
John R. Verani (58) Vice President 1988
Paul M. O'Neil (44) 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 September 30, 1997
Net assets
Shares outstanding and authorized to vote shares
5% beneficial ownership of your fund as of September 30, 1997
Persons beneficially owning more than 5% of the fund's shares
<PAGE>
Appendix A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") made as of July 23,
1997, as amended October , 1997, in Boston, Massachusetts, by and among
Putnam Master Intermediate Income Trust, a Massachusetts business trust (the
"Master Fund"), and Putnam Intermediate Government Income Trust, a
Massachusetts business trust (the "Government Fund").
Plan of Reorganization
(a) The Government Fund will sell, assign, convey, transfer and deliver to the
Master Fund on the Exchange Date (as defined in Section 6) all of its cash,
properties and other assets existing at the Valuation Time (as defined in
Section 3(c)). In consideration therefor, the Master Fund shall, on the
Exchange Date, assume all of the liabilities of the Government Fund existing at
the Valuation time and deliver to the Government Fund a number of full and
fractional shares of beneficial interest of the Master Fund (the "Master
Shares") having an aggregate net asset value equal to the value of the assets
of the Government Fund transferred to the Master Fund on such date less the
value of the liabilities of the Government Fund assumed by the Master Fund on
such date. It is intended that the reorganization described in this Plan shall
be a reorganization within the meaning of Section 368(a)(1)(D) of the Internal
Revenue Code of 1986, as amended (the "Code").
(b) Upon consummation of the transactions described in paragraph (a) of this
Agreement, the Government Fund shall distribute Master Shares in complete
liquidation to its shareholders of record as of the Exchange Date, each
shareholder being entitled to receive that proportion of such Master Shares
which the number of shares of beneficial interest of the Government Fund held
by such shareholder bears to the number of shares of the Government Fund
outstanding on such date. Certificates representing the Master Shares will be
issued only if the shareholder so requests.
Agreement
The Master Fund and the Government Fund agree as follows:
1. Representations and Warranties of the Master Fund. The Master Fund
represents and warrants to and agrees with the Government Fund that:
(a) The Master Fund is a business trust duly established and validly
existing under the laws of The Commonwealth of Massachusetts, and has power
to own all of its cash, properties and other assets and to carry out its
obligations under this Agreement. The Master Fund is not required to
qualify as a foreign association in any jurisdiction. The Master Fund has
all necessary federal, state and local authorizations to carry on its
business as now being conducted and to carry out this Agreement.
(b) The Master Fund is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as a closed-end management investment company,
and such registration has not been revoked or rescinded and is in full
force and effect.
(c) The following financial statements of the Master Fund have been
furnished to the Government Fund (the "Master Fund Financial Statements"):
(i) a statement of assets and liabilities, statement of operations,
statement of changes in net assets and schedule of investments (indicating
their market values) of the Master Fund for the fiscal year ended September
30, 1996, such statements and schedule having been audited by Coopers &
Lybrand L.L.P., independent accountants; and (ii) a statement of assets and
liabilities, statement of operations, statement of changes in net assets
and schedule of investments (indicating their market values) of the Master
Fund for the six months ended March 31, 1997, such statements and schedule
being unaudited (the "Master Fund Unaudited Financial Statements"). The
Master Fund Financial Statements fairly present the financial position of
the Master Fund as of the respective dates thereof, and said statements of
operations and changes in net assets fairly reflect the results of its
operations and changes in net assets for the respective periods covered
thereby in conformity with generally accepted accounting principles;
provided, however, that the Master Fund Unaudited Financial Statements lack
footnotes and other presentation items and may be subject to normal
recurring adjustments that would be made in the course of an audit and that
would not be material.
(d) There are no material legal, administrative or other proceedings
pending or, to the knowledge of the Master Fund, threatened against the
Master Fund which assert liability on the part of the Master Fund.
(e) The Master Fund has no known liabilities of a material nature,
contingent or otherwise, other than (i) those shown as belonging to it on
its statement of assets and liabilities as of March 31, 1997, or (ii)
liabilities incurred in the ordinary course of the Master Fund's business
as an investment company since March 31, 1997.
<PAGE>
(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 and any amendment thereto (including any
post-effective amendment) (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
statements of the Government Fund and Master Fund included therein
(together, the "Proxy Statements"), (i) on the effective date of the
Registration Statement, will comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder, and (ii) on the effective date of the Registration
Statement, and at the time of the shareholders' meeting referred to in
Section 7(a) and at the Exchange Date, will not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; provided, however, that none of the representations and
warranties in this subsection shall apply to statements in or omissions
from the Registration Statement or the Proxy Statements made in reliance
upon and in conformity with information furnished by the Government Fund
for use in the Registration Statement or the Proxy Statements. The Master
Fund makes no representation or warranty as to any other information in the
Registration Statement or Proxy Statements 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
Statements.
(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 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.
<PAGE>
(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
investments as of November 30, 1996 referred to in Section 2(c) Government
Fund's investments shown on the schedule of its 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
are required to be filed by the Government Fund and has paid or will
returns which, to the knowledge of the Government Fund's officers, 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.
(k) The Registration Statement and the Proxy Statements, 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
Statements, or omissions to state in any thereof a material fact relating
to the Government Fund, as such Registration Statement or Proxy Statements
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 Statements.
(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
<PAGE>
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 and the Master 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
Proxy Statement. Such repositioning will be substantially completed prior
to the Exchange Date, unless otherwise agreed by the Government Fund and
the Master Fund.
(c) The Government Fund will pay or cause to be paid to the Master Fund any
interest, cash or such dividends, rights and other payments received by it
on or after the Exchange Date with respect to the Investments and other
properties and assets of the Government Fund, whether accrued or
contingent, received by it on or after the Exchange Date. Any such
distribution shall be deemed included in the assets transferred to the
Master Fund at the Exchange Date and shall not be separately valued unless
the securities in respect of which such distribution is made shall have
gone "ex" such distribution prior to the Valuation Time, in which case any
such distribution which remains unpaid at the Exchange Date shall be
included in the determination of the value of the assets of the Government
Fund acquired by the Master Fund.
(d) The Valuation Time shall be 4:00 p.m. Boston time on December [19],
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 Master Fund's assets and liabilities.
(c) No adjustment shall be made in the net asset value of either the
Government Fund or the Master Fund to take into account differences in
realized and unrealized gains and losses.
(d) The Master Fund shall issue the Master Shares to the Government Fund in
a certificate registered in the name of the Government Fund. The Government
Fund shall distribute the Master Shares to the shareholders of the
Government Fund by redelivering such certificate to the Government Fund's
transfer agent which will as soon as practicable set up open accounts for
each Government Fund shareholder in accordance with written instructions
furnished by the Government Fund. With respect to any Government Fund
shareholder holding Government Fund share certificates as of the Exchange
Date, the Master Fund will not permit such shareholder to receive dividends
and other distributions on the Master Shares (although such dividends and
other distributions shall be credited to the account of such shareholder),
receive certificates representing the Master Shares, exchange the Master
Shares credited to such shareholder's account for shares of other
investment companies managed by Putnam Investment Management, Inc.
("Putnam"), or pledge such Master Shares until notified by the Government
Fund or the transfer agent that such shareholder has surrendered his or her
outstanding Government Fund certificates or, in the event of lost, stolen,
or destroyed certificates, posted adequate bond. The Government Fund will,
at its expense, request the shareholders of the Government Fund to
surrender their outstanding Government Fund certificates, or post adequate
bond, as the case may be.
(e) The Master Fund shall assume all liabilities of the Government Fund,
whether accrued or contingent, in connection with the acquisition of cash,
properties and other assets and subsequent dissolution of the Government
Fund or otherwise.
5. Expenses, Fees, etc.
(a) All fees and expenses, including legal and accounting expenses,
portfolio transfer taxes (if any) or other similar expenses incurred in
connection with the consummation by the Government Fund and the Master Fund
of the transactions contemplated by this Agreement will be allocated
ratably between the Master Fund and the Government Fund in proportion to
their net assets as of the Valuation Time, except that (i) the costs of
proxy materials and proxy solicitation relating to meetings of shareholders
of the Government Fund and the Master Fund will be borne by each of them,
respectively, (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
<PAGE>
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 Fund's or the
Government Fund's obligations referred to in Section 7(a), Section 8 or
Section 9 of this Agreement, then each of the Master Fund and the
Government Fund shall bear all of its own expenses incurred in connection
with such transactions.
(e) Notwithstanding any other provisions of this Agreement, if for any
reason the transactions contemplated by this Agreement are not consummated,
no party shall be liable to the other party for any damages resulting
therefrom, including without limitation consequential damages, except as
specifically set forth above.
6. Exchange Date. Delivery of the assets of the Government Fund to be
transferred, assumption of the liabilities of the Government Fund to be assumed
and the delivery of the Master Shares to be issued shall be made at the offices
of Ropes & Gray, One International Place, Boston, Massachusetts, at 10:00 A.M.
on the next full business day following the Valuation Time, or at such other
time and date agreed to by the Master Fund and the Government Fund, the date
and time upon which such delivery is to take place being referred to herein as
the "Exchange Date."
7. Meeting of Shareholders; Dissolution.
(a) The Government Fund agrees to call a meeting of its shareholders for
the purpose of considering the sale of all of its assets to and the
assumption of all of its liabilities by the Master Fund as herein provided,
adopting this Agreement, and authorizing the liquidation and dissolution of
the Government Fund.
(b) The Government Fund agrees that the liquidation and dissolution of the
Government Fund will be effected in the manner provided in the Agreement
and Declaration of Trust of the Government Fund in accordance with
applicable law and that on and after the Exchange Date, the Government Fund
shall not conduct any business except in connection with its liquidation
and dissolution.
(c) The Master Fund has, after the preparation and delivery to the Master
Fund by the Government Fund of a preliminary version of the Proxy Statement
which was satisfactory to the Master Fund and to Ropes & Gray for inclusion
in the Registration Statement, filed the Registration Statement with the
Commission. Each of the Government Fund and the Master Fund has cooperated
with the other, and each has furnished to the other the information
relating to itself required by the 1933 Act, the 1934 Act and the 1940 Act
and the rules and regulations thereunder set forth in the Registration
Statement, including the Proxy Statement.
8. Conditions to the Master Fund's Obligations. The obligations of the Master
Fund hereunder shall be subject to the following conditions:
(a) That this Agreement shall have been adopted and the transactions
contemplated hereby shall have been approved by (i) 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 and (ii) the affirmative
vote of a majority of the votes cast at a meeting of the Master Fund
provided that a majority of the Master Fund's shares outstanding and
entitled to vote are voted on the proposal.
(b) That the Government Fund shall have furnished to the Master Fund a
statement of the Government Fund's assets and liabilities, with values
determined as provided in Section 4 of this Agreement, together with a list
of Investments, which list shall identify all illiquid Investments, all as
of the Valuation Time, certified on the Government Fund's behalf by the
Government Fund's President (or any Vice President) and Treasurer, and a
certificate of both such officers, dated the Exchange Date, that there has
been no material adverse change
<PAGE>
in the financial position of the Government Fund since November 30, 1996
other than changes in the Investments and other assets and properties since
that date or changes in the market value of the Investments and other
assets of the Government Fund, or changes due to dividends paid or losses
from operations.
(c) That the Government Fund shall have furnished to the Master Fund a
statement, dated the Exchange Date, signed on behalf of the Government Fund
by the Government Fund's President (or any Vice President) and Treasurer
certifying that as of the Valuation Time and as of the Exchange Date all
representations and warranties of the Government Fund made in this
Agreement are true and correct in all material respects as if made at and
as of such dates and the Government Fund has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to such dates.
(d) That the Government Fund shall have delivered to the Master Fund a
letter from Price Waterhouse LLP dated the Exchange Date, stating that on
the basis of an examination under attestation standards established by the
American Institute of Certified Public Accountants ("AICPA"), management's
assertions that (1) for the fiscal period from December 1, 1996 to the
Exchange Date the Government Fund qualified as a regulated investment
company under the Internal Revenue Code (the "Code"), (2) as of the
Exchange Date, the Government Fund has no tax liability other than
liabilities stated for federal or state income taxes and (3) as of the
Exchange Date, the Government Fund has no liability for federal excise tax
purposes under section 4982 of the Code, are fairly stated.
(e) That there shall not be any material litigation pending with respect to
the matters contemplated by this Agreement.
(f) That the Master Fund shall have received an opinion of Ropes & Gray, in
form satisfactory to the Master Fund and dated the Exchange Date, to the
effect that (i) the Government Fund is a business trust duly established
and validly existing under the laws of The Commonwealth of Massachusetts,
and, to the knowledge of such counsel, is not required to qualify to do
business as a foreign association in any jurisdiction, (ii) this Agreement
has been duly authorized, executed, and delivered by the Government Fund
and, assuming that the Registration Statement and the Proxy Statement
comply with the 1933 Act, the 1934 Act and the 1940 Act and assuming due
authorization, execution and delivery of this Agreement by the Master Fund,
is a valid and binding obligation of the Government Fund, (iii) the
Government Fund has power to sell, assign, convey, transfer and deliver the
assets contemplated hereby and, upon consummation of the transactions
contemplated hereby in accordance with the terms of this Agreement, the
Government Fund will have duly sold, assigned, conveyed, transferred and
delivered such assets to the Master Fund, (iv) the execution and delivery
of this Agreement did not, and the consummation of the transactions
contemplated hereby will not, violate the Government Fund's Agreement and
Declaration of Trust, as amended, or any provision of any agreement known
to such counsel to which the Government Fund is a party or by which it is
bound, and (v) no consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Government
Fund of the transactions contemplated hereby, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may
be required under state securities or blue sky laws and the H-S-R Act, it
being understood that with respect to investment restrictions as contained
in the Government Fund's Agreement and Declaration of Trust, Bylaws or
then-current Registration Statement, such counsel may rely upon a
certificate of an officer of the Government Fund whose responsibility it is
to advise the Government Fund with respect to such matters.
(g) That the Government Fund shall have received an opinion of Ropes &
Gray, in form satisfactory to the Master Fund, with respect to the matters
specified in Section 9(f) of this Agreement, and such other matters as the
Master Fund may reasonably deem necessary or desirable.
(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.
<PAGE>
(k) That the Master Fund shall have received from the Commission, any
relevant state securities administrator, the Federal Trade Commission (the
"FTC") and the Department of Justice (the "Department") such order or
orders as Ropes & Gray deems reasonably necessary or desirable under the
1933 Act, the 1934 Act, the 1940 Act, any applicable state securities or
blue sky laws and the H-S-R Act in connection with the transactions
contemplated hereby, and that all such orders shall be in full force and
effect.
(l) That all actions taken by the Government Fund in connection with the
transactions contemplated by this Agreement and all documents incidental
thereto shall be satisfactory in form and substance to the Master Fund and
Ropes & Gray.
(m) That, prior to the Exchange Date, the Government Fund shall have
declared a dividend or dividends which, together with all previous such
dividends, shall have the effect of distributing to the shareholders of the
Government Fund all of the Government Fund's investment company taxable
income for its taxable years ending on or after November 30, 1996 and on or
prior to the Exchange Date (computed without regard to any deduction for
dividends paid), and all of its net capital gain realized in each of its
taxable years ending on or after November 30, 1996 and on or prior to the
Exchange Date.
(n) That the Government Fund shall have furnished to the Master Fund a
certificate, signed by the President (or any Vice President) and the
Treasurer of the Government Fund, as to the tax cost to the Government Fund
of the securities delivered to the Master Fund pursuant to this Agreement,
together with any such other evidence as to such tax cost as the Master
Fund may reasonably request.
(o) That the Government Fund's custodian shall have delivered to the Master
Fund a certificate identifying all of the assets of the Government Fund
held by such custodian as of the Valuation Time.
(p) That the Government Fund's transfer agent shall have provided to the
Master Fund (i) the originals or true copies of all of the records of the
Government Fund in the possession of such transfer agent as of the Exchange
Date, (ii) a certificate setting forth the number of shares of the
Government Fund outstanding as of the Valuation Time, and (iii) the name
and address of each holder of record of any such shares and the number of
shares held of record by each such shareholder.
(q) That all of the issued and outstanding shares of beneficial interest of
the Government Fund shall have been offered for sale and sold in conformity
with all applicable state securities or blue sky laws and, to the extent
that any audit of the records of the Government Fund or its transfer agent
by the Master Fund or its agents shall have revealed otherwise, either (i)
the Government Fund shall have taken all actions that in the opinion of the
Master Fund or its counsel are necessary to remedy any prior failure on the
part of the Government Fund to have offered for sale and sold such shares
in conformity with such laws or (ii) the Government Fund shall have
furnished (or caused to be furnished) surety, or deposited (or caused to be
deposited) assets in escrow, for the benefit of the Master Fund in amounts
sufficient and upon terms satisfactory, in the opinion of the Master Fund
or its counsel, to indemnify the Master Fund against any expense, loss,
claim, damage or liability whatsoever that may be asserted or threatened by
reason of such failure on the part of the Government Fund to have offered
and sold such shares in conformity with such laws.
(r) That the Master Fund shall have received from Price Waterhouse LLP a
letter addressed to the Master Fund dated as of the Exchange Date
satisfactory in form and substance to the Master Fund to the effect that,
on the basis of an examination under attestation standards established by
the AICPA, management's assertion that as of the Valuation Time the value
of the assets of the Government Fund to be exchanged for the Master Shares
has been determined in accordance with the provisions of Article 10 section
5 (10.5) of the Government Fund's By-laws pursuant to the procedures
customarily utilized by the Master Fund in valuing its assets and issuing
its shares is fairly stated.
(s) That the Government Fund shall have executed and delivered to the
Master Fund an instrument of transfer dated as of the Exchange Date
pursuant to which the Government Fund will assign, transfer and convey all
of the assets and other property to the Master Fund at the Valuation Time
in connection with the transactions contemplated by this Agreement.
(t) The Government Fund shall have repositioned its portfolio,
satisfactorily to the Master Fund, to reflect the investment policies of
the Master Fund.
9. Conditions to the Government Fund's Obligations. The obligations of the
Government Fund hereunder shall be subject to the following conditions:
(a) That this Agreement shall have been adopted and the transactions
contemplated hereby shall have been approved by (i) 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 and (ii) the affirmative
vote of a majority of the votes cast
<PAGE>
at a meeting of the Master Fund provided that a majority of the Master
Fund's Shares outstanding and entitled to vote are voted on the proposal.
(b) That the Master Fund shall have furnished to the Government Fund a
statement of the Master Fund's net assets, together with a list of
portfolio holdings with values determined as provided in Section 4, all as
of the Valuation Time, certified by the Master Fund's President (or any
Vice President) and Treasurer (or any Assistant Treasurer), and a
certificate of both such officers, dated the Exchange Date, to the effect
that as of the Valuation Time and as of the Exchange Date there has been no
material adverse change in the financial position of the Master Fund since
March 31, 1997, other than changes in its portfolio securities since that
date, changes in the market value of its portfolio securities, and changes
due to net dividends paid or losses from operations.
(c) That the Master Fund shall have executed and delivered to the
Government Fund an Assumption of Liabilities dated as of the Exchange Date
pursuant to which the Master Fund will assume all of the liabilities of the
Government Fund existing at the Valuation Time in connection with the
transactions contemplated by this Agreement.
(d) That the Master Fund shall have furnished to the Government Fund a
statement, dated the Exchange Date, signed on behalf of the Master Fund by
the Master Fund's President (or any Vice President) and Treasurer (or any
Assistant Treasurer) certifying that as of the Valuation Time and as of the
Exchange Date all representations and warranties of the Master Fund made in
this Agreement are true and correct in all material respects as if made at
and as of such dates, and that the Master Fund has complied with all of the
agreements and satisfied all of the conditions on its part to be performed
or satisfied at or prior to each of such dates.
(e) That there shall not be any material litigation pending or threatened
with respect to the matters contemplated by this Agreement.
(f) That the Government Fund shall have received an opinion of Ropes &
Gray, in form satisfactory to the Government Fund and dated the Exchange
Date, to the effect that (i) the Master Fund is a business trust duly
established and validly existing in conformity with the laws of The
Commonwealth of Massachusetts, and, to the knowledge of such counsel, is
not required to qualify to do business as a foreign association in any
jurisdiction except as may be required by state securities or blue sky
laws, (ii) the Master Shares to be delivered to the Government Fund as
provided for by this Agreement are duly authorized and upon such delivery
will be validly issued and will be fully paid and nonassessable by the
Master Fund and no shareholder of the Master Fund has any preemptive right
to subscription or purchase in respect thereof, (iii) this Agreement has
been duly authorized, executed and delivered by the Master Fund and,
assuming that the Registration Statement and the Proxy Statements 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 Government Fund upon the transfer of Investments
to the Master Fund pursuant to this Agreement in exchange for the Master
Shares, (ii) no gain or loss will be recognized by the shareholders of the
Government Fund on the distribution of Master Shares to them in exchange
for their shares in the Government Fund, (iii) the basis of the Master
Shares received by the shareholders of the Government Fund will be the same
as the basis of the shares in the Government Fund exchanged and (iv) the
holding period of the shareholders of the Government Fund in the Master
Shares received will include such shareholders' holding period in the
shares of the Government Fund exchanged.
<PAGE>
(h) That all actions taken by or on behalf of the Master Fund in connection
with the transactions contemplated by this Agreement and all documents
incidental thereto shall be satisfactory in form and substance to the
Government Fund and Ropes & Gray.
(i) That the Registration Statement shall have become effective under the
1933 Act, and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of the Master Fund, threatened by the
Commission.
(j) That the Government Fund shall have received from the Commission, any
relevant state securities administrator, the FTC and the Department such
order or orders as Ropes & Gray deems reasonably necessary or desirable
under the 1933 Act, the 1934 Act, the 1940 Act, any applicable state
securities or blue sky laws and the H-S-R Act in connection with the
transactions contemplated hereby, and that all such orders shall be in full
force and effect.
10. Indemnification.
(a) The Government Fund will indemnify and hold harmless, out of the assets
of the Government Fund but no other assets, the Master Fund, its trustees
and its officers (for purposes of this subparagraph, the "Indemnified
Parties") against any and all expenses, losses, claims, damages and
liabilities at any time imposed upon or reasonably incurred by any one or
more of the Indemnified Parties in connection with, arising out of, or
resulting from any claim, action, suit or proceeding in which any one or
more of the Indemnified Parties may be involved or with which any one or
more of the Indemnified Parties may be threatened by reason of any untrue
statement or alleged untrue statement of a material fact relating to the
Government Fund contained in the Registration Statement, the Proxy
Statement or any amendment or supplement to any of the foregoing, or
arising out of or based upon the omission or alleged omission to state in
any of the foregoing a material fact relating to the Government Fund
required to be stated therein or necessary to make the statements relating
to the Government Fund therein not misleading, including, without
limitation, any amounts paid by any one or more of the Indemnified Parties
in a reasonable compromise or settlement of any such claim, action, suit or
proceeding, or threatened claim, action, suit or proceeding made with the
consent of the Government Fund. The Indemnified Parties will notify the
Government Fund in writing within ten days after the receipt by any one or
more of the Indemnified Parties of any notice of legal process or any suit
brought against or claim made against such Indemnified Party as to any
matters covered by this Section 10(a). The Government Fund shall be
entitled to participate at its own expense in the defense of any claim,
action, suit or proceeding covered by this Section 10(a), or, if it so
elects, to assume at its expense by counsel satisfactory to the Indemnified
Parties the defense of any such claim, action, suit or proceeding, and if
the Government Fund elects to assume such defense, the Indemnified Parties
shall be entitled to participate in the defense of any such claim, action,
suit or proceeding at their expense. The Master Fund's obligation under
this Section 10(a) to indemnify and hold harmless the Indemnified Parties
shall constitute a guarantee of payment so that the Government Fund will
pay in the first instance any expenses, losses, claims, damages and
liabilities required to be paid by it under this Section 10(a) without the
necessity of the Indemnified Parties' first paying the same.
(b) The Master Fund will indemnify and hold harmless, out of the assets of
the Master Fund but no other assets, the Government Fund, its trustees and
its officers (for purposes of this subparagraph, the "Indemnified Parties")
against any and all expenses, losses, claims, damages and liabilities at
any time imposed upon or reasonably incurred by any one or more of the
Indemnified Parties in connection with, arising out of, or resulting from
any claim, action, suit or proceeding in which any one or more of the
Indemnified Parties may be involved or with which any one or more of the
Indemnified Parties may be threatened by reason of any untrue statement or
alleged untrue statement of a material fact relating to the Master Fund
contained in the Registration Statement, the Proxy Statement, or any
amendment or supplement to any thereof, or arising out of, or based upon,
the omission or alleged omission to state in any of the foregoing a
material fact relating to the Master Fund required to be stated therein or
necessary to make the statements relating to the Master Fund therein not
misleading, including without limitation any amounts paid by any one or
more of the Indemnified Parties in a reasonable compromise or settlement of
any such claim, action, suit or proceeding, or threatened claim, action,
suit or proceeding made with the consent of the Master Fund. The
Indemnified Parties will notify the Master Fund in writing within ten days
after the receipt by any one or more of the Indemnified Parties of any
notice of legal process or any suit brought against or claim made against
such Indemnified Party as to any matters covered by this Section 10(b). The
Master Fund shall be entitled to participate at its own expense in the
defense of any claim, action, suit or proceeding covered by this Section
10(b), or, if it so elects, to assume at its expense by counsel
satisfactory to the Indemnified Parties the defense of any such claim,
action, suit or proceeding, and, if the Master Fund elects to assume such
defense, the Indemnified Parties shall be entitled to participate in the
defense of any such claim, action, suit or proceeding at their own expense.
The Government Fund's obligation under this Section 10(b) to indemnify and
hold harmless the Indemnified Parties shall constitute a guarantee of
payment so that the Master Fund will pay in the first instance any
expenses, losses, claims,
<PAGE>
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, 1998, this
Agreement shall automatically terminate on that date unless a later date is
agreed to by the Government Fund and the Master Fund.
13. Rule 145. Pursuant to Rule 145 under the 1933 Act, the Master Fund will, in
connection with the issuance of any Master Shares to any person who at the time
of the transaction contemplated hereby is deemed to be an affiliate of a party
to the transaction pursuant to Rule 145(c), cause to be affixed upon the
certificates issued to such person (if any) a legend as follows:
"These shares have not been registered under the Securities Act of 1933, as
amended, and may not be sold or otherwise transferred except to Putnam
Intermediate Government Income Trust unless (i) a registration statement with
respect thereto is effective under the Securities Act of 1933, as amended, or
(ii) in the opinion of counsel reasonably satisfactory to Putnam Intermediate
Government Income Trust such registration is not required."
and, further, the Master Fund will issue stop transfer instructions to its
transfer agent with respect to such shares. The Government Fund will provide
the Master Fund on the Exchange Date with the name of any Government Fund
shareholder who is to the knowledge of the Government Fund an affiliate of the
Government Fund on such date.
14. Covenants, etc. Deemed Material. All covenants, agreements, representations
and warranties made under this Agreement and any certificates delivered
pursuant to this Agreement shall be deemed to have been material and relied
upon by each of the parties, notwithstanding any investigation made by them or
on their behalf.
15. Sole Agreement; Amendments. This Agreement supersedes all previous
correspondence and oral communications between the parties regarding the
subject matter hereof, constitutes the only understanding with respect to such
subject matter, and shall be construed in accordance with and governed by the
laws of The Commonwealth of Massachusetts. The parties may, by mutual consent
of their trustees, amend, modify and supplement this Agreement in such manner
as may be agreed upon by them in writing at any time before or after action
thereon by the shareholders of the Master Fund or the Government Fund or both;
provided, however, that following the approval of this Agreement by the
shareholders of the Master Fund or the Government Fund no amendment,
modification or supplement shall affect the rights of the shareholders of the
Master Fund or the Government Fund in a manner which is materially adverse to
such shareholders in the judgment of the respective Board of Trustees.
16. Agreement and Declaration of Trust. Copies of the Agreements and
Declarations of Trust of the Government Fund and the Master Fund are on file
with the Secretary of State of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed by the Trustees of each Fund,
respectively, as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees, officers or shareholders
of the Government Fund or the Master Fund individually but are binding only
upon the assets and property of the Government Fund and the Master Fund, as the
case may be.
This Agreement may be executed in any number of counterparts, each of which,
when executed and delivered, shall be deemed to be an original.
PUTNAM MASTER INTERMEDIATE INCOME TRUST
By: /s/ Charles E. Porter
Executive Vice President
PUTNAM INTERMEDIATE GOVERNMENT INCOME TRUST
By: /s/ Charles E. Porter
Executive Vice President
<PAGE>
Appendix B
ADDITIONAL INFORMATION ABOUT THE
MASTER FUND AND GOVERNMENT FUND
The discussion in this appendix concerning the Government Fund and the Master
Fund is provided for informational purposes. If the proposal is approved and
the closing of the transaction is consummated, shares of the Master Fund
currently outstanding will not be affected by the transaction, except that they
will represent interests in a substantially larger fund. The investment
objectives and policies of the Master Fund and its general operations will not
be affected by the transaction. Prior to the transaction, the portfolio of the
Government Fund will be repositioned to conform substantially to the investment
objectives and policies of the Master Fund. Accordingly, the following
information, which has been provided to shareholders of the Government Fund and
primarily addresses issues of concern to those shareholders, will be of limited
relevance to shareholders of the Master Fund in deciding whether to approve the
proposed transaction.
COMPARISON OF THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
Both funds seek, with equal emphasis, high current income and relative
stability of net asset value, by investing in a diversified portfolio of fixed
income securities having a dollar-weighted average maturity of from three to
ten years. The Government Fund does not invest in a security having a remaining
effective maturity of more than 10 years, while the Master Fund does not invest
in a security having a remaining effective maturity of more than 12 years.
While both funds invest substantially all of their assets in fixed income
securities, the Master Fund invests in a wider range of such securities.
The Government Fund invests substantially all of its assets in the following
two market sectors:
[bullet] U.S. government sector, consisting of debt obligations issued or
guaranteed by the U.S. government, or by its agencies or
instrumentalities ("U.S. government securities"), and related options
and futures; and
[bullet] a foreign government sector, consisting of debt obligations issued or
guaranteed by foreign national, provincial, state or other governments
with taxing authority, by their agencies or instrumentalities, or by
suprana-tional entities ("foreign government securities"). Up to 50%
of the Government Fund's assets may be invested in foreign government
securities.
By comparison, the Master Fund invests in the following three market sectors:
[bullet] a U.S. high grade sector, consisting of U.S. government securities,
related options, futures and repurchase agreements, high grade
corporate debt obligations and high grade mortgage-backed and
asset-backed securities;
[bullet] a high yield sector, consisting primarily of high yield, lower-rated
U.S. and foreign corporate fixed income securities; and o an
international sector, consisting primarily of foreign government
securities and other fixed income securities denominated in foreign
currencies or U.S. dollars.
The Master Fund may invest up to 65% of its assets in any of these sectors, and
must invest at least 15% of its assets in each sector.
The funds have different credit quality limitations, with the Master Fund
having significantly greater flexibility to invest in lower-rated securities.
The Government Fund may invest up to 15% of its assets in securities rated
below investment grade (rated below Baa or BBB by a recognized rating agency
such as Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's
("S&P")), but will not invest in securities rated below B. By contrast, the
Master Fund may invest up to 65% of its assets in securities rated below
investment grade, although it may invest no more than 20% of its assets in
lower-rated foreign securities. The Master Fund also may invest up to 5% of its
assets in securities rated below Caa or CCC. With respect to both funds, the
above limitations also apply to unrated securities of comparable quality.
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.
Prior to the transaction, the portfolio of the Government Fund will be
restructured to conform substantially to the investment objectives and policies
of the Master Fund.
<PAGE>
PRINCIPAL RISK FACTORS ASSOCIATED WITH INVESTMENTS IN THE TWO FUNDS
The risks related to the Master Fund's portfolio securities are greater than
the risks of those held by the Government Fund. In contrast to the Government
Fund, the Master Fund invests a substantial portion of its assets in corporate
fixed income securities and lower-rated securities. The broader diversification
of the Master Fund is intended to reduce overall portfolio risk, although there
can be no assurance that this diversification will be effective. A more
detailed description of certain risks associated with an investment in the
Master Fund is included in Appendix B 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 sensitive to changes in interest rates.
Mortgage-backed securities. Like the Government Fund, the Master Fund may
invest in mortgage-backed securities. Prepayments on mortgage-backed securities
may require reinvestment of principal under less attractive terms. Prepayments
may also significantly shorten the effective maturities of these securities,
especially during periods of declining interest rates. Conversely, during
periods of rising interest rates, a reduction in prepayments may increase the
effective maturities of these securities. Prepayments may cause losses in
securities purchased at a premium.
Options and futures transactions. As with the Government Fund, the ability of
the Master Fund to engage in futures and options transactions involves certain
risks, including the risk that the Master Fund will be unable at times to close
out such positions, that such transactions may not accomplish their purpose
because of imperfect market correlations, or that Putnam Management may not
forecast market movements correctly.
Other investment practices. As with the Government Fund, to the extent the
Master Fund exercises its ability to engage in certain investment practices,
such as securities loans, repurchase agreements and forward commitments, it may
be delayed in recovering or unable to recover its collateral in the event of
default by the other party.
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
<PAGE>
[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 adjusts the average
maturity of the investments held in the portfolio from time to time, depending
on its assessment of relative yields and risks of securities of different
maturities and its expectations of future changes in interest rates.
Historically, the markets for U.S. government securities and other high-grade
U.S. fixed income securities, high yield fixed income securities and foreign
fixed income securities have tended to behave independently and have at times
moved in opposite directions. For example, U.S. government securities have
generally been affected negatively by inflationary concerns resulting from
increased economic activity. High yield U.S. corporate fixed income securities,
on the other hand, have generally benefited from increased economic activity
due to improvements in the credit quality of corporate issuers. The reverse has
generally been true during periods of economic decline. Similarly, U.S.
government securities have often been negatively affected by a decline in the
value of the dollar against foreign currencies, while the bonds of foreign
issuers held by U.S. investors have generally benefited from such decline.
Putnam Management believes that, when financial markets exhibit such a lack of
correlation, a pooling of investments among these markets may lead to greater
stability of net asset value over the long term than investing exclusively in
any one of the markets.
Putnam Management determines the amount of assets to be allocated to each
market sector based on its assessment of the returns that can be achieved from
a portfolio which is invested in all three sectors. In doing so, it will seek
to maximize current income without incurring undue risk to capital. In making
this determination, Putnam Management will rely in part on quantitative
analytical techniques that measure relative risks and opportunities of each
market sector based on current and historical market data for each sector, as
well as on its own assessment of economic and market conditions. Putnam
Management will continuously review this allocation of assets and make such
adjustments as it deems appropriate. Under normal market conditions, the Master
Fund will not invest more than 65% of its assets in any one market sector, and
will invest at least 15% of its assets in each market sector. The Master Fund's
assets allocated to each of these market sectors will be managed in accordance
with the particular investment policies described below. The Master Fund will
not invest more than 65% of its assets (across all sectors) in securities rated
below BBB/Baa by a nationally recognized securities rating agency, such as
Moody's or S&P (or in unrated securities determined by Putnam Management to be
of comparable quality). To the extent a security is assigned a different rating
by one or more of the various ratings agencies, Putnam Management will use the
highest rating assigned by an agency.
The U.S. High Grade Sector
The Master Fund will invest assets allocated to the U.S. High Grade Sector in
U.S. government securities, related options, futures contracts and repurchase
agreements, high grade U.S. corporate debt obligations and high grade
mortgage-backed and asset-backed securities. All securities purchased by this
sector must have, at the time of purchase, at least an "A" rating from a
nationally recognized securities rating agency (or unrated securities of
comparable quality).
"U.S. government securities" are debt securities issued or guaranteed by the
U.S. government, by various of its agencies, or by various instrumentalities
established or sponsored by the U.S. government. Some of these obligations,
including U.S. Treasury bills, notes and bonds, mortgage participation
certificates guaranteed by the Government National Mortgage Association
("Ginnie Mae"), and Federal Housing Administration debentures, are supported by
the full faith and credit of the United States. Other U.S. government
securities issued or guaranteed by federal agencies or government-sponsored
enterprises are not supported by the full faith and credit of the United
States. These securities include obligations supported by the right of the
issuer to borrow from the U.S. Treasury, such as obligations of Federal Home
Loan Banks, and obligations supported only by the credit of the
instrumentality, such as Federal National Mortgage Association ("Fannie Mae")
bonds.
The Master Fund may invest assets allocated to the U.S. High Grade Sector in
mortgage-backed securities, including collateralized mortgage obligations
("CMOs"). CMOs and other mortgaged-backed securities represent participations
in, or are secured by, mortgage loans and include:
- -- 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.
<PAGE>
The Master Fund may also invest assets allocated to the U.S. High Grade Sector
in asset-backed securities. Asset-backed securities are structured like
mortgage-backed securities, but instead of mortgage loans or interests in
mortgage loans, the underlying assets may include such items as motor vehicle
installment sales or installment loan contracts, leases of various types of
real and personal property, and receivables from credit card agreements. The
ability of an issuer of asset-backed securities to enforce its security
interest in the underlying assets may be limited.
High Yield Sector
The Master Fund will invest assets allocated to the High Yield Sector primarily
in high yielding, lower- rated, higher risk fixed income securities of U.S.
companies, including debt securities, convertible securities and preferred
stocks. The High Yield Sector may also invest in high yielding, lower-rated
fixed income securities of corporate issuers located in foreign countries. As
described below, however, the Master Fund may invest all or any part of the
High Yield Sector portfolio in higher-rated and unrated fixed-income
securities. The Master Fund will not necessarily invest in the highest yielding
securities available if in Putnam Management's opinion the differences in yield
are not sufficient to justify the higher risks involved.
Differing yields on fixed income securities of the same maturity are a function
of several factors, including the relative financial strength of the issuers.
Higher yields are generally available from lower-rated fixed income securities.
Lower-rated fixed income securities are generally regarded as those rated below
investment grade (rated Baa/BBB by nationally recognized securities rating
agencies such as Moody's or S&P, or unrated securities of comparable quality).
Securities rated below Baa or BBB, commonly known as "junk bonds", are
considered to be of poor standing and predominantly speculative. The entire
High Yield Sector and up to 65% of the Master Fund's assets may be invested in
such lower-rated securities, although the Master Fund may not invest more than
20% of its assets in such lower-rated securities issued by foreign issuers. In
addition, the Master Fund may invest up to 5% of its assets in securities rated
below Caa or CCC by a nationally recognized rating agency, or in unrated
securities of comparable quality. Such securities may be in default and are
generally regarded by the rating agencies as having extremely poor prospects of
ever attaining any real investment standing. The rating services' descriptions
of these rating categories, including the speculative characteristics of the
lower categories, are included in Appendix B to this 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.
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.
<PAGE>
Historically, yields available from securities of issuers in many foreign
countries have often been higher than those available from securities of U.S.
issuers. The Master Fund has the flexibility to invest in any country where
Putnam Management sees potential for high income. Putnam Management expects
that the Master Fund will invest primarily in securities of issuers in
industrialized Western European countries (including Scandinavian countries)
and in Canada, Japan, Australia and New Zealand. However, the International
Sector also may make substantial investments in emerging market countries. The
Master Fund will not invest more than 20% of its assets in foreign fixed income
securities rated, at the time of purchase, below BBB or Baa by securities
ratings agencies, or unrated securities of comparable quality. To the extent a
security is assigned a different rating by one or more ratings agencies, Putnam
Management will use the highest rating assigned by any agency. Putnam
Management will also consider expected changes in foreign currency exchange
rates in determining the anticipated returns of securities denominated in
foreign currencies.
The obligations of foreign governmental entities, including supranational
issuers, have various kinds of government support. Obligations of foreign
governmental entities include obligations issued or guaranteed by national,
provincial, state or other governments with taxing power or by their agencies.
These obligations may or may not be supported by the full faith and credit of a
foreign government.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter- American Development Bank. The governmental
members or "stockholders" usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowing.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by members at the
entity's call), reserves, and net income.
The Master Fund may engage in foreign currency exchange transactions and
futures and options to manage its foreign currency exposure. The Master Fund
may also engage in the writing of covered call and put options with respect to
foreign fixed income securities and related futures in order to supplement the
Master Fund's portfolio income. See "Other investment practices."
Risk Factors
Set forth below are the principal risk factors of investing in the Master Fund.
Fixed income securities. The values of fixed income securities fluctuate in
response to changes in interest rates. Changes in the value of portfolio
securities will not affect interest income from those securities but will be
reflected in the Master Fund's net asset value. Thus, a decrease in interest
rates will generally result in an increase in the value of the Master Fund's
assets. Conversely, during periods of rising interests rates, the value of the
Master Fund's assets will generally decline. The magnitude of these
fluctuations will generally be greater for securities with longer maturities.
U.S. government securities are considered among the safest of fixed income
investments, but their values, like those of other debt securities, will
fluctuate with changes in interest rates. Because of their added safety, the
yields available from U.S. government securities are generally lower than the
yields available from comparable corporate debt securities.
While certain U.S. government securities, such as U.S. Treasury obligations and
Ginnie Mae certificates, are backed by the full faith and credit of the U.S.
government, other securities in which the Master Fund may invest are subject to
varying degrees of risk of default. These risk factors include the
creditworthiness of the issuer and, in the case of mortgage-backed and
corporate debt securities, the ability of the underlying mortgagors or other
borrowers to meet their obligations.
Lower-rated securities. Like those of other fixed income securities, the values
of lower-rated securities will fluctuate in response to changes in interest
rates. However, the yields on such securities are also generally higher. In
addition, the values of such lower-rated securities will also be affected by
general economic and business conditions affecting the specific industries of
their issuers. Changes by recognized rating agencies in their ratings of a
fixed income security and changes in the ability of an issuer to make payments
of interest and principal may also affect the value of these investments.
Investors should carefully consider their ability to assume the risks of owning
shares of a fund that invests in lower-rated securities. The lower rating of
certain securities reflects a greater possibility of adverse changes in the
financial condition of the issuer or adverse changes in general economic
conditions, or both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal. The inability
(or perceived inability) of issuers to make timely payments of interest and
principal would likely make the values of securities held by the Master Fund
more volatile and could limit the Master Fund's ability to sell its securities
at prices approxi-
<PAGE>
mating the values placed on such securities. In the absence of a liquid trading
market for its portfolio securities the Master Fund at times may be unable to
establish the fair value of such securities.
The rating assigned to a security by a rating agency does not reflect an
assessment of the volatility of the security's market value or of the liquidity
of an investment in the security.
Putnam Management seeks to minimize the risks of investing in lower-rated
securities through careful investment analysis. When the Master Fund invests in
securities in the lower rating categories, the achievement of its goals is more
dependent on Putnam Management's ability than would be the case if the Master
Fund were investing in securities in the higher rating categories.
At times, a substantial portion of Master Fund assets allocated to the High
Yield Sector may be invested in securities which the Master Fund, by itself or
together with other funds and accounts managed by Putnam Management or its
affiliates, holds all or a major portion. Under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, it may be more difficult to sell these securities when Putnam
Management believes it advisable to do so or the Master Fund may be able to
sell the securities only at prices lower than if they were more widely held.
Under these circumstances, it may also be more difficult to determine the fair
value of such securities for purposes of computing the Master Fund's net asset
value.
In order to enforce its rights in the event of a default of these securities,
the Master Fund may be required to participate in various legal proceedings or
take possession of and manage assets securing the issuer's obligations on the
securities. This could increase fund operating expenses and adversely affect
net asset value.
Prepayment risk. Mortgage-backed and asset-backed securities have yield and
maturity characteristics corresponding to the underlying assets. Unlike
traditional debt securities, which may pay a fixed rate of interest until
maturity when the entire principal amount comes due, payments on certain
mortgage-backed and asset-backed securities include both interest and a partial
payment of principal. Besides the scheduled repayment of principal, payments of
principal may result from the voluntary prepayment, refinancing, or foreclosure
of the underlying mortgage loans or other assets.
Mortgage-backed and asset-backed securities are less effective than other types
of securities as a means of "locking in" attractive long-term interest rates.
One reason is the need to reinvest prepayments of principal; another is the
possibility of significant unscheduled prepayments resulting from declines in
interest rates. These prepayments would have to be reinvested at lower rates.
As a result, these securities may have less potential for capital appreciation
during periods of declining interest rates than other securities of comparable
maturities, although they may have a similar risk of decline in market value
during periods of rising interest rates. Prepayments may also significantly
shorten the effective maturities of these securities, especially during periods
of declining interest rates. Conversely, during periods of rising interest
rates, a reduction in prepayments may increase the effective maturities of
these securities, subjecting them to a greater risk of decline in market value
in response to rising interest rates than traditional debt securities, and,
therefore, potentially increasing the volatility of the Master Fund.
Prepayments may cause losses on securities purchased at a premium. At times,
some of the mortgage-backed and asset-backed securities in which the Master
Fund may invest will have higher than market interest rates and therefore will
be purchased at a premium above their par value. Unscheduled prepayments, which
are made at par, will cause the Master Fund to experience a loss equal to any
unamortized premium.
CMOs. CMOs are issued with a number of classes or series that have different
maturities and that may represent interests in some or all of the interest or
principal on the underlying collateral. Payment of interest or principal on
some classes or series of CMOs may be subject to contingencies and some classes
or series may bear some or all of the risk of default on the underlying
mortgages. CMOs of different classes or series are generally retired in
sequence as the underlying mortgage loans in the mortgage pool are repaid. If
enough mortgages are repaid ahead of schedule, the classes or series of a CMO
with the earliest maturities generally will be retired prior to their
maturities. Thus, the early retirement of particular classes or series of a CMO
would have the same effect as the prepayment of mortgages underlying other
mortgage-backed securities. Conversely, slower than anticipated prepayments can
extend the effective maturities of CMOs, subjecting them to a greater risk of
decline in market value in response to rising interest rates than traditional
debt securities, and, therefore, potentially increasing the volatility of the
Master Fund.
Foreign investments. Foreign investments involve certain risks that are not
present with respect to domestic securities. Because most securities held in
the International Sector are denominated in foreign currencies, a change in the
value of any such currency against the U.S. dollar will result in a change in
the U.S. dollar value of the Master Fund's assets and the Master Fund's income
available for distribution. In addition, although a portion of the Master
Fund's investment income may be received or realized in such currencies, the
Master Fund will be required to compute and distribute its income in U.S.
dollars. Therefore, if the exchange rate for any such currency declines after
<PAGE>
the Master Fund's income has been earned and translated into U.S. dollars but
before payment, the Master Fund could be required to liquidate portfolio
securities to make such distributions.
The values of foreign investments and the investment income derived from them
may also be affected favorably or unfavorably by changes in currency exchange
control regulations. Although the Master Fund will invest only in securities
denominated in foreign currencies that are fully exchangeable into U.S. dollars
without legal restriction at the time of investment, there is no assurance that
currency controls will not be imposed subsequently. In addition, the values of
foreign fixed income investments will fluctuate in response to changes in U.S.
and foreign interest rates.
Investments in foreign securities may subject the Master Fund to other risks as
well. For example, there may be less information publicly available about a
foreign issuer than about a U.S. issuer, and foreign issuers are not generally
subject to accounting, auditing and financial reporting standards and practices
comparable to those in the United States. The securities of some foreign
issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers. Foreign brokerage commissions and other fees are also
generally higher than those in the United States. Foreign settlement procedures
and trade regulations may involve certain risks (such as delay in payment or
delivery of securities or in the recovery of Master Fund assets held abroad)
and expenses not present in the settlement of investments in U.S. markets.
In addition, the Master Fund's investments in foreign securities may be subject
to the risk of nationalization or expropriation of assets, imposition of
currency exchange controls or restrictions on the repatriation of foreign
currency, confiscatory taxation, political or financial instability and
diplomatic developments which could affect the value of investments in certain
foreign countries. Dividends or interest on, or proceeds from the sale of,
foreign securities may be subject to foreign withholding taxes, and special
U.S. tax considerations may apply. Legal remedies available to investors in
certain foreign countries may be more limited than those available with respect
to investments in the United States or in other foreign countries. The laws of
some foreign countries may limit the fund's ability to invest in securities of
certain issuers organized under the laws of those foreign countries.
The risks described above are typically increased in connection with
investments in less developed and developing nations, sometimes referred to as
"emerging markets." For example, political and economic structures in these
countries may be in their infancy and developing rapidly, causing instability.
High rates of inflation or currency devaluations may adversely affect the
economies and securities markets of such countries. In addition, the small
size, limited trading volume and relative inexperience of the securities
markets in these countries may make the Master Fund's investments in such
countries illiquid and more volatile than investments in more developed
countries. Investments in emerging markets may be considered speculative.
Defensive strategies
At times, Putnam Management may judge that conditions in the securities markets
make pursuing the Master Fund's basic investment strategy inconsistent with the
best interests of its shareholders. At such times, Putnam Management may
temporarily use alternative strategies that are designed primarily to reduce
fluctuations in the value of the Master Fund's assets. In implementing these
defensive strategies, depending on the circumstances, the Master Fund may shift
its portfolio emphasis to higher rated securities in the High Yield Sector,
hedge currency risks in the International Sector, or generally reduce the
average maturity of its holdings in any or all of the sectors. Under unusual
market conditions, the Master Fund could invest up to 100% of its assets in
short-term U.S. government securities when the risks of investing into other
sectors are perceived to outweigh the possible benefits of sector
diversification. It is impossible to predict when, or for how long, these
alternative strategies will be used.
Other investment practices
The Master Fund may also engage in the following investment practices, each of
which involves certain special risks.
Options. The Master Fund may seek to increase its current return by writing
covered call and put options on U.S. government securities, foreign
fixed-income securities and foreign currencies. The Master Fund receives a
premium from writing a call or put option, which increases the Master Fund's
return if the option expires unexercised or is closed out at a net profit.
When the Master Fund writes a call option, it gives up the opportunity to
profit from any increase in the price of a security or currency above the
exercise price of the option; when it writes a put option, it takes the risk
that it will be required to purchase a security or currency from the option
holder at a price above the current market price of the security or currency.
The Master Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it
purchases an option having the same terms as the option written.
The Master Fund may also buy and sell put and call options, including
combinations of put and call options on the same underlying security or
currency. The use of these strategies may be limited by applicable law.
<PAGE>
Foreign currency exchange transactions. The Master Fund may engage in foreign
currency exchange transactions to manage its exposure to foreign currencies.
Putnam Management may engage in foreign currency exchange transactions in
connection with the purchase and sale of portfolio securities ("transaction
hedging") and to protect against changes in the value of specific portfolio
positions ("position hedging"). It may also engage in foreign currency
transactions for non-hedging purposes, subject to applicable law.
The Master Fund may engage in transaction hedging to protect against a change
in foreign currency exchange rates between the date on which the Master Fund
contracts to purchase or sell a security and the settlement date, or to "lock
in" the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. The Master Fund may purchase or sell a foreign currency on a spot (or
cash) basis at the prevailing spot rate in connection with the settlement of
transactions in portfolio securities denominated in that foreign currency.
If conditions warrant, for transaction hedging purposes the Master Fund may
also enter into contracts to purchase or sell foreign currencies at a future
date ("forward contracts") and purchase and sell foreign currency futures
contracts. A foreign currency forward contract is a negotiated agreement to
exchange currency at a future time at a rate or rates that may be higher or
lower than the spot rate. Foreign currency futures contracts are standardized
exchange-traded contracts and have margin requirements. In addition, for
transaction hedging purposes the Master Fund may also purchase or sell
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies.
The Master Fund may engage in position hedging to protect against a decline in
the value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of the
currency in which the securities the Master Fund intends to buy are
denominated, when the Master Fund holds cash or short-term investments). For
position hedging purposes, the Master Fund may purchase or sell foreign
currency futures contracts, foreign currency forward contracts and options on
foreign currency futures contracts and on foreign currencies on exchanges or in
over-the-counter markets. In connection with position hedging, the Master Fund
may also purchase or sell foreign currency on a spot basis.
The Master Fund's currency hedging transactions may call for the delivery of
one foreign currency in exchange for another foreign currency and may at times
not involve currencies in which its portfolio securities are then denominated.
Putnam Management will engage in such "cross hedging" activities when it
believes that such transactions provide significant hedging opportunities for
the Master Fund. Cross hedging transactions by the Master Fund involve the risk
of imperfect correlation between changes in the values of the currencies to
which such transactions relate and changes in the value of the currency or
other asset or liability which is the subject of the hedge.
The Master Fund may also engage in non-hedging currency transactions. For
example, Putnam Management may believe that exposure to a currency is in the
Master Fund's best interest but that bonds dominated in that currency are
unattractive. In that case the Master Fund may purchase a currency forward or
option to give it exposure to the currency. The Master Fund will segregate
liquid securities in its portfolio to cover forward contracts used for
non-hedging purposes in accordance with SEC regulations.
The decision as to whether and to what extent the Master Fund will engage in
foreign currency exchange transactions will depend on a number of factors,
including prevailing market conditions, the composition of the Master Fund's
portfolio and the availability of suitable transactions. Accordingly, there can
be no assurance that the Master Fund will engage in foreign currency exchange
transactions at any given time or from time to time.
For a further discussion of the risks associated with purchasing and selling
futures contracts and options, see "Financial futures and options" below. The
SAI also contains additional information concerning the Master Fund's use of
foreign currency exchange transactions.
Financial futures and options. The Master Fund may purchase and sell futures
contracts on U.S. government securities, foreign fixed income securities and on
foreign currencies. A futures contract is a contract to buy or sell a certain
amount of a particular U.S. government security, foreign fixed income security
or foreign currency at an agreed price on a specified future date. Depending on
the change in the value of the security or currency between the time the Master
Fund enters into and terminates a futures contract, the Master Fund realizes a
gain or loss. The Master Fund may purchase and sell call and put options on
futures contracts or on securities it is permitted to purchase in addition to
or as an alternative to purchasing and selling futures contracts. The Master
Fund may engage in futures and options transactions for hedging purposes and
for nonhedging purposes, such as to adjust its exposure to relevant markets or
as a substitute for direct investment.
The use of futures and options involves certain special risks. Futures and
options transactions involve costs and may result in losses.
The successful use of futures and related options will usually depend on Putnam
Management's ability to forecast interest rate and market movements correctly.
The use of futures and options strategies also involves the risk of
<PAGE>
imperfect correlation between movements in the prices of futures and options
and movements in the prices of the underlying securities or currencies or in
the values of the securities or currencies that are the subject of a hedge. The
successful use of futures and options also depends on the availability of a
liquid secondary market to enable the Master Fund to close its positions on a
timely basis. There can be no assurance that such a market will exist at a
particular time. The Master Fund's ability to terminate option positions
established in the over-the-counter market may be more limited than for
exchange-traded options and may also involve the risk that securities dealers
participating in such transactions would fail to meet their obligations to the
Master Fund.
Because the markets for futures and options on foreign fixed income securities
and foreign currencies are relatively new and still developing and are subject
to certain regulatory constraints, the Master Fund's ability to engage in such
transactions may be limited. The use of futures and options transactions for
purposes other than hedging entails greater risks. Certain provisions of the
Internal Revenue Code and certain regulatory requirements may limit the use of
futures and options transactions.
A more detailed description of futures and options strategies, including the
risks associated with them, is included in the SAI.
Securities loans, repurchase agreements and forward commitments. The Master
Fund may lend portfolio securities amounting to not more than 25% of its assets
to broker-dealers and may enter into repurchase agreements on up to 25% of its
assets. These transactions must be fully collateralized at all times. The
Master Fund may also purchase securities for future delivery, which may
increase its overall investment exposure and involves a risk of loss if the
value of the securities declines prior to the settlement date. These
transactions involve some risk if the other party should default on its
obligation and the Master Fund is delayed or prevented from recovering the
collateral or completing the transaction.
<PAGE>
Financial highlights
The following table presents per share financial information for the Master
Fund since its inception. With the exception of the information for the six
months ended March 31, 1997, this information has been audited and reported on
by Coopers & Lybrand, L.L.P., the fund's independent accountants.
<TABLE>
<CAPTION>
Six months
ended March 31, Year ended September 30
1997 -----------------------------------------------------------
(Unaudited) 1996 1995 1994 1993 1992
---------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 8.58 $ 8.38 $ 8.13 $ 8.91 $ 8.71 $ 8.16
Investment operations
Net investment income 0.33 0.63 0.67 0.62 0.68 0.74
Net realized and unrealized gain
(loss) on investments (0.13) 0.19 0.21 (0.71) 0.29 0.63
Total from investment operations 0.20 0.82 0.88 (0.09) 0.97 1.37
Less distributions:
From net investment income (0.31) (0.61) (0.49) (0.55) (0.68) (0.74)
In excess of net investment
income -- -- -- -- (0.09) --
From net realized gain on
investments -- -- -- (0.06) -- --
From return of capital -- (0.01) (0.14) (0.08) -- (0.08)
Total distributions (0.31) (0.62) (0.63) (0.69) (0.77) (0.82)
Net asset value end of period 8.47 8.58 8.38 8.13 8.91 8.71
Market value, end of period 7.500 7.500 7.375 7.250 8.375 8.500
Total investment return at market
value (%) (a) 4.12(c) 10.34 10.90 (5.57) 7.89 21.13
Net assets, end of period (in
thousands) $325,735 $332,537 $326,735 $317,296 $347,620 $339,871
Ratio of expenses to average net
assets (%) (b) $ 0.46(c) 0.99 1.03 0.92 0.96 0.98
Ratio of net investment income to
average net assets (%) 3.79(c) 7.44 8.24 7.18 7.83 8.76
Portfolio turnover (%) 107.73(c) 232.90 219.63 204.92 237.63 134.43
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the
period
April 29,
1988 (com-
mencement of operations)
1991 1990 1989 to September 30, 1988
----------- ----------- ----------- -----------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 7.60 $ 8.62 $ 9.27 $ 9.29
Investment operations
Net investment income .76 .84 .97 .38
Net realized and unrealized gain (loss) on
investments .67 (.91) (.55) (.06)
Total from investment operations 1.43 (.07) .42 .32
Less distributions:
From net investment income (.76) (.85) (.99) .34
In excess of net investment income -- -- -- --
From net realized gain on investments -- (.08) (.08) --
From return of capital (.11) (.02) -- --
Total distributions (.87) (.95) (1.07) (.34)
Net asset value, end of period $ 8.16 $ 7.60 $ 8.62 $ 9.27
Market value, end of period $ 7.750 $ 6.375 $ 8.375 $ 9.250
Total investment return at market value (%)
(a) 36.82 (13.29) 1.92 (4.05)(c)
Net assets, end of period (in thousands) $317,747 $301,613 $345,931 $371,282
Ratio of expenses to average net assets (%)
(b) 1.08 1.04 1.04 .39(c)
Ratio of net investment income to average net
assets (%) 9.65 10.4 10.61 4.13(c)
Portfolio turnover (%) 204.31 211.22 202.47 33.18(c)
</TABLE>
* Activity for the period March 10, 1988 to April 28, 1988 is not included.
(a) Total investment return does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended September
30, 1995 and thereafter includes amounts paid through expense offset
arrangements.
(c) Not annualized.
<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 instrumentalities, and
supranational entities ("foreign government securities")
The Government Fund may engage in foreign currency exchange transactions and
options to manage its foreign currency exposure. The Government Fund may also
hold a portion of its assets in cash and money-market instruments.
Putnam Management believes that, because the Government Fund limits the
maturity of its portfolio investments and normally invests a portion of its
assets in foreign securities, the Government Fund's net asset value is likely
to be more stable over the long term than if the Government Fund invested
exclusively in longer-term U.S. government securities. The values of fixed
income securities generally rise during periods of falling interest rates and
decline during periods of rising interest rates. The magnitude of these
fluctuations generally has been smaller for intermediate-term securities than
for securities with longer maturities. While the volatility associated with
intermediate-term securities is lower, the yields available on such securities
are also generally lower. Options on intermediate-term securities generally
carry smaller premiums and, therefore, the additional income that can be
generated by the Government Fund's options and futures strategies described
below is likely to be less than if the Government Fund invested in longer-term
securities.
Putnam Management adjusts the average maturity of the investments held in the
portfolio from time to time, depending on its assessment of relative yields and
risks of securities of different maturities and its expectations of future
changes in interest rates.
Historically, the markets for U.S. government securities and foreign government
securities have tended to behave independently and have at times moved in
opposite directions. For example, U.S. government securities have often been
negatively affected by a decline in the value of the dollar against foreign
currencies, while the bonds of foreign issuers held by U.S. investors have
generally benefitted from such decline. Putnam Management believes that,
because the markets for U.S. government securities and for foreign securities
often exhibit such a lack of correlation, the Government Fund should be able to
achieve greater stability of net asset value over the long term by investing a
portion of its assets in foreign securities than by investing exclusively in a
portfolio of U.S. government securities.
Putnam Management expects that a portion of the Government Fund's assets will
normally be invested in foreign government securities. Such investments may
represent up to 50% of the Government Fund's assets. Putnam Management
determines the amount of the Government Fund's assets invested in foreign
government securities based on its assessment of the maximum level of current
income that can be achieved from a portfolio invested in U.S. government
securities and foreign government securities, consistent with reducing
fluctuations in net asset value. In making these adjustments, Putnam Management
will consider changing market, economic, and currency conditions and the
relative risks and opportunities of investing in foreign securities.
The Government Fund may invest up to 15% of its assets in securities rated
below investment grade (rated below Baa or BBB by a recognized securities
rating agency, such as Moody's or S&P), or in unrated securities determined to
be of comparable quality. The Government Fund will not invest in securities
rated below B at the time of purchase.
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.
<PAGE>
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."
<PAGE>
Financial highlights
The following table presents per share financial information for the Government
Fund since inception. With the exception of the information for the six months
ended May 31, 1997, this information has been audited and reported on by Price
Waterhouse LLP, the fund's independent accountants.
<TABLE>
<CAPTION>
Six months
ended
May 31, Year ended November 30,
1997 -----------------------------------------------------------------------------------
(Unaudited) 1996 1995 1994 1993 1992 1991 1990
--------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 8.66 $ 8.70 $ 8.07 $ 9.05 $ 9.32 $ 9.21 $ 9.08 $ 9.11
Investment operations
Net investment income 0.25 0.54 0.58 0.56 0.55 0.60 0.68 0.73
Net realized and unrealized
gain (loss) on investments (0.36) 0.01 0.65 (0.84) 0.21 0.28 0.34 0.22
Total from investment
operations (0.11) 0.55 1.23 (0.28) 0.76 0.88 1.02 0.95
Less distributions:
From net investment income (0.30) (0.59) (0.60) (0.39) (0.55) (0.60) (0.68) (0.73)
In excess of net investment
income -- (0.01) -- -- (0.04) -- -- --
From net realized gain on
investments -- -- -- (0.07) (0.44) (0.17) (0.05) (0.08)
In excess of net realized
gain on investments -- -- -- -- -- -- -- (0.09)
Return of capital -- -- -- (0.24) -- -- (0.16) (0.08)
Total distributions (0.30) (0.60) (0.60) (0.70) (1.03) (0.77) (0.89) (0.98)
Increase in net asset value
from shares repurchased -- 0.01 -- -- -- -- -- --
Net asset value, end of
period $ 8.25 $ 8.66 $ 8.70 $ 8.07 $ 9.05 $ 9.32 $ 9.21 $ 9.08
Market value, end of period $ 7.500 $ 7.625 $ 7.750 $ 7.250 $ 8.125 $ 9.125 $ 9.125 $ 9.00
Total investment return at
market value (%) (a) 2.29(c) 6.44 15.58 (2.38) (.01) 8.69 11.80 11.90
Net assets, end of period (in
thousands) $531,059 $559,137 $566,049 $525,592 $589,227 $601,573 $585,649 $567,117
Ratio of expenses to average
net assets (%) (b) .45(c) .90 1.00 .87 .89 .92 1.01 1.02
Ratio of net investment
income to average net
assets (%) 3.00(c) 6.31 6.85 6.64 5.98 6.51 7.51 8.19
Portfolio turnover (%) 162.70(c) 326.92 416.86 242.42 303.68 216.24 255.49 268.42
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the period
June 27, 1988
Year ended (commencement
November 30, of operations) to
1989 November 30, 1988
-------------- -------------------
<S> <C> <C>
Net asset value, beginning of period $ 9.38 $ 9.30
Investment operations
Net investment income 0.79 0.35
Net realized and unrealized gain (loss) on investments (0.05) 0.07
Total from investment operations 0.74 0.42
Less distributions:
From net investment income (0.79) (0.34 )
In excess of net investment income -- --
From net realized gain on investments (0.22) --
Return of capital -- --
Total distributions (1.01) (0.34 )
Increase in net asset value from shares repurchased -- --
Net asset value, end of period $ 9.11 $ 9.38
Market value, end of period $ 9.00 $ 9.250
Total investment return at market value (%) (a) $ 8.52 (4.11)(c)
Net assets, end of period (in thousands) $562,115 $569,990
Ratio of expenses to average net assets (%) (b) 1.00 0.42(c)
Ratio of net investment income to average net assets (%) 8.43 3.71(c)
Portfolio turnover (%) 174.57 34.74(c)
</TABLE>
(a) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended November 30,
1995 and thereafter includes amounts paid through expense offset arrangements.
Prior period ratios exclude these amounts.
(c) Not annualized.
<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 which generally will result in taxable distributions to shareholders.
Portfolio turnover rates for the funds are shown in the their respective
"Financial highlights".
Investment restrictions
Both funds have adopted the following investment restrictions which may not be
changed without the affirmative vote of a "majority of the outstanding voting
securities" of the affected fund (which is defined in the Investment Company
Act of 1940 to mean the affirmative vote of the lesser of (1) more than 50% of
the outstanding shares of the fund, or (2) 67% or more of the shares present at
a meeting if more than 50% of the outstanding shares of the fund are
represented at the meeting in person or by proxy.) Each fund may not:
1. Borrow money or issue senior securities (as defined in the Investment
Company Act of 1940), except that the fund may borrow amounts not exceeding 15%
of the value (taken at the lower of cost or current value) of its total assets
(not including the amount borrowed) at the time the borrowing is made for
temporary purposes (including repurchasing its shares while effecting an
orderly liquidation of portfolio securities) or for emergency purposes.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets in excess of
15% of its total assets (taken at current value) and then only to secure
borrowings permitted by restriction 1 above. Collateral arrangements with
respect to margin for futures contracts and options are not deemed to be
pledges or other encumbrances for purposes of this restriction.
3. Purchase securities on margin, except such short term credits as may be
necessary for the clearance of purchases and sales of securities, and except
that it may make margin payments in connection with transactions in futures
contracts and options.
4. Make short sales of securities or maintain a short position for the account
of the fund unless at all times when a short position is open it owns an equal
amount of such securities or owns securities which, without payment of any
further consideration, are convertible into or exchangeable for securities of
the same issue as, and in equal amount to, the securities sold short.
5. Underwrite securities issued by other persons except to the extent that, in
connection with the disposition of its portfolio investments, it may be deemed
to be an underwriter under the federal securities laws.
6. Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, securities which are secured by interests in real
estate and securities representing interests in real estate.
7. Purchase or sell commodities or commodity contracts, except that it may
purchase or sell financial futures contracts and related options, and futures,
forward contracts and options on foreign currencies.
8. Make loans, except by purchase of debt obligations in which the fund may
invest consistent with its investment policies, by entering into repurchase
agreements with respect to not more than 25% of its total assets (taken at
current value), or through the lending of its portfolio securities with respect
to not more than 25% of its total assets.
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 supra-
<PAGE>
national entities, and securities backed by the credit of a governmental entity
are not considered to represent industries).
13. Invest in the securities of registered open-end investment companies,
except as they may be acquired as part of a reorganization or consolidation or
acquisition of assets or by purchases in the open market involving only
customary brokers' commissions.
14. Purchase securities restricted as to resale if, as a result, such
investments would exceed 15% of the value of the fund's net assets, excluding
restricted securities that have been determined by the Trustees of the fund (or
the person designated by them to make such determination) to be readily
marketable.
15. Buy or sell oil, gas, or other mineral leases, rights or royalty contracts,
although it may purchase securities of issuers which deal in, represent
interests in or are secured by interests in such leases, rights or contracts.
16. Make investments for the purpose of gaining control of a company's
management.
All percentage limitations on investments will apply at the time of investment
and shall not be considered violated unless an excess or deficiency occurs or
exists immediately after and as a result of such investment.
Except for the investment restrictions listed above, the other investment
policies described in this Proxy Statement are not fundamental and may be
changed by approval of the affected fund's Trustees.
Management
Each fund's Trustees are responsible for generally overseeing the conduct of
fund business. The funds have the same Trustees. Information concerning the
age, principal occupations, and professional affiliations of the Trustees is
contained on pages 17 of this Proxy Statement. Information relating to the
compensation of Trustees is contained on pages 25 of this 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 fees at the following identical rates: 0.75% of the first
$500 million of average weekly net assets, 0.65% of the next $500 million,
0.60% of the next $500 million, and 0.55% of any amount over $1.5 billion.
Putnam Management is a subsidiary of Putnam Investments, Inc., which is wholly
owned by Marsh & McLennan Companies, Inc., a publicly-owned holding company
whose principal businesses are international insurance and reinsurance
brokerage, employee benefit consulting and investment management.
Except as otherwise noted, the following officers of Putnam Management have had
primary responsibility for the day-to-day management of the funds' portfolios
since the years stated below:
<TABLE>
<CAPTION>
Business Experience
Year (at least 5 years)
------ --------------------------------------------------
<S> <C> <C>
Gail S. Attridge 1997 Employed as an investment professional by Putnam
Senior Vice President 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 by Putnam
Managing Director 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* 1990 Employed as an investment professional by Putnam
Managing Director Management since 1987.
Kenneth J. Taubes 1997 Employed as an investment professional by Putnam
Senior Vice President Management since 1991.
</TABLE>
*Master Fund only.
The funds pay all expenses not assumed by Putnam Management, including
Trustees' fees, auditing, legal, custodial, investor servicing and shareholder
reporting expenses. The funds also reimburse Putnam Management for the com-
<PAGE>
pensation and related expenses of certain fund officers and their staff who
provide administrative services. The total reimbursement is determined annually
by the Trustees.
Putnam Management places all orders for the purchase and sale of fund
securities. In selecting broker-dealers, Putnam Management may consider
research and brokerage services furnished to it and its affiliates. Subject to
seeking the most favorable price and execution available, Putnam Management
may, if permitted by law, consider the sale of shares of the other Putnam funds
as a factor in the selection of broker-dealers.
Putnam Fiduciary Trust Company, One Post Office Square, Boston, Massachusetts
02109, is the custodian of the funds' securities. Putnam Investor Services,
P.O. Box 41203, Providence, Rhode Island 02940-1203, a division of Putnam
Fiduciary Trust Company, is investor servicing, transfer and dividend
disbursing agent for the funds.
Description of fund shares
General. The Trustees of each fund have authority to issue an unlimited number
of shares of beneficial interest without par value. Except for the Master Fund
shares to be issued in the transaction, neither fund has a present intention of
offering additional shares, other than under its dividend reinvestment plan.
See "Dividend Reinvestment Plan" below. Other offerings of a fund's shares
require approval of the Trustees. Any additional offering will be subject to
the requirements of the Investment Company Act of 1940 that shares may not be
sold at a price below the then current net asset value, exclusive of
underwriting discounts and commissions, except in connection with an offering
to existing shareholders or with the consent of the holders of a majority of a
fund's outstanding shares.
Set forth below is information about each fund's securities as of September 30,
1997 (except where otherwise noted):
<TABLE>
<CAPTION>
Master Fund
Title of Class Amount Authorized Amount Held by Fund Amount Outstanding
- ---------------- ------------------- --------------------- --------------------
<S> <C> <C> <C>
Common Shares Unlimited 0 shares
</TABLE>
<TABLE>
<CAPTION>
Government Fund
Title of Class Amount Authorized Amount Held by Fund Amount Outstanding
- ---------------- ------------------- --------------------- --------------------
<S> <C> <C> <C>
Common Shares Unlimited 0 shares
</TABLE>
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 reducing discount levels, but are not believed to
influence discounts materially over the longer term.
Shares of the funds trade in the open market at a price which will be a
function of several factors, including yield and net asset value of the shares
and the extent of market activity. Shares of closed-end investment companies
frequently trade at a discount from net asset value, but in some cases trade at
a premium. When a fund repurchases its shares at a price below their net asset
value, the net asset value of those shares that remain outstanding will be
increased, but this does not necessarily mean that the market price of those
outstanding shares will be affected either positively or negatively.
Determination of net asset value. Each fund calculates the net asset value of a
share at least weekly by dividing the total value of its assets, less
liabilities, by the number of its shares outstanding. Shares are valued as of
the close of regular trading on the New York Stock Exchange each day the
exchange is open.
Securities for which market quotations are readily available are valued at
market values. Short-term investments that have remaining maturities of 60 days
or less are valued at amortized cost, which approximates market value. All
other securities and assets are valued at their fair value following procedures
approved by the Trustees.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, and certain
foreign securities. These investments are valued at fair value on the basis of
valuations furnished by pricing services, which determine valuations for
normal, institutional-size trading units of such securities using methods
based on market transactions for comparable securities and various
relationships between securities which are generally recognized by
institutional traders.
Securities quoted in foreign currencies are translated into U.S. dollars at
current exchange rates or at such other rates as the Trustees may determine in
computing net asset value. As a result, fluctuations in the value of such
currencies in relation to the U.S. dollar will affect the net asset value of
fund shares even though there has not been any change in the values of such
securities as quoted in such foreign currencies.
<PAGE>
Dividend Reinvestment Plan. Each fund has adopted a dividend reinvestment plan
(each, a "Plan") pursuant to which each registered shareholder may have all
income dividends and distributions of capital gains automatically reinvested by
BankBoston (the "Plan Agent"), as agent for shareholders, in additional shares
of the fund. Shareholders who do not participate in the Plan receive all
distributions in cash paid by check mailed directly to the shareholder by the
Plan Agent as dividend disbursing agent. Shareholders whose shares are held in
the name of a broker or nominee should contact the broker or nominee to
determine whether and how they may participate in a Plan. For the Master Fund,
shareholders must make an election to participate in the Plan. For the
Government Fund, shareholders are automatically enrolled in the Plan and must
elect not to participate in the Plan.
If the Trustees of a fund declare a dividend or determine to make a capital
gain distribution payable either in shares of the fund or in cash,
non-participants in that fund's Plan will receive cash and participants in the
Plan will receive the equivalent in shares of the fund. If the market price of
the shares on the payment date for the dividend or distribution is equal to or
exceeds their net asset value as determined on the payment date, participants
will be issued shares of the relevant fund at a value equal to the higher of
net asset value or 95% of the market price. This discount reflects savings in
underwriting and other costs that the fund would otherwise be required to incur
to raise additional capital. If net asset value exceeds the market price of the
fund's shares at such time, or if the fund declares a dividend or other
distribution payable only in cash, the Plan Agent will, as agent for Plan
participants, buy fund shares in the open market, on the New York Stock
Exchange or elsewhere, for the participants' accounts. If, before the Plan
Agent has completed its purchases, the market price exceeds the net asset value
of the fund's shares, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the fund's shares, resulting in the
acquisition of fewer shares than if the dividend or distribution had been paid
in shares issued by the fund.
Participants in a Plan may withdraw from the Plan upon written notice to the
Plan Agent. When a participant withdraws from a Plan or upon termination of a
Plan as provided below, certificates for whole shares credited to his or her
account under the Plan will be issued and a cash payment will be made for any
fraction of a share credited to such account.
The Plan Agent will maintain all shareholders' accounts in a Plan and will
furnish written confirmation of all transactions in the account, including
information needed by shareholders for tax records. Shares in the account of
each participant in a Plan will be held by the Plan Agent in non-certificated
form in the name of the participant, and each shareholder's proxy will include
those shares purchased pursuant to the Plan.
In the case of shareholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Plan Agent will administer
a Plan on the basis of the number of shares certified from time to time by the
record shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by a
fund as a result of dividends or capital gain distributions payable either in
shares or in cash. However, each participant will bear a proportionate share of
brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of dividends or capital gain
distributions. In each case, the cost per share of shares purchased for each
participant's account will be the average cost, including brokerage
commissions, of any shares purchased in the open market plus the cost of any
shares issued by a fund.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income taxes that may be payable (or required to be
withheld) on dividends or distributions. See "Taxation."
Experience under a Plan may indicate that changes are desirable. Accordingly,
each fund reserves the right to amend or terminate its Plan. There is no direct
service charge to participants in a Plan; however, each fund reserves the right
to amend the Plan to include a service charge payable by the participants.
It may be necessary to suspend operation of the Government Fund's Plan for one
or two dividend payments immediately prior to the combination so that all
purchase activity under the Plan is settled in advance of the effective date of
the transaction. In that event all shareholders, including those in the Plan,
will receive those dividends in cash.
Dividends and distributions. Each fund pays monthly distributions from net
investment income and any net realized short term capital gains (including
gains from options and futures transactions). Net realized long term capital
gains, if any, will be distributed at least annually.
Based on a policy adopted by the Trustees in May 1997, the Master Fund sets its
monthly dividend at the end of each year based on current and retained earnings
of the fund. These amounts include not only current net investment income, but
also realized capital gain and undistributed income and gain from prior
periods. Expectations of future capital gains will not be taken into account.
Under normal market conditions, the Master Fund's dividend will be adjusted
once a year. The dividend will be set at a level which is intended to avoid a
return of capital to shareholders,
<PAGE>
although subsequent market events could result in returns of capital. The
Government Fund's dividend rate is based on Putnam Management's projections of
net investment income and net realized short-term capital gains that the fund
is likely to earn over the long term. Such distributions may at times exceed
the current earnings of the Government Fund, resulting in a return of capital
to shareholders.
Any amount retained by a fund in excess of earnings would be available to
stabilize future distributions. As a result, the distributions paid by a fund
for any particular period may be more or less than the amount of net investment
income and net realized short term capital gains actually earned by the fund
during such period. Distributions in excess of current and retained earnings
may result in a return of capital to shareholders.
For information concerning the tax treatment of such dividends and
distributions to shareholders, see the discussion under "Taxation."
Declarations of Trust. Each fund's Agreement and Declaration of Trust includes
provisions that could have the effect of limiting the ability of other entities
or persons to acquire control of the fund, or to cause it to engage in certain
transactions or to modify its structure. The affirmative vote of at least
two-thirds of the outstanding shares of a fund is required to authorize any of
the following actions: (1) merger or consolidation of the fund, (2) sale of all
or substantially all of the assets of the fund, (3) liquidation or dissolution
of the fund, or (4) amendment of the Agreement and Declaration of Trust to
reduce the two-thirds vote required to authorize the actions in (1) through (3)
above, unless with respect to any of the foregoing such action has been
authorized by the affirmative vote of two-thirds of the total number of
Trustees, in which case the affirmative vote of a majority of the outstanding
shares is required.
The Trustees have determined that the two-thirds voting requirements described
above, which are greater than the minimum requirements under the Investment
Company Act of 1940, are in the best interests of each fund and its
shareholders generally. Reference is made to the Agreement and Declaration of
Trust of each fund, on file with the Securities and Exchange Commission, for
the full text of these provisions. These provisions could have the effect of
depriving shareholders of an opportunity to sell their shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of a fund in a tender offer or similar transaction.
For each fund, if the fund's shares have traded on the principal securities
exchange where listed at an average discount from net asset value of more than
10%, determined on the basis of the discount as of the end of the last trading
day in each week during the 12 calendar weeks preceding the beginning of such
fiscal year, the fund will submit to its shareholders at the next succeeding
annual meeting of shareholders a proposal to convert the fund to an open-end
investment company. Conversion of a fund to an open-end investment company
would require an amendment to the Agreement and Declaration of Trust. Such an
amendment would require the affirmative vote of the holders of a majority of
the shares entitled to be voted on the matter. Shareholders of an open-end
investment company may require the company to redeem their shares at any time
(except in certain circumstances as authorized by or under the Investment
Company Act of 1940) at their net asset value, less such redemption charge, if
any, as might be in effect at the time of redemption. If a fund converted to an
open-end company, it could be required to liquidate portfolio securities to
meet requests for redemption, and its shares would no longer be listed on the
New York Stock Exchange. The Trustees may at any time propose conversion of a
fund to an open-end company depending upon their judgment as to the
advisability of such action in light of circumstances then prevailing.
For the past two fiscal years, the Master Fund's shares traded at an average
discount of greater than 10% for the twelve-week period ended September 30 in
each year, requiring that the Master Fund submit a proposal to shareholders to
convert the Master Fund to an open-end fund. At the 1996 and 1997 annual
meetings of shareholders, the Master Fund's shareholders voted to retain
closed-end status. For the past two fiscal years, the Government Fund's shares
have traded at an average discount of greater than 10% for the twelve-week
period ended November 30 in each year, requiring submission to shareholders of
a conversion proposal. At the 1996 and 1997 annual meetings of shareholders,
the Government Fund's shareholders voted to retain closed-end status.
Taxation. Each fund intends to qualify each year as a "regulated investment
company" for federal income tax purposes and to meet all other requirements
necessary for it to be relieved of federal taxes on income and gains it
distributes to shareholders. Each fund will distribute substantially all of its
ordinary income and capital gain net income on a current basis.
Fund distributions will be taxable to you as ordinary income to the extent
derived from the fund's investment income and net short-term gains (that is,
net gains from capital assets held for not more than a year). Distributions
designated by the fund as deriving from net gains on capital assets held for
more than one year but not more than 18 months and from net gains on capital
assets held for more than 18 months will be taxable to you as such, regardless
of how long you have 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
<PAGE>
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 eligible
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. The ability
of the shareholders to use such foreign tax credit is subject to certain
limitations (including a holding period requirement).
Fund transactions in foreign currencies and hedging activities may give rise to
ordinary income or loss to the extent such income or loss results from
fluctuations in value of the foreign currency concerned. In addition, such
activities will likely produce a difference between book income and taxable
income. This difference may cause a portion of a fund's income distributions to
constitute a return of capital for tax purposes or require the fund to make
distributions exceeding book income to qualify as a regulated investment
company for tax purposes.
Investment in an entity that qualifies as a "passive foreign investment
company" under the Code could subject a fund to a U.S. federal income tax
(including interest charges) on certain "excess distributions" with respect to
the investment, and on the proceeds from disposition of the investment which
tax cannot be eliminated by making distributions to the fund's shareholders.
Early in each year Putnam Investor Services will notify fund shareholders of
the amount and tax status of distributions paid by each fund for the preceding
year.
The foregoing is a summary of certain federal income tax consequences of
investing in the fund. Shareholders should consult their tax advisers to
determine the precise effect of an investment in either fund on their
particular tax situation (including possible liability for state and local
taxes). Certain accounting and tax principles pertaining to transactions in
options, futures and forward contracts are described in the SAI.
SECURITIES RATINGS
The following rating services describe rated securities as follows:
Moody's Investors Service, Inc.
Bonds
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
<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 differs from the higher rated issues only in small degree.
A--Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB-B-CCC-CC-C--Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB--Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B--Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC--Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC--The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
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.
<PAGE>
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, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC--Well below investment-grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable economic/
industry conditions, and/or with unfavorable company developments.
DD--Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
Fitch Investors Service, Inc.
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB--Bonds considered to be speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the
issue and repay principal when due.
CCC--Bonds have certain characteristics which, with passing of time, could lead
to the possibility of default on either principal or interest payments.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable.
C--Bonds are in actual or imminent default in payment of interest or principal.
DDD--Bonds are in default and in arrears in interest and/or principal payments.
Such bonds are extremely speculative and should be valued only on the basis of
their value in liquidation or reorganization of the obligor.
<PAGE>
PUTNAM MASTER INTERMEDIATE INCOME TRUST
FORM N-14
PART B
STATEMENT OF ADDITIONAL INFORMATION
October 31, 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 "Proxy Statement") of Putnam Master Intermediate Income Trust
(the "Master Fund") dated October 31, 1997 relating to the sale of all or
substantially all of the assets of Putnam Intermediate Government Income Trust
(the "Government Fund") to the Master Fund. This SAI is not a prospectus and is
authorized for distribution only when it accompanies or follows delivery of the
Proxy Statement . This SAI should be read in conjunction with the Proxy
Statement. Investors may obtain a free copy of the Proxy Statement by writing
Putnam Investor Services, One Post Office Square, Boston, MA 02109 or by
calling 1-800-225-1581.
Table of Contents
ADDITIONAL INFORMATION ABOUT THE MASTER FUND AND THE GOVERNMENT FUND 76
Management 76
Investment Decisions 77
Brokerage Services, Brokerage Allocation and Other Practices 77
Investor Servicing Agent and Custodian 79
Charges and Expenses 80
Tax Status 80
Certain Investment Practices 83
Determination of Net Asset Value 90
Officers 91
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS 92
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
<PAGE>
only by a vote of the shareholders of the relevant fund. Each Management
Contract also terminates without payment of any penalty in the event 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")) 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
<PAGE>
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.
Each Management Contract provides that commissions, fees, brokerage or similar
payments received by Putnam Management or an affiliate in connection with the
purchase and sale of portfolio securities of a fund, less any direct expenses
approved by the Trustees, shall be recaptured by the fund through a reduction
of the fee payable by the fund under the Management Contract. Putnam Management
seeks to recapture for each fund soliciting dealer fees on the tender of the
fund's portfolio securities in tender or exchange offers. Any such fees which
may be recaptured are likely to be minor in amount. Consistent with the Rules
of Fair Practice of the National Association of Securities Dealers, Inc. and
subject to seeking the most favorable price and execution available and such
other policies as the Trustees may determine, Putnam Management may consider
sales of shares of the funds (and, if permitted by law, sales of the other
Putnam funds) as a factor in the selection of broker-dealers to execute
portfolio transactions for a fund.
Brokerage commissions. The following table shows brokerage commissions paid by
each fund during the fiscal periods indicated:
Fiscal year Brokerage Commissions
Master Fund ------------- -----------------------
1997
1996 $19,063
1995 $21,412
Government Fund 1996 $17,229
1995 $31,866
1994 $ 781
The following table shows transactions placed with brokers and dealers by each
fund during its most recent fiscal year to recognize research, statistical and
quotation services received by Putnam Management and its affiliates:
Dollar
value Percent of
of these total Amount of
transactions transactions Commissions
-------------- -------------- -------------
Master Fund
Government Fund $13,441,956 19.13% $1,334
Investor Servicing Agent and Custodian
Putnam Investor Services, a division of Putnam Fiduciary Trust Company
("PFTC"), is the funds' investor servicing agent (transfer, plan and dividend
disbursing agent), for which it receives fees which are paid monthly by each of
the funds as an expense of all its shareholders. The fee paid to Putnam
Investor Services is determined on the basis of the number of shareholder
accounts, the number of transactions and the assets of the relevant fund.
PFTC is the custodian of each of the fund's assets. In carrying out its duties
under its custodian contracts, PFTC may employ one or more sub-custodians 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 sub-custodians
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 sub-custodians 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 sub-custodian 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 sub-custodians 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 sub-custodians or with
a third-party broker having an agreement with the sub-custodians. 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 sub-custodian employed by it in
performing custodial services.
<PAGE>
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
------------- ---------------------
1997
1996 $2,479,579
1995 $2,378,222
Government Fund Fiscal Year Management Fee Paid
------------- ---------------------
1996 $4,075,170
1995 $4,051,749
1994 $4,096,234
Administrative expense reimbursement. The Master Fund and the Government Fund
reimbursed Putnam Management in the following amounts for administrative
services during fiscal 1997 and 1996, respectively, 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
- ------------- --------------------- ------------------------------------
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)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
(c) diversify its holdings so that, at the end of each fiscal quarter, (i)
at least 50% of the market value of the fund's assets is represented by
cash and cash items, U.S. government securities, securities of other
regulated investment companies, and other securities limited in respect of
any one issuer to a value not greater than 5% of the value of the fund's
total assets and to not more than 10% of the outstanding voting securities
of such issuer, and (ii) not more than 25% of the value of its assets is
invested in the securities (other than those of the U.S. government or
other regulated investment companies) of any one issuer or of two or more
issuers which the fund controls and which are engaged in the same, similar
or related trades or businesses.
In addition, until the start of a fund's first tax year beginning after August
5, 1997, a fund must 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 in order to qualify as a regulated investment company.
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
<PAGE>
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.
Fund distributions. Distributions from a fund will be taxable to shareholders
as ordinary income to the extent derived from the fund's investment income and
net short-term gains. Pursuant to the Taxpayer Relief Act of 1997, generally
with respect to capital assets sold after July 28, 1997, two different tax
rates apply to net capital gains (that is, the excess of net gains from capital
assets held for more than one year over net losses from capital assets held for
not more than one year). One rate (generally 28%) applies to net gains on
capital assets held for more than one year but not more than 18 months
("mid-term gains") and a second, preferred rate (generally 20%) applies to the
balance of such net capital gains ("adjusted net capital gains"). Distributions
of net capital gains will be treated in the hands of shareholders as mid-term
gains to the extent designated by the fund as deriving from net gains from
assets held for more than one year but not more than 18 months, and the balance
will be treated as adjusted net capital gains. Distributions of mid-term gains
and adjusted net capital gains will be taxable to shareholders as such,
regardless of how long a shareholder has held the shares in the fund.
Distributions will be taxed as described above whether received in cash or in
shares through the reinvestment of distributions.
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, short sale, and, after June 8, 1997,
constructive 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. The tax consequences of certain hedging
transactions have been modified by the 1997 Act.
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
<PAGE>
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, 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 stock or
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 respect of
foreign securities the fund has held for at least the minimum period specified
in the Code. In such a case, shareholders will include in gross income from
foreign sources their pro rata share of such taxes. In particular, shareholders
must hold their fund shares (without protection from risk of loss) on the
ex-dividend date and for at least 15 days during the 30 day period surrounding
the ex-dividend date to be eligible to claim a foreign tax credit with respect
to a given dividend. 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.
In addition, any loss 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.
Shares purchased through tax qualified plans. Special tax rules apply to
investments through defined contribution plans and other tax-qualified plans.
Shareholders should consult their tax adviser to determine the suitability of
shares of a fund as an investment through such plans and the precise effect of
an investment on their particular tax situation.
Backup withholding. Each fund generally is required to withhold and remit to
the U.S. Treasury 31% of the taxable dividends and other distributions paid to
any individual shareholder who fails to furnish the fund with a correct
taxpayer identification number (TIN), who has under-reported dividends or
interest income, or who fails to certify to the fund that he or she is not
subject to such withholding. Shareholders who fail to furnish their correct TIN
are subject to a penalty of $50 for each such failure unless the failure is due
to reasonable cause and not wilful neglect. An individual's taxpayer
identification number is his or her social security number.
Certain Investment Practices
Set forth below is additional information about the investment practices in
which each fund may invest. This information supplements the information
provided in the Prospectus.
Options on Securities
Writing covered options. A fund may write covered call options and covered put
options on optionable securities held in its portfolio, when in the opinion of
Putnam Management such transactions are consistent with the fund's investment
objective(s) and policies. Call options written by a fund give the purchaser
the right to buy the underlying securities from the fund at a stated exercise
price; put options give the purchaser the right to sell the underlying
securities to the fund at a stated price.
A fund may write only covered options, which means that, so long as the fund is
obligated as the writer of a call option, it will own the underlying securities
subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, a fund will
hold cash and/or high-grade short-term
<PAGE>
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
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 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.
<PAGE>
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 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 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.
<PAGE>
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 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
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
<PAGE>
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 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 and a short position if the
option is a put) at a specified exercise
<PAGE>
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 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,
<PAGE>
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.
Determination of Net Asset Value
Each fund determines the net asset value of its shares at least once each week
as of the close of business on the last day on which the New York Stock
Exchange is open, and on such other days as may be required by its Dividend
Reinvestment Plan. Net asset value is determined by dividing the value of all
assets of a fund (including accrued interest and dividends), less all
liabilities (including accrued expenses), by the total number of shares
outstanding.
Securities for which market quotations are readily available are valued at
prices which, in the opinion of Putnam Management, most nearly represent the
market value of such securities. Currently, such prices are determined using
the last reported sale price or, if no sales are reported (as in the case of
some securities traded over-the-counter) the last reported bid price, except
that certain securities are stated at the mean between the last reported bid
and asked prices. Short-term investments having remaining maturities of 60 days
or less are stated at amortized cost, which approximates market value. All
other securities and assets are valued at their fair value following procedures
approved by the Trustees. Liabilities are deducted from the total, and the
resulting amount is divided by the number of shares of the class outstanding.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, tax-exempt
securities, and certain foreign securities. These investments are valued at
fair value on the basis of valuations furnished by pricing services, which
determine valuations for normal, institutional-size trading units of such
securities using methods based on market transactions for comparable securities
and various relationships between securities which are generally recognized by
institutional traders.
If any securities held by a fund are restricted as to resale, Putnam Management
determines their fair value following procedures approved by the Trustees. The
fair value of such securities is generally determined as the amount which a
fund could reasonably expect to realize from an orderly disposition of such
securities over a reasonable period of time. The valuation procedures applied
in any specific instance are likely to vary from case to case. However,
consideration is generally given to the financial position of the issuer and
other fundamental analytical data relating to the investment and to the nature
of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a fund in connection with such
disposition). In addition, specific factors are also generally considered,
such as the cost of the investment, the market value of any unrestricted
securities of the same class, the size of the holding, the prices of any
recent transactions or offers with respect to such securities and any available
analysts' reports regarding the issuer.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset
value of a fund's shares are computed as of such times. Also, because of the
amount of time required to collect and process trading information as to large
numbers of securities issues, the values of certain securities (such as
convertible bonds, 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 (59), Executive Vice President. Managing Director of Putnam
Investments, Inc. and Putnam Management.
Patricia C. Flaherty (50), Senior Vice President. Senior Vice President of
Putnam Investments, Inc. and Putnam Management.
William N. Shiebler (55), Vice President. Director and Senior Managing Director
of Putnam Investments, Inc. President and Director of Putnam Mutual Funds.
<PAGE>
Gordon H. Silver (50), Vice President. Director and Senior Managing Director of
Putnam Investments, Inc. and Putnam Management.
John R. Verani (58), Vice President. Senior Vice President of Putnam
Investments, Inc. and Putnam Management.
Paul M. O'Neil (44), Vice President. Vice President of Putnam Investments, Inc.
and Putnam Management.
John D. Hughes (62), Senior Vice President and Treasurer.
Beverly Marcus (53), Clerk and Assistant Treasurer.
The mailing address of each of the officers of the funds is One Post Office
Square, Boston, Massachusetts 02109. The principal occupations of the officers
for the last five years have been with the employers shown above, although in
some cases they have held different positions with such employers.
The Agreement and Declaration of Trust of each of the funds provide that each
of the funds will indemnify its officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the respective funds, except if it is determined in the
manner specified in the Agreement and Declaration of Trust that they have not
acted in good faith in the reasonable belief that their actions were in the
best interest of the respective funds or that such indemnification would
relieve any officer of any liability to the respective funds or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his or her duties. Each of the funds, at its expense,
provides liability insurance for the benefit of its officers.
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, MA 02109 are the
independent accountants for the Master Fund, providing audit services, tax
return review and other tax consulting services and assistance and consultation
in connection with the review of various Securities and Exchange Commission
filings for the Master Fund. Price Waterhouse LLP, 160 Federal Street, Boston,
MA 02110, are the independent accountants for the Government Fund, providing
audit services, tax return reviews and other tax consulting services and
assistance and consultation in connection with the review of various Securities
and Exchange Commission filings for the Government Fund. The Report of
Independent Accountants, financial highlights and financial statements included
in the Master Fund's Annual Report for the fiscal year ended September 30,
1996, filed electronically on December 2, 1996 (File No. 811-5498), and the
financial highlights and financial statements included in the Master Fund's
Semi-Annual Report for the six months ended March 31, 1997, filed
electronically on June 2, 1997 (File No. 811-5498), are incorporated by
reference into this SAI. The Report of Independent Accountants, financial
highlights and financial statements included in the Government Fund's Annual
Report for the fiscal year ended November 30, 1996, filed electronically on
January 28, 1997 (File No. 811-5556), and the financial highlights and
financial statements included in the Government Fund's Semi-Annual Report for
the six months ended May 31, 1997, filed electronically on July 23, 1997 (File
No. 811-5556), are also incorporated by reference into this SAI. The audited
financial statements for the Master Fund and the Government Fund incorporated
by reference into the SAI have been so included and incorporated in reliance
upon the reports of Coopers & Lybrand L.L.P. and Price Waterhouse LLP,
respectively, given on their authority as experts in auditing and accounting.
<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. $121,000 relates to proxy costs
which will be borne by Master Intermediate Income Trust. The other $180,000
relates to legal and accounting related merger costs that will be allocated
ratably between the two funds upon consummation of the merger.
C) Issuance of Master Intermediate Income Trust shares to the holders of shares
of Intermediate Government Income Trust.
<PAGE>
Putnam Master Intermediate Income Trust
Pro Forma Combining Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Master Intermediate
Intermediate Government
March 31, 1997 (Unaudited) Income Income Pro Forma Pro Forma
Assets Trust Trust Adjustments Combined
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments in securities, at value
(identified cost $340,856,013,
$559,218,309, and $900,074,322) $333,255,977 $543,960,795 $ -- $877,216,772
- --------------------------------------------------------------------------------------------------------------------
Cash 718,957 177 -- 719,134
- --------------------------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 5,344,598 7,369,124 -- 12,713,722
- --------------------------------------------------------------------------------------------------------------------
Receivable for securities sold 1,845,152 -- -- 1,845,152
- --------------------------------------------------------------------------------------------------------------------
Receivable for open forward currency
contracts 476,502 1,054,397 -- 1,530,899
- --------------------------------------------------------------------------------------------------------------------
Receivable for closed forward currency
contracts 229,379 481,518 -- 710,897
====================================================================================================================
Total assets 341,870,565 552,866,011 -- 894,736,576
- --------------------------------------------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,919,499 3,220,181 -- 5,139,680
- --------------------------------------------------------------------------------------------------------------------
Payable for securities purchased 11,963,719 17,456,387 -- 29,420,106
- --------------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager 600,531 309,056 -- 909,587
- --------------------------------------------------------------------------------------------------------------------
Payable for investor servicing and
custodian fees 81,584 126,035 -- 207,619
- --------------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees 5,787 11,267 -- 17,054
- --------------------------------------------------------------------------------------------------------------------
Payable for administrative services 5,766 2,892 -- 8,658
- --------------------------------------------------------------------------------------------------------------------
Payable for open forward currency
contracts 922,331 1,862,154 -- 2,784,485
- --------------------------------------------------------------------------------------------------------------------
Payable for closed forward currency
contracts 561,231 1,486,303 -- 2,047,534
- --------------------------------------------------------------------------------------------------------------------
Other accrued expenses 75,465 61,824 460,000(b) 597,289
====================================================================================================================
Total liabilities 16,135,913 24,536,099 460,000 41,132,012
- --------------------------------------------------------------------------------------------------------------------
Net assets $325,734,652 $528,329,912 $ (460,000) $853,604,564
- --------------------------------------------------------------------------------------------------------------------
Net assets $325,734,652 $528,329,912 $ (460,000)(b) $853,604,564
Shares outstanding 38,448,138 64,333,052 (1,986,663)(c) 100,794,527
Net asset value per share $ 8.47 $ 8.21 $ 8.47
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Putnam Master Intermediate Income Trust
Pro Forma Combining Statement of Operations
Twelve Months ended March 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Master Intermediate
Intermediate Government
Income Income Pro Forma Pro Forma
Investment income: Trust Trust Adjustments Combined
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest (net of foreign tax of $26,643,
$257,183 and 283,826, respectively) $28,089,399 $ 39,190,106 $ -- $ 67,279,505
- --------------------------------------------------------------------------------------------------------------------------
Dividends 186,590 -- -- 186,590
==========================================================================================================================
Total investment income 28,275,989 39,190,106 -- 67,466,095
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------------------------------
Compensation of Manager 2,474,673 4,027,593 (306,004)(A) 6,196,262
- --------------------------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees 394,441 584,592 -- 979,033
- --------------------------------------------------------------------------------------------------------------------------
Compensation of Trustees 21,397 32,027 (18,424)(A) 35,000
- --------------------------------------------------------------------------------------------------------------------------
Administrative services 7,305 11,797 (6,102)(A) 13,000
- --------------------------------------------------------------------------------------------------------------------------
Reports to shareholders 49,913 61,345 (81,150)(A) 30,108
- --------------------------------------------------------------------------------------------------------------------------
Auditing 57,853 50,868 (43,721)(A) 65,000
- ---------------------------------------------------------------------------------------------------------------------------
Legal 35,324 9,395 -- 44,719
- --------------------------------------------------------------------------------------------------------------------------
Postage 156,345 123,679 -- 280,024
- --------------------------------------------------------------------------------------------------------------------------
Exchange listing fees 28,340 46,351 -- 74,691
- --------------------------------------------------------------------------------------------------------------------------
Other 5,168 17,360 -- 22,528
==========================================================================================================================
Total expenses 3,230,759 4,965,007 (455,401) 7,740,365
- --------------------------------------------------------------------------------------------------------------------------
Expense reduction (60,904) (87,126) 26,838 (121,192)
==========================================================================================================================
Net expenses 3,169,855 4,877,881 (428,563) 7,619,173
- --------------------------------------------------------------------------------------------------------------------------
Net investment income 25,106,134 34,312,225 428,563 59,846,922
==========================================================================================================================
Net realized gain on investments 7,964,122 914,514 -- 8,878,636
- --------------------------------------------------------------------------------------------------------------------------
Net realized gain on written options 53,950 125,450 179,400
- --------------------------------------------------------------------------------------------------------------------------
Net realized loss on foreign currency
transactions (630,594) (2,647,564) -- (3,278,158)
- --------------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and
liabilities in foreign currencies during the
period (126,071) (103,393) -- (229,464)
- --------------------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments
during the period (8,267,917) (10,283,113) -- (18,551,030)
- --------------------------------------------------------------------------------------------------------------------------
Net loss on investments (1,006,510) (11,994,106) -- (13,000,616)
- --------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations $24,099,624 $ 22,318,119 $ 428,563 $ 46,846,306
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Proforma Combining Investment Portfolio
Master Intermediate Income Trust and
Intermediate Government Income Trust
March 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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
<PAGE>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
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%) (--%)
- -----------------------------------------------------------------------------------------------------------------------
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%)
- -----------------------------------------------------------------------------------------------------------------------
<PAGE>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
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
--------- ---------
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
<PAGE>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
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
<PAGE>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
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>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
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
<PAGE>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
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>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
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
<PAGE>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
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
<PAGE>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
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
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
<PAGE>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
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
<PAGE>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
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
<PAGE>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
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>
Intermediate
Master Government
Intermediate Income Trust Income Trust Proforma Combined
PRINCIPAL (35.7%)* PRINCIPAL ( %)* PRINCIPAL (13.6%)
Corporate Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
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>
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL (25.8%) PRINCIPAL (32.7%) PRINCIPAL (30.1%)
Foreign Government Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ARS Argentina (Republic of) deb.
Ser. A, 6 1/4s, 2019 4,035,200 $ 3,606,460 4,035,200 3,606,460
AUD Australia (Government of)
notes 8 3/4s, 2001 4,530,000 $ 3,721,524 3,780,000 3,105,377 8,310,000 6,826,901
BRC Brazil (Republic of) deb.
Ser. RG, 6 7/8s, 2006 4,210,000 3,746,900 4,210,000 3,746,900
CAD Canada (Government of)
bonds 7s, 2006 1,850,000 1,361,807 4,550,000 3,349,310 6,400,000 4,711,117
DKK Denmark (Government of)
bonds 8s, 2006 11,140,000 1,904,824 25,845,000 4,419,226 36,985,000 6,324,050
DKK Denmark (Government of)
notes 8s, 2001 11,460,000 1,986,547 11,460,000 1,986,547
FRF France Treasury notes 7s,
2000 48,106,000 9,256,399 118,547,000 22,810,426 166,653,000 32,066,825
FRF France Treasury notes 5 1/2s,
2001 39,030,000 7,136,598 120,540,000 22,040,624 159,570,000 29,177,222
FRF France Treasury bill 4 1/2s,
1998 29,110,000 5,224,740 30,120,000 5,406,017 59,230,000 10,630,757
DEM Germany (Unity Fund)
bonds 8s, 2002 18,995,000 12,795,558 18,995,000 12,795,558
DEM Germany (Federal Republic
of) notes 8s, 2002 7,915,000 5,331,763 7,915,000 5,331,763
DEM Germany (Federal Republic
of) bonds Ser. 95, 7 3/8s, 2005 5,375,000 3,542,176 5,375,000 3,542,176
DEM Germany (Federal Republic
of) bonds Ser. 95, 6 7/8s, 2005 2,260,000 1,446,211 2,260,000 1,446,211
DEM Germany (Federal Republic
of) bonds Ser. 96, 6 1/4s, 2006 3,935,000 2,413,592 29,525,000 18,109,606 33,460,000 20,523,198
DEM Germany (Federal Republic
of) bonds Ser. 118, 5 1/4s, 2001 9,575,000 5,855,832 9,575,000 5,855,832
DEM Germany (Federal Republic
of) bonds Ser. 121, 4 3/4s, 2001 18,045,000 10,777,463 33,170,000 19,810,961 51,215,000 30,588,424
USD Russian Ministry of Finance
notes 9 1/4s, 2001 2,655,000 2,575,350 3,770,000 3,656,900 6,425,000 6,232,250
ZAR South Africa (Republic of)
bonds 12s, 2005 9,185,000 1,783,374 13,315,000 2,585,261 22,500,000 4,368,635
GBP United Kingdom Treasury
bonds 7 1/2s, 2006 6,665,000 10,821,294 8,065,000 13,094,334 14,730,000 23,915,628
GBP United Kingdom Treasury
bonds 7s, 2002 3,080,000 4,973,866 7,610,000 12,289,325 10,690,000 17,263,191
GBP United Kingdom Treasury
bonds 6 3/4s, 2004 7,830,000 12,263,346 7,830,000 12,263,346
GBP United Kingdom Treasury
bonds 6s, 1999 2,480,000 3,982,033 6,125,000 9,834,658 8,605,000 13,816,691
----------- ------------ ------------
Total Foreign Government Bonds
and Notes (cost $92,374,237,
$179,870,349 and $272,244,586) $84,095,393 $172,924,289 $257,019,682
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL (23.4%) PRINCIPAL (57.2%) PRINCIPAL (44.3%)
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL (23.4%) PRINCIPAL (57.2%) PRINCIPAL (44.3%)
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Obligations (3.8%) (13.3%) (9.7%)
- ----------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds
12 3/8s, May 15, 2004 15,000,000 19,549,200 15,000,000 19,549,200
11 5/8s, November 15, 2004 20,000,000 25,496,800 20,000,000 25,496,800
10 3/4s, August 15, 2005 3,000,000 3,713,910 3,000,000 3,713,910
U.S. Treasury Notes
9 1/8s, May 15, 1999 15,020,000 15,789,775 15,020,000 15,789,775
6 1/2s, October 15, 2006 5,359,000 5,192,389 9,819,000 9,513,727 15,178,000 14,706,116
5 5/8s, November 30, 1998 3,475,000 3,434,829 3,475,000 3,434,829
----------- ------------ ------------
12,341,128 70,349,502 82,690,630
----------- ------------ ------------
Total U.S. Government and
Agency Obligation (cost
$78,109,995, $310,337,599 and
$388,447,594) $76,300,661 $302,045,745 $378,346,406
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL (1.8%) PRINCIPAL ( %) PRINCIPAL (0.7%)
Units AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL (1.8%) PRINCIPAL ( %) PRINCIPAL (0.7%)
Units AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL (1.6%) PRINCIPAL ( %) PRINCIPAL (0.6%)
Brady Bonds AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL (1.1%) PRINCIPAL ( %) PRINCIPAL (0.4%)
Asset Backed Securities AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Chemical Master Credit Card
Trust Ser. 95-2, Class A, 6.23s,
2003 $1,096,000 $1,075,450 1,096,000 $1,075,450
Contimortgage Home Equity Loan
Trust Ser. 97-1, Class M2,
7.67s, 2025 350,000 346,500 350,000 346,500
Sears Credit Account Master Trust
Ser. 95-5, Class A, 6.05s, 2004 2,255,000 2,147,888 2,255,000 2,147,888
---------- ----------
Total Asset-Backed Securities
($3,726,304, $--, $3,726,304) $3,569,838 $3,569,838
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF (1.0%) NUMBER OF ( %) NUMBER OF (0.4%)
Common Stocks SHARES VALUE SHARES VALUE SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL (1.1%) PRINCIPAL ( %) PRINCIPAL (0.4%)
Collateralized Mortgage Obligations AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF (0.8%) NUMBER OF ( %) NUMBER OF (0.3%)
Preferred Stocks SHARES VALUE SHARES VALUE SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF (0.8%) NUMBER OF ( %) NUMBER OF (0.3%)
Preferred Stocks SHARES VALUE SHARES VALUE SHARES VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL (0.6%) PRINCIPAL ( %) PRINCIPAL (0.2%)
Convertible Bonds and Notes AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EXPIRATION NUMBER OF (0.2%) NUMBER OF ( %) NUMBER OF (0.1%)
Warrants DATE WARRANTS VALUE WARRANTS VALUE WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXPIRATION NUMBER OF (0.2%) NUMBER OF ( %) NUMBER OF (0.1%)
Warrants DATE WARRANTS VALUE WARRANTS VALUE WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Purchased Options EXPIRATION DATE/ NUMBER OF ( %) NUMBER OF (0.1%) NUMBER OF (0.1%)
Outstanding STRIKE PRICE CONTRACTS VALUE CONTRACTS VALUE CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------
JPY U.S. Dollars in
exchange for
<S> <C> <C> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL (9.2%) PRINCIPAL (13.0%) PRINCIPAL (11.6%)
Short-Term Investments AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------------
* 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
</TABLE>
(RES) Restricted excluding 144A securities, as to public resale.
<PAGE>
(NON) Non-income-producing security.
(STP) The interest rate and date shown parenthetically represent the new
interest rate to be paid and the date the fund will begin receiving
interest at this rate.
(PIK) Income may be received in cash or additional securities at the
discretion of the issuer.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
TBA after the name of a security represents to be announced securities.
Master Intermediate Income Trust
Forward Currency Contracts to Buy at March 31, 1997
(aggregate face value $62,755,167)
<TABLE>
<CAPTION>
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
Intermediate Government Income Trust
Forward Currency Contracts to Buy at March 31, 1997
(aggregate face value $136,245,401)
<TABLE>
<CAPTION>
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
Proforma Combined
Forward Currency Contracts to Buy at March 31, 1997
(aggregate face value $199,000,568)
<TABLE>
<CAPTION>
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
Master Intermediate Income Trust
Forward Currency Contracts to Sell at March 31, 1997
(aggregate face value $56,939,955)
<TABLE>
<CAPTION>
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
British Pounds $14,975,121 $14,596,161 6/18/97 $(378,960)
Danish Krone 1,129,636 1,124,906 6/18/97 (4,730)
Deutschemarks 16,929,483 16,792,127 6/18/97 (137,356)
French Francs 10,644,652 10,627,140 6/18/97 (17,512)
Japanese Yen 6,354,915 6,461,259 6/18/97 106,344
Swedish Krona 2,087,752 2,056,407 6/18/97 (31,345)
Swiss Francs 5,289,817 5,281,955 6/18/97 (7,862)
- -----------------------------------------------------------------------------------
$(471,421)
</TABLE>
Intermediate Government Income Trust
Forward Currency Contracts to Sell at March 31, 1997
(aggregate face value $114,972,551)
<TABLE>
<CAPTION>
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
British Pounds $39,696,726 $38,890,071 6/18/97 $ (806,655)
Canadian Dollars 2,206,803 2,247,781 6/18/97 40,978
Deutschemarks 16,203,519 16,083,518 6/18/97 (120,001)
French Francs 27,110,630 27,062,559 6/18/97 (48,071)
Japanese Yen 13,079,698 13,294,949 6/18/97 215,251
Swedish Krona 5,274,875 5,193,810 6/18/97 (81,065)
Swiss Francs 12,217,968 12,199,863 6/18/97 (18,105)
- ------------------------------------------------------------------------------------
$ (817,668)
</TABLE>
Proforma Combined
Forward Currency Contracts to Sell at March 31, 1997
(aggregate face value $171,912,506)
<TABLE>
<CAPTION>
Unrealized
Aggregate Face Delivery Appreciation/
Market Value Value Date (Depreciation)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
British Pounds $54,671,847 $53,486,232 6/18/97 $ (1,185,615)
Canadian Dollars 2,206,803 2,247,781 6/18/97 40,978
Danish Krone 1,129,636 1,124,906 6/18/97 (4,730)
Deutschemarks 33,133,002 32,875,645 6/18/97 (257,357)
French Francs 37,755,282 37,689,699 6/18/97 (65,583)
Japanese Yen 19,434,613 19,756,208 6/18/97 321,595
Swedish Krona 7,362,627 7,250,217 6/18/97 (112,410)
Swiss Francs 17,507,785 17,481,818 6/18/97 (25,967)
- ------------------------------------------------------------------------------------
$ (1,289,089)
</TABLE>
<PAGE>
PUTNAM MASTER INTERMEDIATE INCOME TRUST
FORM N-14
PART C
OTHER INFORMATION
Item 15. Indemnification
The information required by this item is incorporated herein by reference to
the Registrant's Initial Registration Statement on Form N-2 under the
Investment Company Act of 1940 (File No. 811-5498).
Item 16. Exhibits
1. Agreement and Declaration of Trust dated May 10, 1988, as amended April 15,
1988--Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-14 filed on July 28, 1997
("Pre-Effective Amendment No. 1")
2. By-Laws, as amended July 7, 1991--- Incorporated by reference to
Pre-Effective Amendment No. 1.
3. Not applicable.
4. Agreement and Plan of Reorganization--constitutes Appendix A to Part A
hereof.
5a. Portions of Agreement and Declaration of Trust Relating to Shareholders'
Rights--- Incorporated by reference to Pre-Effective Amendment No. 1.
5b. Portions of By-Laws Relating to Shareholders' Rights--- Incorporated by
reference to Pre-Effective Amendment No. 1.
6. Management Contract dated July 11, 1991--- Incorporated by reference to
Pre-Effective Amendment No. 1.
7. Not applicable.
8. Retirement Plan of the Trustees--Incorporated by reference to Registrant's
Registration Statement on Form N-14 filed on June 2, 1997 (File Nos. 811-5498,
333-28271).
9. Custodian Agreement with Putnam Fiduciary Trust Company dated May 3, 1991,
as amended July 13, 1992--Incorporated by reference to Registrant's
Registration Statement on Form N-14 filed on June 2, 1997 (File Nos. 811-5498,
333-28271).
10. Not applicable.
11. Opinion of Ropes & Gray--Incorporated by reference to Registrant's
Registration Statement on Form N-14 filed on June 2, 1997 (File Nos. 811-5498,
333-28271).
12. Internal Revenue Service Private Letter Ruling--Exhibit 1.
13a. Investor Servicing Agreement dated July 1, 1991 with Putnam Fiduciary
Trust Company--Incorporated by reference to Registrant's Registration Statement
on Form N-14 filed on June 2, 1997 (File Nos. 811-5498, 333-28271).
13b. Dividend Reinvestment Plan Agency Agreement, dated October 15, 1993--
Incorporated by reference to Registrant's Registration Statement on Form N-14
filed on June 2, 1997 (File Nos. 811-5498, 333-28271).
14a. Consent of Price Waterhouse LLP Independent Accountants to the Putnam
Intermediate Government Income Trust--Exhibit 2.
14b. Consent of Coopers & Lybrand L.L.P. Independent Accountants to the Putnam
Master Intermediate Income Trust--Exhibit 3.
15. Not applicable.
16a. Power of Attorney--Incorporated by reference to Registrant's Registration
Statement on Form N-14 filed on June 2, 1997 (File Nos. 811-5498, 333-28271).
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
<PAGE>
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.
<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.
<PAGE>
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 19th day of September, 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.
<TABLE>
<S> <C>
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
/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
September 19, 1997
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------------------------------------------------------------------------------------------
<S> <C>
99.1 Internal Revenue Service Private Letter Ruling regarding the tax consequences of the proposed
reorganization--Exhibit 1.
99.2 Consent of Price Waterhouse LLP Independent Accountants to the Putnam Intermediate
Government Income Trust--Exhibit 2.
99.3 Consent of Coopers Lybrand L.L.P. Independent Accountants to the Putnam Master Intermediate
Income Trust--Exhibit 3.
</TABLE>
EX-99.1
EX 99.B
Index Number 368.04-00
Susan A. Johnston Matthew B. Krasner
Ropes & Gray
One International Place (202) 622-7550
Boston, MA 02110
CC:DOM:Corp:5 PLR 110312-97
SEP 5 1997
Acquiring -- Putnam Master Intermediate Income Trust EIN: 04-6584465
Target -- Putnam Intermediate Government Income Trust EIN: 04-3008388
Management -- Putnam Investment Management, Inc.
V -- 325,734,652
W -- 528,329,912
"This document may not be used or cited as precedent.
Section 611Q(i)(3) of the Internal Revenue Code."
Dear Ms. Johnston,
This is in response to a letter dated May 23, 1997, requesting rulings as
to the federal income tax consequences of a proposed transaction. The
information submitted is summarized below.
Acquiring operates as a diversified closed end, management investment
company under the Investment Company Act of 1940 ("Act") whose shares are
traded on the New York Stock Exchange. It is managed by Management. Acquiring
has elected to be a regulated investment company for federal income tax
purposes under [Section Mark]851 of the Code. On March 31, 1997, Acquiring's
net asset value was approximately $v.
Target operates as a diversified closed end, management investment company
under the Act whose shares are traded on the New York Stock Exchange. It is
also managed by Management. Target has elected to be a regulated investment
company for federal income tax purposes under [Section Mark]851. On March 31,
1997, Target's net asset value was approximately $w.
Acquiring and Target each invest in fixed income securities and have
similar investment objectives. For what are expressed to be valid business
purposes, Acquiring will acquire all of the properties and assets of Target
other than those distributed as set forth in representation (1) solely in
exchange for Acquiring shares (including fractional shares) and the assumption
by
<PAGE>
PLR 110312-97
-2-
Acquiring of all of the liabilities of Target. As soon as practicable after
the exchange of Target's assets for shares of Acquiring, Target will distribute
all of the Acquiring shares received in the reorganization to its shareholders
in complete liquidation.
The following representations have been made in connection with the
proposed transaction:
(a) The fair market value of the shares to be received by each Target
shareholder will be approximately equal to the fair market value of the Target
shares surrendered in the exchange (calculated with reference to net asset
value rather than trading price).
(b) There is no plan or intention by the shareholders of Target who own 5
percent or more of the Target shares, and to the best of the knowledge of the
management of Target, there is no plan or intention on the part of the
remaining shareholders of Target to sell, exchange, or otherwise dispose of a
number of Acquiring shares received in the reorganization that would reduce the
Target shareholders' ownership of Acquiring shares to a number of shares having
a value, as of the date of the reorganization, of less than 50 percent of the
value of all of the formerly outstanding shares of Target as of the same date.
For purposes of this representation, shares of Target stock exchanged for cash
or other property will be treated as outstanding Target shares on the date of
the reorganization. Moreover, Target shares and Acquiring shares held by Target
shareholders and otherwise sold, redeemed, or disposed or prior to the
reorganization will be considered in making this representation.
(c) Acquiring will acquire at least 90 percent of the fair market value of
the net assets and at least 70 percent of the fair market value of the gross
assets held by Target immediately prior to the reorganization. For purposes of
this representation, amounts paid by Target to shareholders who receive cash or
other property, amounts used by Target to pay its reorganization expenses, and
all redemptions and distributions (except for regular, normal distributions and
dividends declared and paid in order to ensure Target's continued qualification
as a regulated investment company and to avoid fund-level tax) made by Target
immediately preceding the transfer will be included as assets of Target held
immediately prior to the reorganization.
(d) After the reorganization, the shareholders of Target will be in
control of Acquiring within the meaning of [Section Mark]368(a)(2)(H) of the
Internal Revenue Code.
(e) Acquiring has no plan or intention to reacquire any of its shares
issued in the reorganization, except for Acquiring
<PAGE>
PLR 110312-97
-3-
shares reacquired in the ordinary course of business as a closed-end investment
company.
(f) Acquiring has no plan or intention to sell or otherwise dispose of any
of the assets of Target acquired in the reorganization, except for (i)
dispositions necessary for Acquiring to maintain its status as a diversified
investment company, and (ii) dispositions made in the ordinary course of
Acquiring's business as a closed-end investment company (i.e., dispositions
resulting from investment decisions made after the reorganization on the basis
of investment considerations independent of the reorganization). Acquiring,
however, may realign (that is, sell and reinvest the proceeds of) up to one
half of the Target portfolio in connection with the reorganization.
(g) The liabilities of Target assumed by Acquiring plus the liabilities to
which the assets are subject were incurred by Target in the ordinary course of
its business and are associated with the assets transferred.
(h) Following the reorganization, Acquiring will continue the historic
business of Target as an investment company or use a significant portion of
Target's historic business assets in its business. As used herein, the phrase
"will use a significant portion of Target's historic business assets in its
business" means that Acquiring will continue to hold a significant portion of
the assets transferred to it by Target, except for dispositions resulting from
investment decisions made on the basis of investment considerations arising
after, and independent of, the reorganization). Acquiring, however, may realign
(that is, sell and reinvest the proceeds of) up to one half of the Target
portfolio in connection with the reorganization.
(i) At the time of the reorganization, Acquiring will not have outstanding
any warrants, options, convertible securities or any other type of right
pursuant to which any person could acquire stock in Acquiring that, if
exercised or converted, would affect the Target shareholders' acquisition or
retention of control of Acquiring, as defined in [Section Mark]368(a)(2)(H).
(j) All fees and expenses of the reorganization (including any fees and
expenses incurred by Acquiring and/or Target as the direct result of the
reorganization) will be allocated ratably between Target and Acquiring in
proportion to their net assets as of the date of the reorganization, except
that the costs of proxy materials and proxy solicitations will be borne by
Target and the costs of filing the registration statement will be borne by
Acquiring, 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 Acquiring or
<PAGE>
PLR 110312-97
-4-
Target as a regulated investment company within the meaning of [Section
Mark]851 of the Code. Any reorganization expense of Target paid or assumed by
Acquiring shall be solely and directly related to the reorganization in
accordance with the guidelines established in Rev. Rul. 73-54, 1973-1 C.B. 187.
The shareholders of Target will pay their respective expenses, if any, incurred
in connection with the reorganization.
(k) There is no intercorporate indebtedness existing between Acquiring and
Target.
(l) For federal income tax purposes, each of Acquiring and Target
qualifies as a regulated investment company, and the provisions of [Double
Section Mark]851 through 855 of the Code apply to each of Acquiring and Target
for its current taxable year, and will continue to apply to each of them
through the closing date. After the reorganization, Acquiring intends to
continue to qualify as a regulated investment company. In that regard, on or
prior to the date of the reorganization, Target will distribute to its
shareholders, of record all of the excess of (i) its investment income
excludable from gross income under [Section Mark]103 of the Code over (ii) its
deductions disallowed under [Double Section Mark]265 and 171(a)(2) of the Code,
all of its investment company taxable income as defined in [Section
Mark]852(b)(2) of the Code and all of its net capital gain as such term is used
in [Section Mark]852(b)(3)(C) of the Code, after reduction by any capital loss
carryforward, for its short taxable year ending on the closing date.
(m) The fair market value of the assets of Target transferred to Acquiring
will equal or exceed the sum of the liabilities assumed by Acquiring, plus the
amount of liabilities, if any, to which the transferred assets are subject.
(n) The total adjusted basis of the assets of Target transferred to
Acquiring will equal or exceed the sum of the liabilities to be assumed by
Acquiring, plus the amount of liabilities, if any, to which the transferred
assets are subject.
(o) Target is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of [Section Mark]368(a)(3)(A) of the Code.
(p) None of the compensation received by any shareholder-employee of
Target will be separate consideration for, or allocable to, any of their shares
of Target stock; none of the shares of Acquiring stock received by any
shareholder-employee will be separate consideration for, or allocable to, any
employment agreement, and the compensation paid to any shareholder-employee
will be for services actually rendered and will be commensurate with amounts
paid to third parties bargaining at arm's-length for similar services.
<PAGE>
PLR 110312-97
-5-
Based solely on the information submitted and the representations set
forth above, it is held as follows:
(1) The acquisition by Acquiring of all of the assets of Target in
exchange solely for voting stock of Acquiring and the assumption of Target's
liabilities will constitute a reorganization within the meaning of [Section
Mark]368(a)(1)(D). For purposes of this ruling, the term "substantially all"
means at least 90 percent of the fair market value of the net assets and at
least 70 percent of the fair market value of the gross assets of Target.
Acquiring and Target will each be a "party to a reorganization" within the
meaning of [Section Mark]368(b).
(2) No gain or loss will be recognized by Target upon the transfer of its
assets to Acquiring in exchange for Acquiring stock and the assumption by
Acquiring of the liabilities of Target or on its distribution of Acquiring
stock to its shareholders on liquidation ([Double Section Mark]361(a), (c) and
357(a)).
(3) No gain or loss will be recognized to Acquiring on the receipt of the
assets of Target in exchange for stock of Acquiring ([Section Mark]1032(a)).
(4) The basis of the assets of Target in the hands of Acquiring will be
the same as the basis of such assets in the hands of Target immediately prior
to the transaction ([Section Mark]362(b)).
(5) The holding period of the assets of Target in the hands of Acquiring
will include the holding period of those assets in the hands of Target
immediately prior to the transaction ([Section Mark]1223(2)).
(6) No gain or loss will be recognized by the shareholders of Target on
the exchange of their Target stock solely for Acquiring stock ([Section
Mark]354(a)(1)).
(7) The basis to the shareholders of Target of the Acquiring stock to be
received (including fractional shares) will be the same as the Target stock
surrendered in exchange therefor ([Section Mark]358(a)).
(8) The holding period of the Acquiring stock (including fractional
shares) received by the shareholders of Target will include the period during
which they held the Target stock surrendered in exchange therefor, provided the
Target stock was held as a capital asset on the date of the exchange ([Section
Mark]1223(1)).
(9) Under [Section Mark]381(b)(1), the taxable year of Target will end on
the effective date of the proposed reorganization. As provided by [Section
Mark]381(c)(2) and [Section Mark]1.381(c)(2)-1 of the Income Tax Regulations,
Acquiring will succeed to and take into account the
<PAGE>
PLR 110312-97
-6-
earnings and profits, or deficit in earning and profits, of Target as of the
date of the transfer. Any deficit in earnings and profits of either Target or
Acquiring will be used only to offset earning and profits accumulated after the
date of transfer. Acquiring will take these items into account subject to the
conditions and limitations of [Double Section Mark]381, 382, 383 and 384 and
the regulations thereunder.
No opinion is expressed about the tax treatment of the described
transaction under other provisions of the Code and regulations or about the tax
treatment of any conditions existing at the time of, or effects resulting from,
the described transaction that are not specifically covered by the above
ruling.
This ruling is directed only to the taxpayer requesting it. Section
6110(j)(3) provides that it may not be used or cited as precedent.
Each affected taxpayer must attach a copy of this letter to the federal
income tax return for the taxable year in which the transaction covered by this
letter is consummated.
Pursuant to the power of attorney on file with this office, a copy of this
letter is being sent to the taxpayer's representative.
Sincerely yours,
Assistant Chief Counsel (Corporate)
By /s/ Charles Whedbee
-------------------------------------
Charles Whedbee
Senior Technical Reviewer, Branch
EX-99.2
CONSENT OF INDEPENDENT ACCOUNTANTS
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus/Proxy
Statement and Statement of Additional Information constituting part of this
Post-Effective Amendment No. 1 to the Registration Statement on Form N-14 (the
"Registration Statement") of Putnam Master Intermediate Income Trust of our
report dated January 13, 1997 relating to the financial statements and
financial highlights appearing in the November 30, 1996 Annual Report to the
Shareholders of Putnam Intermediate Government Income Trust, which is
incorporated by reference into such Statement of Additional Information. We
also consent to the reference to us under the heading "Independent Public
Accountants and Financial Statements" in such Statement of Additional
Information and to the reference to us under the heading "Financial Highlights"
in the Proxy Statement of Putnam Master Intermediate Income Trust.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Boston, Massachusetts
September 19, 1997
EX-99.3
CONSENT OF INDEPENDENT ACCOUNTANTS
[letterhead]
Coopers & Lybrand L.L.P.
a professional services firm
Consent of Independent Accountants
We consent to the incorporation by reference in the Prospectus and Statement of
Additional Information constituting parts of Post-Effective Amendment No. 1 to
the Registration Statement of Putnam Master Intermediate Income Trust (the
"Fund") on Form N-14 (File 333-28271) of our report dated November 14, 1996 on
our audit, of the financial statements and financial highlights of the Fund,
which report is included in the Annual Report for Putnam Master Intermediate
Income Trust for the year ended September 30, 1996, which is incorporated by
reference in the Registration Statement.
We also consent to the references to our firm under the caption "Independent
Accountants and Financial Statements" in the Statement of Additional
Information and under the heading "financial highlights" in such Prospectus.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
September 19, 1997
<PAGE>
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 PROXY CARD
- --------------------------------------------------------------------------------
Proxy for a meeting of shareholders, to be held on December 18, 1997 for Putnam
Master Intermediate 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 Master Intermediate
Income Trust on December 18, 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
- --------------------- -------- --------
Telephone
- ------------------------------------------
DO YOU HAVE ANY COMMENTS?
- ------------------------------------------
- ------------------------------------------
- ------------------------------------------
<PAGE>
DEAR SHAREHOLDER:
Your vote is important. Please help us to eliminate the expense of follow-up
mailings by signing and returning this proxy as soon as possible. A
postage-paid envelope is enclosed for your convenience.
THANK YOU!
- ------------------------------------------
PLEASE FOLD AT PERFORATION BEFORE DETACHING ADDRESS CARD
If you complete and sign the proxy, we'll vote it exactly as you tell us. If
you simply sign the proxy, it will be voted FOR Proposal 1, FOR fixing the
number of Trustees and electing Trustees as set forth in Proposal 2, and FOR
Proposal 3. 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 acquisition by Putnam Master
Intermediate Income Trust (the "Master
Fund") of all of the assets and assumption of
all the liabilities of Putnam Intermediate
Government Income Trust at net asset value
in exchange for shares of the Master 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,
W. Thomas Stephens 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.
<PAGE>
FOR AGAINST ABSTAIN
3. Proposal to ratify
the selection of [ ] [ ] [ ]
Coopers & Lybrand L.L.P.
as the independent auditors
of your fund.
Note: If you have questions on any of the Proposals, please call 1-800-225-1581.
