PROSPECTUS
FEBRUARY 1, 1996
PUTNAM INTERMEDIATE TAX EXEMPT FUND
CLASS A AND B SHARES
INVESTMENT STRATEGY: TAX-FREE
This prospectus explains concisely what you should know before
investing in Putnam Intermediate Tax Exempt Fund (the "fund").
Please read it carefully and keep it for future reference. You
can find more detailed information in the February 1, 1996
statement of additional information (the "SAI"), as amended from
time to time. For a free copy of the SAI or other information,
call Putnam Investor Services at 1-800-225-1581. The SAI has
been filed with the Securities and Exchange Commission and is
incorporated into this prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SHARES OF THE 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.
BOSTON*LONDON*TOKYO
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ABOUT THE FUND
EXPENSES SUMMARY 4
This section describes the sales charges, management fees, and
annual operating expenses that apply to the fund's various
classes of shares. Use it to help you estimate the impact of
transaction costs on your investment over time.
FINANCIAL HIGHLIGHTS 5
Study this table to see, among other things, how the fund
performed each year for the past 10 years or since it began
investment operations if it has been in operation for less
than 10 years.
OBJECTIVE 6
Read this section to make sure the fund's objective is
consistent with your own.
HOW THE FUND PURSUES ITS OBJECTIVE 6
This section explains in detail how the fund seeks its
investment objective.
RISK FACTORS 8
All investments entail some risk. Read this section to
make sure you understand certain risks that may be
involved when investing in the fund.
HOW PERFORMANCE IS SHOWN 16
This section describes and defines the measures used to
assess the fund's performance. All data are based on the
fund's past investment results and do not predict future
performance.
HOW THE FUND IS MANAGED 17
Consult this section for information about the fund's
management, allocation of the fund's expenses, and how
purchases and sales of securities are made for the fund.
ORGANIZATION AND HISTORY 18
In this section, you will learn when the fund was
introduced, how it is organized, how it may offer shares,
and who its Trustees are.
ABOUT YOUR INVESTMENT
ALTERNATIVE SALES ARRANGEMENTS 19
Read this section for descriptions of the classes of shares
this prospectus offers and for points you should consider
when making your choice.
HOW TO BUY SHARES 21
This section describes the ways you may purchase shares and
tells you the minimum amounts required to open various types
of accounts. It explains how sales charges are determined
and how you may become eligible for reduced sales charges on
each class of shares.
DISTRIBUTION PLANS 24
This section tells you what distribution fees are charged
against each class of shares.
HOW TO SELL SHARES 25
In this section you can learn how to sell shares of the
fund, either directly to the fund or through an investment
dealer.
HOW TO EXCHANGE SHARES 26
Find out in this section how you may exchange shares of the
fund for shares of other Putnam funds. The section also
explains how exchanges can be made without sales charges and
the conditions under which sales charges may be required.
HOW THE FUND VALUES ITS SHARES 27
This section explains how the fund determines the value of
its shares.
HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX
INFORMATION 28
This section describes the various options you have in
choosing how to receive dividends from the fund. It also
discusses the federal tax status of the payments and
counsels shareholders to seek specific advice about their
own situation.
ABOUT PUTNAM INVESTMENTS, INC. 30
Read this section to learn more about the companies that
provide the marketing, investment management, and
shareholder account services to Putnam funds and their
shareholders.
<PAGE>
ABOUT THE FUND
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing.
The following table summarizes your maximum transaction costs
from investing in the fund and expenses incurred in the most
recent fiscal year. The examples show the cumulative expenses
attributable to a hypothetical $1,000 investment over specified
periods.
CLASS A CLASS B
SHARES SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on
purchases (as a percentage of
offering price) 3.25% NONE*
3.0% in the
first year,
declining to
Deferred sales charge (as a 1.0% in the
percentage of the lower of fourth year, and
original purchase price or eliminated
redemption proceeds) NONE** thereafter
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Total fund
Management 12b-1 Other operating
fees fees expenses expenses
- ---------- ----- -------------------
Class A 0.60% 0.15% 0.95% 1.70%
Class B 0.60% 0.75% 0.95% 2.30%
The table is provided to help you understand the expenses of
investing in the fund and your share of the operating expenses
that the fund incurs. The management fees and "Other expenses"
in the table reflect the termination of an expense limitation
currently in effect. Actual "Other expenses" and total fund
operating expenses were 0.84% and 0.99%, respectively, for class
A shares and 0.80% and 1.55%, respectively, for class B shares.
Due to the expense limitation, the fund did not incur any
management fees during its last year.
EXAMPLES
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return, and, except as indicated, redemption
at the end of each period:
1 3 5 10
year years years years
CLASS A $59 $ 84 $122 $228
CLASS B $73 $102 $143 $249 ***
CLASS B (NO REDEMPTION) $23 $ 72 $123 $249 ***
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.
* The higher 12b-1 fees borne by class B shares may cause
long-term shareholders to pay more than the economic
equivalent of the maximum permitted front-end sales
charge on class A shares.
** A deferred sales charge of up to 1.00% is assessed on
certain redemptions of class A shares that were
purchased without an initial sales charge. See "How to
buy shares -- Class A shares."
*** Reflects conversion of class B shares to class A shares
(which pay lower ongoing expenses) approximately eight
years after purchase. See "Alternative sales
arrangements."
FINANCIAL HIGHLIGHTS
The following table presents per share financial information for
class A and class B shares. This information has been audited
and reported on by the fund's independent accountants. The
"Report of independent accountants" and financial statements
included in the fund's annual report to shareholders for the 1995
fiscal year are incorporated by reference into this prospectus.
The fund's annual report, which contains additional unaudited
performance information, is available without charge upon
request.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
(The table appears on page 5a)
<PAGE>
OBJECTIVE
PUTNAM INTERMEDIATE TAX EXEMPT FUND SEEKS AS HIGH A LEVEL OF
CURRENT INCOME EXEMPT FROM FEDERAL INCOME TAX AS PUTNAM
INVESTMENT MANAGEMENT, INC., THE FUND'S INVESTMENT MANAGER
("PUTNAM MANAGEMENT"), BELIEVES IS CONSISTENT WITH PRESERVATION
OF CAPITAL. The fund is not intended to be a complete investment
program, and there is no assurance it will achieve its objective.
HOW THE FUND PURSUES ITS OBJECTIVE
BASIC INVESTMENT STRATEGY
PUTNAM INTERMEDIATE TAX EXEMPT FUND SEEKS ITS OBJECTIVE BY
FOLLOWING THE FUNDAMENTAL INVESTMENT POLICY OF INVESTING AT LEAST
80% OF ITS NET ASSETS IN TAX-EXEMPT SECURITIES (WHICH ARE
DESCRIBED BELOW), EXCEPT WHEN INVESTING FOR DEFENSIVE PURPOSES
DURING TIMES OF ADVERSE MARKET CONDITIONS.
The fund may also invest in taxable obligations, as described
below, to the extent permitted by its investment policies, or
hold its assets in money market instruments or in cash.
The fund's investments in tax-exempt securities and taxable
obligations will be limited to securities rated at the time of
purchase not lower than the five highest grades assigned by
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A, Baa or
Ba), Standard & Poor's ("S&P") (AAA, AA, A, BBB or BB) or Fitch
Investors Service, Inc. ("Fitch") (AAA, AA, A, BBB or BB), or
unrated securities that Putnam Management determines are of
comparable quality.
Under normal market conditions, the fund expects to maintain a
portfolio of tax-exempt securities with an intermediate-term
dollar-weighted average maturity (i.e., six to ten years).
Subject to the foregoing limitations, Putnam Management will
adjust the average maturity of the investments held in the
portfolio from time to time, depending on its assessment of
relative yields and risks of securities of different maturities
and its expectations of future changes in interest rates.
ALTERNATIVE MINIMUM TAX
INTEREST INCOME FROM CERTAIN TYPES OF TAX-EXEMPT SECURITIES MAY
BE SUBJECT TO FEDERAL ALTERNATIVE MINIMUM TAX FOR INDIVIDUALS AND
CORPORATIONS.
In determining compliance with the 80% test described above it is
a fundamental policy of the fund to exclude from tax-exempt
securities any securities the interest from which may be subject
to the federal alternative minimum tax for individuals. An
investment in the fund may subject corporate shareholders to the
federal alternative minimum tax, because a portion of the tax-
exempt income is generally included in the alternative minimum
taxable income of corporations.
ALTERNATIVE INVESTMENT STRATEGIES
At times Putnam Management may judge that conditions in the
markets for tax-exempt securities make pursuing the fund's basic
investment strategy inconsistent with the best interests of its
shareholders. At such times Putnam Management may temporarily
use alternative strategies primarily designed to reduce
fluctuations in the value of the fund's assets.
In implementing these defensive strategies, the fund may invest
without limit in taxable obligations, including: obligations of
the U.S. government, its agencies or instrumentalities, or any
other fixed-income securities that Putnam Management considers
consistent with such defensive strategies. As indicated above,
under current market conditions the fund expects to maintain a
portfolio of securities with an intermediate-term dollar-weighted
average maturity. However, the fund may be primarily invested in
short-term securities for temporary defensive purposes. In such
cases, the fund's dollar-weighted average maturity may be less
than six years.
It is impossible to predict when, or for how long, the fund will
use these alternative strategies.
TAX-EXEMPT SECURITIES
TAX-EXEMPT SECURITIES INCLUDE OBLIGATIONS OF A STATE (INCLUDING
THE DISTRICT OF COLUMBIA), A TERRITORY OR A U.S. POSSESSIONS, OR
ANY OF THEIR AGENCIES, INSTRUMENTALITIES OR OTHER GOVERNMENTAL
UNITS, THE INTEREST ON WHICH, IN THE OPINION OF BOND COUNSEL, IS
EXEMPT FROM FEDERAL INCOME TAX.
These securities are issued to obtain funds for various public
purposes, such as the construction of public facilities, the
payment of general operating expenses or the refunding of
outstanding debts.
They may also be issued to finance various private activities,
including the lending of funds to public or private institutions
for the construction of housing, educational or medical
facilities, or to fund short-term cash requirements. They may
also include certain types of industrial development bonds,
private activity bonds or notes issued by public authorities to
finance privately owned or operated facilities.
Short-term tax-exempt securities may be issued as interim
financing in anticipation of tax collections, revenue receipts or
bond sales to finance various public purposes.
THE TWO PRINCIPAL CLASSIFICATIONS OF TAX-EXEMPT SECURITIES ARE
GENERAL OBLIGATION AND SPECIAL OBLIGATION (OR SPECIAL REVENUE
OBLIGATION) SECURITIES.
GENERAL OBLIGATION securities involve a pledge of the credit of
an issuer possessing taxing power and are payable from the
issuer's general unrestricted revenues. Their payment may depend
on an appropriation by the issuer's legislative body. The
characteristics and methods of enforcement of general obligation
securities vary according to the law applicable to the particular
issuer.
SPECIAL OBLIGATION (or SPECIAL REVENUE OBLIGATION) securities are
payable only from the revenues derived from a particular facility
or class of facilities, or a specific revenue source, and
generally are not payable from the unrestricted revenues of the
issuer. Industrial development bonds and private activity bonds
are in most cases special obligation securities, whose credit
quality is tied to private users of the facilities.
The fund may also invest in securities representing interests in
tax-exempt securities, known as "inverse floating obligations" or
"residual interest bonds." These obligations pay interest rates
that vary inversely with changes in the interest rates of
specified short-term tax-exempt securities or an index of
short-term tax-exempt securities. The interest rates on inverse
floating obligations or residual interest bonds will typically
decline as short-term market interest rates increase and increase
as short-term market rates decline.
These securities have the effect of providing a degree of
investment leverage. They will generally respond to changes in
market interest rates more rapidly than fixed-rate long-term
securities (typically twice as fast). As a result, the market
values of inverse floating obligations and residual interest
bonds will generally be more volatile than the market values of
fixed-rate tax-exempt securities.
RISK FACTORS
THE VALUES OF TAX-EXEMPT SECURITIES FLUCTUATE IN RESPONSE TO
CHANGES IN INTEREST RATES. A decrease in interest rates will
generally result in an increase in the value of the fund's
assets. Conversely, during periods of rising interest rates, the
value of the fund's assets will generally decline. The magnitude
of these fluctuations generally has been smaller for intermediate
term securities than for securities with longer maturities.
Although the volatility associated with intermediate term
securities may be lower than that for longer-term securities, the
yields on such securities are also generally lower.
Changes by recognized rating services 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. Changes in the value of portfolio
securities generally will not affect income derived from these
securities, but will affect the fund's net asset value.
The 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 fund's investment objective.
THE FUND MAY INVEST IN BOTH HIGHER-RATED AND LOWER-RATED TAX-
EXEMPT SECURITIES. LOWER-RATED SECURITIES ARE SECURITIES RATED
BELOW BAA BY MOODY'S OR BBB BY S&P (AND COMPARABLE UNRATED
SECURITIES), AND ARE COMMONLY KNOWN AS "JUNK BONDS." The values
of lower-rated securities generally fluctuate more than those of
higher-rated securities. In addition, the lower rating reflects
a greater possibility that the financial condition of the issuer,
or adverse changes in general economic conditions, or both, may
impair the ability of the issuer to make payments of income and
principal.
The tables below show the percentages of fund assets invested
during fiscal 1995 in securities assigned to the various rating
categories by S&P, or, if unrated by S&P, assigned to comparable
rating categories by Moody's, and unrated securities of
comparable quality:
UNRATED SECURITIES
RATED SECURITIES OF COMPARABLE QUALITY,
AS PERCENTAGE OF AS PERCENTAGE OF
RATING NET ASSETS NET ASSETS
"AAA" 31.38% --
"AA" 16.59 --
"A" 5.81 --
"Baa" 22.02 --
"Ba" 3.43 --
"BBB" 16.26 0.56%
"BB" -- 4.23
"CC" -- --
"C" -- --
"D" -- --
- ------- -------- --------
Total 95.49 4.79
Putnam Management seeks to minimize the risks of investing in
lower-rated securities through careful investment analysis.
However, the amount of information available about the financial
condition of an issuer of tax-exempt securities may not be as
extensive as that which is made available by corporations whose
securities are publicly traded. When the fund invests in tax-
exempt securities in the lower rating categories, the achievement
of the fund's goals is more dependent on Putnam Management's
ability than would be the case if the fund were investing in tax-
exempt securities in the higher rating categories. Investors
should consider carefully their ability to assume the risks of
owning shares of a mutual fund that may invest in securities in
certain of the lower rating categories.
At times, a substantial portion of the fund assets may be
invested in securities as to which the fund, by itself or
together with other funds and accounts managed by Putnam
Management and its affiliates, holds all or a major portion.
Under adverse market or economic conditions or in the event of
adverse changes in the financial condition of the issuer, the
fund could find it more difficult to sell these securities when
Putnam Management believes it advisable to do so or may be able
to sell the securities only at prices lower than if they were
more widely held. Under these circumstances, it may also be more
difficult to determine the fair value of such securities for
purposes of computing the fund's net asset value.
In order to enforce its rights in the event of a default of these
securities, the 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 the fund's operating expenses and adversely affect the
fund's net asset value. Any income derived from the fund's
ownership or operation of such assets would not be tax-exempt.
The ability of a holder of a tax-exempt security to enforce the
terms of that security in a bankruptcy proceeding may be more
limited than would be the case with respect to a privately-issued
security.
Certain securities held by the fund may permit the issuer at its
option to "call," or redeem, its securities. If an issuer were
to redeem securities held by the fund during a time of declining
interest rates, the fund may not be able to reinvest the proceeds
in securities providing the same investment return as the
securities redeemed.
The fund may invest in so-called "zero-coupon" bonds, whose
values are subject to greater fluctuation in response to changes
in market interest rates than bonds that pay interest currently.
Zero-coupon bonds are issued at a significant discount from face
value and pay interest only at maturity rather than at intervals
during the life of the security.
Zero-coupon bonds allow an issuer to avoid the need to generate
cash to meet current interest payments. Accordingly, such bonds
may involve greater credit risks than bonds paying interest
currently. The fund is required to accrue and distribute income
from zero-coupon bonds on a current basis, even though it does
not receive that income currently in cash. Thus, the fund may
have to sell other investments to obtain cash needed to make
income distributions.
The secondary market for tax-exempt securities is generally less
liquid than that for taxable fixed-income securities,
particularly in the lower rating categories. Thus it may be more
difficult for the fund to value or buy and sell certain
securities.
Certain investment grade tax-exempt securities in which the fund
may invest share some of the risk factors discussed above with
respect to lower-rated securities.
FOR ADDITIONAL INFORMATION CONCERNING THE RISKS ASSOCIATED WITH
INVESTING IN SECURITIES IN THE LOWER RATING CATEGORIES, SEE THE
SAI.
DIVERSIFICATION AND CONCENTRATION POLICIES
The fund is a "diversified" investment company under the
Investment Company Act of 1940. This means that with respect to
75% of its total assets the fund may not invest more than 5% of
its total assets in the securities of any one issuer (except U.S.
government securities). The remaining 25% of the fund's total
assets is not subject to this restriction. To the extent the
fund invests a significant portion of its assets in the
securities of a particular issuer, the fund will be subject to an
increased risk of loss if the market value of such issuer's
securities declines.
THE FUND WILL NOT INVEST MORE THAN 25% OF ITS TOTAL ASSETS IN ANY
ONE INDUSTRY. Governmental issuers of tax-exempt securities are
not considered part of any "industry." However, for this purpose
tax-exempt securities backed only by the assets and revenues of
nongovernmental users may be deemed to be issued by such
nongovernmental users. Thus, the 25% limitation would apply to
these obligations.
It is possible that the fund may invest more than 25% of its
assets in a broader segment of the market for tax-exempt
securities, such as revenue obligations of hospitals and other
health care facilities, housing revenue obligations, or airport
revenue obligations. This would be the case only if Putnam
Management determined that the yields available from obligations
in a particular segment of the market justified the additional
risks associated with such concentration.
Although these obligations could be supported by the credit of
governmental issuers or by the credit of nongovernmental issuers
engaged in a number of industries, economic, business, political
and other developments generally affecting the revenues of such
issuers may have a general adverse effect on all tax-exempt
securities in a particular market segment. (Examples would
include proposed legislation or pending court decisions affecting
the financing of such projects and market factors affecting the
demand for their services or products).
The fund reserves the right to invest more than 25% of its assets
in industrial development securities and private activity
securities. The fund also reserves the right to invest more than
25% of its assets in securities relating to any state or states
(including the District of Columbia), U.S. territories or
possessions, or any of their political subdivisions. As a result
of such an investment, the performance of the fund may be
especially affected by factors pertaining to the economy of the
relevant governmental issuers and other factors specifically
affecting the ability of issuers of such securities to meet their
obligations. As a result, the value of the fund's shares may
fluctuate more widely than the value of shares of a portfolio
investing in securities relating to a greater number of
governmental issuers. The ability of governmental issuers to
meet their obligations will depend primarily on the availability
of tax and other revenues to those governments and on their
fiscal conditions generally. The amounts of tax and other
revenues available to governmental issuers may be affected from
time to time by economic, political, and demographic conditions
within the particular state, territory or possession. In
addition, constitutional or statutory restrictions may limit a
government's power to raise revenues or increase taxes. The
availability of federal, state, and local aid to issuers of such
securities may also affect their ability to meet their
obligations. Payments of principal and interest on limited
obligation securities will depend on the economic condition of
the facility or specific revenue source from whose revenues the
payments will be made, which in turn could be affected by
economic, political, and demographic conditions in the particular
state, territory or possession. Any reduction in the actual or
perceived ability of an issuer of tax-exempt securities in a
particular state, territory or possession to meet its obligations
(including a reduction in the rating of its outstanding
securities) would likely affect adversely the market value and
marketability of its obligations and could affect adversely the
values of tax-exempt securities issued by others in that state,
territory or possession as well.
INVESTMENTS IN PREMIUM SECURITIES
During a period of declining interest rates, many of the fund's
portfolio investments will likely bear coupon rates that are
higher than current market rates, regardless of whether these
securities were originally purchased at a premium. These
securities would generally carry market values greater than the
principal amounts payable on maturity, which would be reflected
in the net asset value of the fund's shares.
The values of such "premium" securities tend to approach the
principal amount as the securities approach maturity (or call
price in the case of securities approaching their first call
date). As a result, an investor who purchases shares of the fund
during these periods would initially receive higher monthly
distributions (derived from the higher coupon rates payable on
the fund's investments) than might be available from alternative
investments bearing current market interest rates. But the
investor may face an increased risk of capital loss as these
higher coupon securities approach maturity (or first call date).
In evaluating the potential performance of an investment in the
fund, investors may find it useful to compare the fund's current
dividend rate with the fund's "yield," which is computed on a
yield-to-maturity basis in accordance with SEC regulations and
which reflects amortization of market premiums. See "How
performance is shown."
PORTFOLIO TURNOVER
The length of time the fund has held a particular security is not
generally a consideration in investment decisions. A change in
the securities held by the fund is known as "portfolio turnover."
As a result of the fund's investment policies, under certain
market conditions the fund's portfolio turnover rate may be
higher than that of other mutual funds.
Portfolio turnover generally involves some expense to the fund,
including brokerage commissions or dealer markups and other
transaction costs on the sale of securities and reinvestment in
other securities. These transactions may result in realization
of taxable capital gains. Portfolio turnover rates for the life
of the fund are shown in the section, "Financial highlights."
FINANCIAL FUTURES AND OPTIONS
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS FOR
HEDGING PURPOSES.
Futures contracts on the Municipal Bond Index are traded on the
Chicago Board of Trade. This index is intended to represent a
numerical measure of market performance for long-term tax-exempt
bonds. An "index future" is a contract to buy or sell units of a
particular securities index at an agreed price on a specified
future date. Depending on the change in value of the index
between the time the fund enters into and terminates an index
futures contract, the fund realizes a gain or loss. The fund may
purchase and sell futures contracts on the index (or any other
tax-exempt bond index approved for trading by the Commodity
Futures Trading Commission) to hedge against general changes in
market values of tax-exempt securities that the fund owns or
expects to purchase. The fund may also purchase and sell put and
call options on index futures or on the indexes directly, in
addition to or as an alternative to purchasing and selling index
futures.
For hedging purposes, the fund may also purchase and sell futures
contracts and related options on U.S. Treasury securities,
including U.S. Treasury bills, notes and bonds ("U.S. government
securities") and options directly on U.S. government securities.
U.S. government securities futures and options would be used for
purposes similar to index futures and options.
In addition, the fund may purchase put and call options on, or
warrants to purchase, tax-exempt securities, either directly or
through custodial arrangements in which the fund and other
investors own an interest in one or more options on tax-exempt
securities.
THE USE OF FUTURES AND OPTIONS INVOLVES CERTAIN SPECIAL RISKS AND
MAY RESULT IN REALIZATION OF TAXABLE INCOME OR CAPITAL GAINS.
FUTURES AND OPTIONS TRANSACTIONS INVOLVE COSTS AND MAY RESULT IN
LOSSES.
Certain risks arise from the possibility of imperfect
correlations between movements in the prices of financial futures
and options and movements in the prices of the underlying bond
index or U.S. government securities or of the tax-exempt
securities that are the subject of the hedge. The successful use
of futures and options further depends on Putnam Management's
ability to forecast interest rate movements correctly.
Other risks arise from the potential inability to close out
futures or options positions. There can be no assurance that a
liquid secondary market will exist for any futures contract or
option at a particular time. Certain provisions of the Internal
Revenue Code and certain regulatory requirements may limit the
use of futures and options transactions.
A MORE DETAILED EXPLANATION OF FINANCIAL FUTURES AND OPTIONS
TRANSACTIONS AND THE RISKS ASSOCIATED WITH THEM IS INCLUDED IN
THE SAI.
OTHER INVESTMENT PRACTICES
THE FUND MAY ALSO ENGAGE IN THE FOLLOWING INVESTMENT PRACTICES,
EACH OF WHICH MAY RESULT IN TAXABLE INCOME OR CAPITAL GAINS AND
INVOLVES CERTAIN SPECIAL RISKS. THE SAI CONTAINS MORE DETAILED
INFORMATION ABOUT THESE PRACTICES, INCLUDING LIMITATIONS DESIGNED
TO REDUCE THESE RISKS.
REPURCHASE AGREEMENTS AND FORWARD COMMITMENTS. The fund may enter
into repurchase agreements on up to 25% of its assets. These
transactions must be fully collateralized at all times. The 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 to the
fund if the other party should default on its obligation and the
fund is delayed or prevented from recovering the collateral or
completing the transaction.
DERIVATIVES
Certain of the instruments in which the fund will invest, such as
futures contracts, options, forward contracts and inverse
floating obligations, are considered to be "derivatives."
Derivatives are financial instruments whose value depends upon,
or is derived from, the value of an underlying asset, such as a
security or an index. Further information about these
instruments and the risk involved in their use is included
elsewhere in this prospectus and in the SAI.
LIMITING INVESTMENT RISK
SPECIFIC INVESTMENT RESTRICTIONS HELP THE FUND LIMIT INVESTMENT
RISKS FOR ITS SHAREHOLDERS. These restrictions prohibit the fund
from investing more than:
(a) (with respect to 75% of its assets) 5% of its total assets in
securities of any one issuer (other than the U.S. government);*
(b) 25% of its total assets in any one industry;* or
(c) 15% of its net assets in any combination of securities that
are not readily marketable, in securities restricted as to resale
(excluding securities determined by the Trustees (or the person
designated by the Trustees to make such determinations) to be
readily marketable), and in repurchase agreements maturing in
more than seven days.
Restrictions marked with an asterisk (*) above are summaries of
fundamental investment policies. See the SAI for the full text
of these policies and the fund's other fundamental investment
policies. Except for investment policies designated as
fundamental in this prospectus or the SAI, the investment
policies described in this prospectus and in the SAI are not
fundamental policies. The Trustees may change any
non-fundamental investment policies without shareholder approval.
As a matter of policy, the Trustees would not materially change
the fund's investment objective without shareholder approval.
HOW PERFORMANCE IS SHOWN
THE FUND'S INVESTMENT PERFORMANCE MAY FROM TIME TO TIME BE
INCLUDED IN ADVERTISEMENTS ABOUT THE FUND. "Yield" for each class
of shares is calculated by dividing the annualized net investment
income per share during a recent 30-day period by the maximum
public offering price per share of the class on the last day of
that period.
For purposes of calculating yield, net investment income is
calculated in accordance with SEC regulations and may differ from
net investment income as determined for financial reporting
purposes. SEC regulations require that net investment income be
calculated on a "yield-to-maturity" basis, which has the effect
of amortizing any premiums or discounts in the current market
value of fixed income securities. The current dividend rate is
based on net investment income as determined for tax purposes,
which may not reflect amortization in the same manner. See "How
the fund pursues its objective -- Investments in premium
securities."
Yield is based on the price of shares, including the maximum
initial sales charge in the case of class A shares, but does not
reflect any contingent deferred sales charge in the case of class
B shares. "Tax-equivalent" yield for each class of shares shows
the effect on performance of the tax-exempt status of
distributions received from the fund. It reflects the
approximate yield that a taxable investment must earn for
shareholders at stated income levels to produce an after-tax
yield equivalent to a class's tax-exempt yield.
"Total return" for the one-, five- and ten-year periods (or for
the life of a class, if shorter) through the most recent calendar
quarter represents the average annual compounded rate of return
on an investment of $1,000 in the fund invested at the maximum
public offering price (in the case of class A shares) or
reflecting the deduction of any applicable contingent deferred
sales charge (in the case of class B shares). Total return may
also be presented for other periods or based on investment at
reduced sales charge levels. Any quotation of investment
performance not reflecting the maximum initial sales charge or
contingent deferred sales charge would be reduced if the sales
charge were used.
ALL DATA ARE BASED ON PAST INVESTMENT RESULTS AND DO NOT PREDICT
FUTURE PERFORMANCE.
Investment performance, which will vary, is based on many
factors, including market conditions, the composition of the
fund's portfolio, the fund's operating expenses and which class
of shares the investor purchases. Investment performance also
often reflects the risks associated with the fund's investment
objective and policies. These factors should be considered when
comparing the fund's investment results with those of other
mutual funds and other investment vehicles.
Quotations of investment performance for any period when an
expense limitation was in effect will be greater than if the
limitation had not been in effect. The fund's performance may be
compared to that of various indexes. See the SAI.
HOW THE FUND IS MANAGED
THE TRUSTEES OF THE FUND ARE RESPONSIBLE FOR GENERALLY OVERSEEING
THE CONDUCT OF THE FUND'S BUSINESS. Subject to such policies as
the Trustees may determine, Putnam Management furnishes a
continuing investment program for the fund and makes investment
decisions on its behalf. Subject to the control of the Trustees,
Putnam Management also manages the fund's other affairs and
business.
The fund pays Putnam Management a quarterly fee for these
services based on the fund's average net assets. See "Expenses
summary" and the SAI.
The following officer of Putnam Management has had primary
responsibility for the day-to-day management of the fund's
portfolio since the year stated below:
Business experience
Year (at least 5 years)
------ --------------------
James M. Prusko 1995 Employed as an investment
Assistant Vice professional by Putnam
President Management since 1992. Prior
to August, 1992, Mr. Prusko was
a Sales and Trading Associate
at Salomon Brothers.
The fund pays all expenses not assumed by Putnam Management,
including Trustees' fees, auditing, legal, custodial, investor
servicing and shareholder reporting expenses, and payments under
its distribution plans (which are in turn allocated to the
relevant class of shares). The fund also reimburses Putnam
Management for the compensation and related expenses of certain
officers of the fund and their staff who provide administrative
services to the fund. The total reimbursement is determined
annually by the Trustees.
Putnam Management places all orders for purchases and sales of
the fund's securities. In selecting broker-dealers, Putnam
Management may consider research and brokerage services furnished
to it and its affiliates. Subject to seeking the most favorable
price and execution available, Putnam Management may consider
sales of shares of the fund (and, if permitted by law, of the
other Putnam funds) as a factor in the selection of
broker-dealers.
ORGANIZATION AND HISTORY
Putnam Intermediate Tax Exempt Fund is a Massachusetts business
trust organized on March 7, 1994. A copy of the Agreement and
Declaration of Trust, which is governed by Massachusetts law, is
on file with the Secretary of State of The Commonwealth of
Massachusetts.
The fund is an open-end, diversified management investment
company with an unlimited number of authorized shares of
beneficial interest. Shares of the fund may be divided, without
shareholder approval into two or more series of shares
representing separate investment portfolios.
Any such series of shares may be divided without shareholder
approval into two or more classes of shares having such
preferences and special or relative rights and privileges as the
Trustees determine. The fund's shares are not currently divided
into series. The fund's shares are currently divided into two
classes. Only the fund's class A and B shares are offered by
this prospectus. The fund may also offer other classes of shares
with different sales charges and expenses. Because of these
different sales charges and expenses, the investment performance
of the classes will vary. For more information, including your
eligibility to purchase any other class of shares, contact your
investment dealer or Putnam Mutual Funds (at 1-800-225-1581).
Each share has one vote, with fractional shares voting
proportionally. Shares of each class will vote together as a
single class except when otherwise required by law or as
determined by the Trustees. Shares are freely transferable, are
entitled to dividends as declared by the Trustees, and, if the
fund were liquidated, would receive the net assets of the fund.
The fund may suspend the sale of shares at any time and may
refuse any order to purchase shares. Although the fund is not
required to hold annual meetings of its shareholders,
shareholders holding at least 10% of the outstanding shares
entitled to vote have the right to call a meeting to elect or
remove Trustees, or to take other actions as provided in the
Agreement and Declaration of Trust.
If you own fewer shares than a minimum amount set by the Trustees
(presently 20 shares), the fund may choose to redeem your shares.
You will receive at least 30 days' written notice before the fund
redeems your shares, and you may purchase additional shares at
any time to avoid a redemption. The fund may also redeem shares
if you own shares above a maximum amount set by the Trustees.
There is presently no maximum, but the Trustees may establish one
at any time, which could apply to both present and future
shareholders.
THE FUND'S TRUSTEES: GEORGE PUTNAM,* CHAIRMAN. President of the
Putnam funds. Chairman and Director of Putnam Management and
Putnam Mutual Funds Corp. ("Putnam Mutual Funds"). Director,
Marsh & McLennan Companies, Inc.; WILLIAM F. POUNDS, VICE
CHAIRMAN. Professor of Management, Alfred P. Sloan School of
Management, Massachusetts Institute of Technology; JAMESON ADKINS
BAXTER, President, Baxter Associates, Inc.; HANS H. ESTIN, Vice
Chairman, North American Management Corp.; JOHN A. HILL,
Principal and Managing Director, First Reserve Corporation;
ELIZABETH T. KENNAN, President Emeritus and Professor, Mount
Holyoke College; LAWRENCE J. LASSER,* Vice President of the
Putnam funds. President, Chief Executive Officer and Director of
Putnam Investments, Inc. and Putnam Management. Director, Marsh
& McLennan Companies, Inc.; ROBERT E. PATTERSON, Executive Vice
President, Cabot Partners Limited Partnership; DONALD S.
PERKINS,* Director of various corporations, including AT&T,
Kmart Corporation and Time Warner Inc.; GEORGE PUTNAM, III,*
President, New Generation Research, Inc.; ELI SHAPIRO, Alfred P.
Sloan Professor of Management, Emeritus, Alfred P. Sloan School
of Management, Massachusetts Institute of Technology; A.J.C.
SMITH,* Chairman, Chief Executive Officer and Director, Marsh &
McLennan Companies, Inc.; and W. NICHOLAS THORNDIKE, Director of
various corporations and charitable organizations, including Data
General Corporation, Bradley Real Estate, Inc. and Providence
Journal Co. Also, Trustee of Massachusetts General Hospital and
Eastern Utilities Associates. The fund's Trustees are also
Trustees of the other Putnam funds. Those marked with an
asterisk (*) are or may be deemed to be "interested persons" of
the fund, Putnam Management or Putnam Mutual Funds.
ABOUT YOUR INVESTMENT
ALTERNATIVE SALES ARRANGEMENTS
This prospectus offers investors two classes of shares that bear
sales charges in different forms and amounts and that bear
different levels of expenses:
CLASS A SHARES. An investor who purchases class A shares pays a
sales charge at the time of purchase. As a result, class A shares
are not subject to any charges when they are redeemed, except for
sales at net asset in excess of $1 million that are subject to a
contingent deferred sales charge ("CDSC"). Certain purchases of
class A shares qualify for reduced sales charges. Class A shares
bear a lower 12b-1 fee than class B shares. See "How to buy
shares -- Class A shares" and "Distribution plans."
CLASS B SHARES. Class B shares are sold without an initial sales
charge, but are subject to a CDSC if redeemed within a specified
period after purchase. Class B shares also bear a higher 12b-1
fee than class A shares. Class B shares automatically convert
into class A shares, based on relative net asset value,
approximately eight years after purchase. For more information
about the conversion of class B shares, see the SAI. This
discussion will include information about how shares acquired
through reinvestment of distributions are treated for conversion
purposes. The discussion will also note certain circumstances
under which a conversion may not occur. Class B shares provide
an investor the benefit of putting all of the investor's dollars
to work from the time the investment is made. Until conversion,
class B shares will have a higher expense ratio and pay lower
dividends than class A shares because of the higher 12b-1 fee.
See "How to buy shares -- Class B shares" and "Distribution
plans."
WHICH ARRANGEMENT IS BEST FOR YOU? The decision as to which
class of shares provides a more suitable investment for an
investor depends on a number of factors, including the amount and
intended length of the investment. Investors making investments
that qualify for reduced sales charges might consider class A
shares. Investors who prefer not to pay an initial sales charge
might consider class B shares. Orders for class B shares for
$250,000 or more will be treated as orders for class A shares or
declined. For more information about these sales arrangements,
consult your investment dealer or Putnam Investor Services.
Shares may only be exchanged for shares of the same class of
another Putnam fund. See "How to exchange shares."
HOW TO BUY SHARES
You can open a fund account with as little as $500 and make
additional investments at any time with as little as $50. You
can buy fund shares three ways - through most investment dealers,
through Putnam Mutual Funds (at 1-800-225-1581), or through a
systematic investment plan. If you do not have a dealer, Putnam
Mutual Funds can refer you to one.
BUYING SHARES THROUGH PUTNAM MUTUAL FUNDS. Complete an order
form and write a check for the amount you wish to invest, payable
to the fund. Return the completed form and check to Putnam
Mutual Funds, which will act as your agent in purchasing shares
through your designated investment dealer.
BUYING SHARES THROUGH SYSTEMATIC INVESTING. You can make regular
investments of $25 or more per month through automatic deductions
from your bank checking or savings account. Application forms
are available from your investment dealer or through Putnam
Investor Services.
Shares are sold at the public offering price based on the net
asset value next determined after Putnam Investor Services
receives your order. In most cases, in order to receive that
day's public offering price, Putnam Investor Services must
receive your order before the close of regular trading on the New
York Stock Exchange. If you buy shares through your investment
dealer, the dealer must receive your order before the close of
regular trading on the New York Stock Exchange to receive that
day's public offering price.
CLASS A SHARES
The public offering price of class A shares is the net asset
value plus a sales charge that varies depending on the size of
your purchase. The fund receives the net asset value. The sales
charge is allocated between your investment dealer and Putnam
Mutual Funds as shown in the following table, except when Putnam
Mutual Funds, in its discretion, allocates the entire amount to
your investment dealer.
SALES CHARGE AMOUNT OF
AS A PERCENTAGE OF: SALES CHARGE
------------------- REALLOWED TO
NET DEALERS AS A
AMOUNT OF TRANSACTION AMOUNT OFFERING PERCENTAGE OF
AT OFFERING PRICE ($) INVESTED PRICE OFFERING PRICE
- -----------------------------------------------------------------
Under 100,000 3.36% 3.25% 3.00%
100,000 but under 250,000 2.56 2.50 2.25
250,000 but under 500,000 2.04 2.00 1.75
500,000 but under 1,000,000 1.52 1.50 1.25
There is no initial sales charge on purchases of class A shares
of $1 million or more. However, a CDSC of 1.00% or 0.50%,
respectively, will be imposed if you redeem these shares within
the first or second year after purchase, based on the lower of
the shares' cost and current net asset value. Any shares
acquired by reinvestment of distributions will be redeemed
without a CDSC.
<PAGE>
Shares purchased by certain investors investing $1 million or
more who have made arrangements with Putnam Mutual Funds and
whose dealer of record waived the commission as described below
are not subject to the CDSC. In determining whether a CDSC is
payable, the fund will first redeem shares not subject to any
charge. Putnam Mutual Funds receives the entire amount of any
CDSC you pay. See the SAI for more information about the CDSC.
Putnam Mutual Funds pays investment dealers of record commissions
on sales of class A shares of $1 million or more based on an
investor's cumulative purchases during the one-year period
beginning with the date of the initial purchase at net asset
value. Each subsequent one-year measuring period for these
purposes will begin with the first net asset value purchase
following the end of the prior period. Such commissions are paid
at the rate of 1.00% of the amount under $3 million, 0.50% of the
next $47 million and 0.25% thereafter.
CLASS B SHARES
Class B shares are sold without an initial sales charge, although
a CDSC will be imposed if you redeem shares within a specified
period after purchase, as shown in the table below. The
following types of shares may be redeemed without charge at any
time: (i) shares acquired by reinvestment of distributions and
(ii) shares otherwise exempt from the CDSC, as described in "How
to buy shares -- General" below. For other shares, the amount of
the charge is determined as a percentage of the lesser of the
current market value or the cost of the shares being redeemed.
YEAR 1 2 3 4 5+
- -----------------------------------------------------------------
CHARGE 3% 3% 2% 1% 0%
In determining whether a CDSC is payable on any redemption, the
fund will first redeem shares not subject to any charge, and then
shares held longest during the CDSC period. For this purpose,
the amount of any increase in a share's value above its initial
purchase price is not regarded as a share exempt from the CDSC.
Thus, when a share that has appreciated in value is redeemed
during the CDSC period, a CDSC is assessed only on its initial
purchase price. For information on how sales charges are
calculated if you exchange your shares, see "How to exchange
shares." Putnam Mutual Funds receives the entire amount of any
CDSC you pay.
<PAGE>
GENERAL
YOU MAY BE ELIGIBLE TO BUY CLASS A SHARES AT REDUCED SALES
CHARGES.
Consult your investment dealer or Putnam Mutual Funds for details
about Putnam's combined purchase privilege, cumulative quantity
discount, statement of intention, group sales plan, employee
benefit plans, and other plans. Descriptions are also included
in the order form and in the SAI.
The fund may sell class A and class B shares at net asset value
without an initial sales charge or a CDSC to the fund's current
and retired Trustees (and their families), current and retired
employees (and their families) of Putnam Management and
affiliates, registered representatives and other employees (and
their families) of broker-dealers having sales agreements with
Putnam Mutual Funds, employees (and their families) of financial
institutions having sales agreements with Putnam Mutual Funds (or
otherwise having an arrangement with a broker-dealer or financial
institution with respect to sales of fund shares), financial
institution trust departments investing an aggregate of $1
million or more in Putnam funds, clients of certain
administrators of tax-qualified plans, tax-qualified plans when
proceeds from repayments of loans to participants are invested
(or reinvested) in Putnam funds, "wrap accounts" for the benefit
of clients of broker-dealers, financial institutions or financial
planners adhering to certain standards established by Putnam
Mutual Funds, and investors meeting certain requirements who sold
shares of certain Putnam closed-end funds pursuant to a tender
offer by the closed-end fund.
In addition, the fund may sell shares at net asset value without
an initial sales charge or a CDSC in connection with the
acquisition by the fund of assets of an investment company or
personal holding company. The CDSC will be waived on redemptions
of shares arising out of the death or post-purchase disability of
a shareholder or settlor of a living trust account, and on
redemptions in connection with certain withdrawals from IRA or
other retirement plans. Up to 12% of the value of shares subject
to a systematic withdrawal plan may also be redeemed each year
without a CDSC. The SAI contains additional information about
purchasing the fund's shares at reduced sales charges.
Shareholders of other Putnam funds may be entitled to exchange
their shares for, or reinvest distributions from their funds in,
shares of the fund at net asset value.
If you are considering redeeming or exchanging shares or
transferring shares to another person shortly after purchase, you
should pay for those shares with a certified check to avoid any
delay in redemption, exchange or transfer. Otherwise the fund
may delay payment until the purchase price of those shares has
been collected or, if you redeem by telephone, until 15 calendar
days after the purchase date. To eliminate the need for
safekeeping, the fund will not issue certificates for your shares
unless you request them.
Putnam Mutual Funds will from time to time, at its expense,
provide additional promotional incentives or payments to dealers
that sell shares of the Putnam funds. These incentives or
payments may include payments for travel expenses, including
lodging, incurred in connection with trips taken by invited
registered representatives and their guests to locations within
and outside the United States for meetings or seminars of a
business nature. In some instances, these incentives or payments
may be offered only to certain dealers who have sold or may sell
significant amounts of shares. Certain dealers may not sell all
classes of shares.
DISTRIBUTION PLANS
CLASS A DISTRIBUTION PLAN. The class A plan provides for
payments by the fund to Putnam Mutual Funds at the annual rate of
up to 0.35% of average net assets attributable to class A shares.
The Trustees currently limit payments under the class A plan to
the annual rate of 0.15% of such assets.
Putnam Mutual Funds makes quarterly payments to qualifying
dealers (including for this purpose, certain financial
institutions) to compensate them for services provided in
connection with sales of class A shares and the maintenance of
shareholders accounts. The payments are based on the average net
asset value of class A shares attributable to shareholders for
whom the dealers are designated as the dealer of record.
This calculation excludes until one year after purchase shares
purchased at net asset value, known as "NAV shares," by
shareholders investing $1 million or more. NAV shares are not
subject to the one-year exclusion provision in cases where
certain shareholders who invested $1 million or more have made
arrangements with Putnam Mutual Funds and the dealer of record
waived the sales commission.
Putnam Mutual Funds makes the quarterly payments at the annual
rate of 0.15% of such average net asset value for class A shares.
CLASS B DISTRIBUTION PLAN. The class B plan provides for payments
by the fund to Putnam Mutual Funds at the annual rate of up to
1.00% of average net assets attributable to class B shares. The
Trustees currently limit payments under the class B plan to the
annual rate of 0.75% of such assets.
Although class B shares are sold without an initial sales charge,
Putnam Mutual Funds pays a sales commission equal to 2.75% of the
amount invested to dealers who sell class B shares. These
commissions are not paid on exchanges from other Putnam funds or
on sales to investors exempt from the CDSC.
The payments are based on the average net asset value of class B
shares attributable to shareholders for whom the dealers are
designated as the dealer of record. Putnam Mutual Funds makes
the payments at an annual rate of 0.15% of such average net asset
value of class B shares.
GENERAL. Payments under the plans are intended to compensate
Putnam Mutual Funds for services provided and expenses incurred
by it as principal underwriter of fund shares, including the
payments to dealers mentioned above. Putnam Mutual Funds may
suspend or modify such payments to dealers.
The payments are also subject to the continuation of the relevant
distribution plan, the terms of service agreements between
dealers and Putnam Mutual Funds, and any applicable limits
imposed by the National Association of Securities Dealers, Inc.
HOW TO SELL SHARES
You can sell your shares to the fund any day the New York Stock
Exchange is open, either directly to the fund or through your
investment dealer. The fund will only redeem shares for which it
has received payment.
SELLING SHARES DIRECTLY TO THE FUND. Send a signed letter of
instruction or stock power form to Putnam Investor Services,
along with any certificates that represent shares you want to
sell. The price you will receive is the next net asset value
calculated after the fund receives your request in proper form
less any applicable CDSC. In order to receive that day's net
asset value, Putnam Investor Services must receive your request
before the close of regular trading on the New York Stock
Exchange.
If you sell shares having a net asset value of $100,000 or more,
the signatures of registered owners or their legal
representatives must be guaranteed by a bank, broker-dealer or
certain other financial institutions. See the SAI for more
information about where to obtain a signature guarantee. Stock
power forms are available from your investment dealer, Putnam
Investor Services and many commercial banks.
If you want your redemption proceeds sent to an address other
than your address as it appears on Putnam's records, a signature
guarantee is required. Putnam Investor Services usually requires
additional documentation for the sale of shares by a corporation,
partnership, agent or fiduciary, or a surviving joint owner.
Contact Putnam Investor Services for details.
THE FUND GENERALLY SENDS YOU PAYMENT FOR YOUR SHARES THE BUSINESS
DAY AFTER YOUR REQUEST IS RECEIVED. Under unusual circumstances,
the fund may suspend redemptions, or postpone payment for more
than seven days, as permitted by federal securities law.
You may use Putnam's Telephone Redemption Privilege to redeem
shares valued up to $100,000 from your account unless you have
notified Putnam Investor Services of an address change within the
preceding 15 days. Unless an investor indicates otherwise on the
account application, Putnam Investor Services will be authorized
to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as
his or her representative, who can provide Putnam Investor
Services with his or her account registration and address as it
appears on Putnam Investor Services' records.
Putnam Investor Services will employ these and other reasonable
procedures to confirm that instructions communicated by telephone
are genuine; if it fails to employ reasonable procedures, Putnam
Investor Services may be liable for any losses due to
unauthorized or fraudulent instructions. For information,
consult Putnam Investor Services.
During periods of unusual market changes and shareholder
activity, you may experience delays in contacting Putnam Investor
Services by telephone. In this event, you may wish to submit a
written redemption request, as described above, or contact your
investment dealer, as described below. The Telephone Redemption
Privilege is not available if you were issued certificates for
shares that remain outstanding. The Telephone Redemption
Privilege may be modified or terminated without notice.
SELLING SHARES THROUGH YOUR INVESTMENT DEALER. Your dealer must
receive your request before the close of regular trading on the
New York Stock Exchange to receive that day's net asset value.
Your dealer will be responsible for furnishing all necessary
documentation to Putnam Investor Services, and may charge you for
its services.
HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of
certain other Putnam funds at net asset value beginning 15 days
after purchase. Not all Putnam funds offer all classes of
shares. If you exchange shares subject to a CDSC, the
transaction will not be subject to the CDSC. However, when you
redeem the shares acquired through the exchange, the redemption
may be subject to the CDSC, depending upon when you originally
purchased the shares. The CDSC will be computed using the
schedule of any fund into or from which you have exchanged your
shares that would result in your paying the highest CDSC
applicable to your class of shares. Class B shares of most other
Putnam funds have a higher CDSC than the fund. For purposes of
computing the CDSC, the length of time you have owned your shares
will be measured from the date of original purchase and will not
be affected by any exchange.
To exchange your shares, simply complete an Exchange
Authorization Form and send it to Putnam Investor Services. The
form is available from Putnam Investor Services. For federal
income tax purposes, an exchange is treated as a sale of shares
and generally results in a capital gain or loss. A Telephone
Exchange Privilege is currently available for amounts up to
$500,000. Putnam Investor Services' procedures for telephonic
transactions are described above under "How to sell shares." The
Telephone Exchange Privilege is not available if you were issued
certificates for shares that remain outstanding. Ask your
investment dealer or Putnam Investor Services for prospectuses of
other Putnam funds. Shares of certain Putnam funds are not
available to residents of all states.
The exchange privilege is not intended as a vehicle for short-
term trading. Excessive exchange activity may interfere with
portfolio management and have an adverse effect on all
shareholders. In order to limit excessive exchange activity and
in other circumstances where Putnam Management or the Trustees
believe doing so would be in the best interests of the fund, the
fund reserves the right to revise or terminate the exchange
privilege, limit the amount or number of exchanges or reject any
exchange. Shareholders would be notified of any such action to
the extent required by law. Consult Putnam Investor Services
before requesting an exchange. See the SAI to find out more
about the exchange privilege.
HOW THE FUND VALUES ITS SHARES
THE FUND CALCULATES THE NET ASSET VALUE OF A SHARE OF EACH CLASS
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.
Tax-exempt securities are valued on the basis of valuations
provided by a pricing service approved by the Trustees, which
uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable
securities and various relationships between securities in
determining value.
The fund believes that reliable market quotations are generally
not readily available for purposes of valuing its portfolio
securities. As a result, it is likely that most of the
valuations provided by a pricing service will be based upon fair
value determined on the basis of the factors listed above.
Non-tax-exempt securities for which market quotations are readily
available are valued at market value. Short-term investments
that will mature in 60 days or less are valued at amortized cost,
which approximates market value. All other securities and assets
are valued at their fair value following procedures approved by
the Trustees.
HOW THE FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION
THE FUND DECLARES ALL OF ITS NET INVESTMENT INCOME AS A
DISTRIBUTION ON EACH DAY IT IS OPEN FOR BUSINESS. Net investment
income consists of interest or other income accrued on portfolio
investments of the fund, less accrued expenses, computed in each
case since the most recent determination of net asset value.
Normally, the fund pays distributions of net investment income
monthly. The fund will distribute at least annually all net
realized capital gains, if any, after applying any available
capital loss carryovers. Distributions paid on class A shares
will generally be greater than those paid on class B shares
because expenses attributable to class B shares will generally be
higher.
You begin earning distributions on the business day after Putnam
Mutual Funds receives payment for your shares. It is your
responsibility to see that your dealer forwards payment promptly.
YOU CAN CHOOSE FROM THREE DISTRIBUTION OPTIONS:
- - Reinvest all distributions in additional shares without a
sales charge;
- - Receive distributions from net investment income in cash
while reinvesting capital gains distributions in additional
shares without a sales charge; or
- - Receive all distributions in cash.
You can change your distribution option by notifying Putnam
Investor Services in writing. If you do not select an option
when you open your account, all distributions will be reinvested.
All distributions not paid in cash will be reinvested in shares
of the class on which the distributions are paid. You will
receive a statement confirming reinvestment of distributions in
additional shares (or in shares of other Putnam funds for
Dividends Plus accounts) promptly following the quarter in which
the reinvestment occurs.
If a check representing a fund distribution is not cashed within
a specified period, Putnam Investor Services will notify you that
you have the option of requesting another check or reinvesting
the distribution in the fund or in another Putnam fund. If
Putnam Investor Services does not receive your election, the
distribution will be reinvested in the fund. Similarly, if
correspondence sent by the fund or Putnam Investor Services is
returned as "undeliverable," fund distributions will
automatically be reinvested in the fund or in another Putnam
fund.
The fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other
requirements necessary for it to be relieved of federal taxes on
income and gains it distributes to shareholders. The fund will
distribute substantially all of its ordinary income and capital
gain net income on a current basis.
Fund distributions designated as "exempt-interest dividends" are
not generally subject to federal income tax. However, if you
receive social security or railroad retirement benefits, you
should consult your tax adviser to determine what effect, if any,
an investment in the fund may have on the taxation of your
benefits. In addition, an investment in the fund may result in
liability for federal alternative minimum tax and for state and
local taxes, both for individual and corporate shareholders.
The fund may at times purchase tax-exempt securities at a
discount from the price at which they were originally issued,
especially during periods of rising interest rates. For federal
income tax purposes, some or all of this market discount will be
included in the fund's ordinary income and will be taxable to
shareholders as such when it is distributed to them.
All fund distributions other than exempt-interest dividends will
be taxable to you as ordinary income, except that any
distributions of net long-term capital gains will be taxable 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 through the reinvestment of distributions.
Early in each year Putnam Investor Services will notify you of
the amount and tax status of distributions paid to you for the
preceding year.
The foregoing is a summary of certain federal income tax
consequences of investing in the fund. You should consult your
tax adviser to determine the precise effect of an investment in
the fund on your particular tax situation (including possible
liability for state and local taxes).
ABOUT PUTNAM INVESTMENTS, INC.
PUTNAM MANAGEMENT HAS BEEN MANAGING MUTUAL FUNDS SINCE 1937.
Putnam Mutual Funds is the principal underwriter of the fund and
of other Putnam funds. Putnam Fiduciary Trust Company is the
fund's custodian. Putnam Investor Services, a division of Putnam
Fiduciary Trust Company, is the fund's investor servicing and
transfer agent.
Putnam Management, Putnam Mutual Funds and Putnam Fiduciary Trust
Company are subsidiaries 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.<PAGE>
PUTNAM INTERMEDIATE TAX EXEMPT FUND
One Post Office Square
Boston, MA 02109
FUND INFORMATION:
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
INVESTOR SERVICING AGENT
Putnam Investor Services
Mailing address:
P.O. Box 41203
Providence, RI 02940-1203
CUSTODIAN
Putnam Fiduciary Trust Company
One Post Office Square
Boston, MA
02109
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
PUTNAMINVESTMENTS
One Post Office Square
Boston, Massachusetts 02109
Toll-free 1-800-225-1581
S:\SHARED\FUNDS\NEW\A93497J.1
<PAGE>
PUTNAM INTERMEDIATE TAX EXEMPT FUND
FORM N-1A
PART B
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
FEBRUARY 1, 1996
This SAI is not a prospectus and is only authorized for
distribution when accompanied or preceded by the prospectus of
the fund dated February 1, 1996, as revised from time to time.
This SAI contains information which may be useful to investors
but which is not included in the prospectus. If the fund has
more than one form of current prospectus, each reference to the
prospectus in this SAI shall include all of the fund's
prospectuses, unless otherwise noted. The SAI should be read
together with the applicable prospectus. Investors may obtain a
free copy of the applicable prospectus from Putnam Investor
Services, Mailing address: P.O. Box 41203, Providence, RI
02940-1203.
Part I of this SAI contains specific information about the fund.
Part II includes information about the fund and the other Putnam
funds.
<PAGE>
TABLE OF CONTENTS
PART I PAGE
TAX-EXEMPT SECURITIES . . . . . . . . . . . . . . . . . . . . .I-3
SECURITY RATINGS. . . . . . . . . . . . . . . . . . . . . . . .I-5
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . .I-7
CHARGES AND EXPENSES. . . . . . . . . . . . . . . .I-10
INVESTMENT PERFORMANCE. . . . . . . . . . . . . . .I-14
ADDITIONAL OFFICERS . . . . . . . . . . . . . . . . . . . . . I-17
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS. . . . . . . I-17
PART II
MISCELLANEOUS INVESTMENT PRACTICES. . . . . . . . . . . . . . II-1
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-25
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . .II-30
DETERMINATION OF NET ASSET VALUE. . . . . . . . . . . . . . .II-40
HOW TO BUY SHARES . . . . . . . . . . . . . . . . . . . . . .II-41
DISTRIBUTION PLANS. . . . . . . . . . . . . . . . . . . . . .II-54
INVESTOR SERVICES . . . . . . . . . . . . . . . . . . . . . .II-55
SIGNATURE GUARANTEES. . . . . . . . . . . . . . . . . . . . .II-60
SUSPENSION OF REDEMPTIONS . . . . . . . . . . . . . . . . . .II-61
SHAREHOLDER LIABILITY . . . . . . . . . . . . . . . . . . . .II-61
STANDARD PERFORMANCE MEASURES . . . . . . . . . . . . . . . .II-61
COMPARISON OF PORTFOLIO PERFORMANCE . . . . . . . . . . . . .II-63
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . .II-67
<PAGE>
SAI
PART I
TAX-EXEMPT SECURITIES
GENERAL DESCRIPTION. As used in the prospectus and in this SAI,
the term "tax-exempt securities" includes debt obligations issued
by a state, (including the District of Columbia) its political
subdivisions (for example, counties, cities, towns, villages,
districts and authorities), a U.S. territory or possession, and
their agencies, instrumentalities or other governmental units,
the interest from which is, in the opinion of bond counsel,
exempt from federal income tax. Such obligations are issued to
obtain funds for various public purposes, including the
construction of a wide range of public facilities, such as
airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works.
Other public purposes for which tax-exempt securities may be
issued include the refunding of outstanding obligations or the
payment of general operating expenses. Short-term tax-exempt
securities are generally issued by state and local governments
and public authorities as interim financing in anticipation of
tax collections, revenue receipts, or bond sales to finance such
public purposes. In addition, certain types of "private
activity" bonds may be issued by public authorities to finance
such projects as privately operated housing facilities and
certain local facilities for water supply, gas, electricity or
sewage or solid waste disposal, student loans, or the obtaining
of funds to lend to public or private institutions for the
construction of facilities such as educational, hospital and
housing facilities. Such obligations are included within the
term tax-exempt securities if the interest paid thereon is, in
the opinion of bond counsel, exempt from federal income tax (such
interest may, however, be subject to federal alternative minimum
tax). Other types of private activity bonds, the proceeds of
which are used for the construction, repair or improvement of, or
to obtain equipment for, privately operated industrial or
commercial facilities, may constitute tax-exempt securities,
although the current federal tax laws place substantial
limitations on the size of such issues. Tax-exempt securities
also include short-term discount notes (tax-exempt commercial
paper), which are promissory notes issued by municipalities to
enhance their cash flows.
STAND-BY COMMITMENTS. When the fund purchases tax-exempt
securities, it has the authority to acquire stand-by commitments
from banks and broker-dealers with respect to those tax-exempt
securities. A stand-by commitment may be considered a security
independent of the tax-exempt security to which it relates. The
amount payable by a bank or dealer during the time a stand-by
commitment is exercisable, absent unusual circumstances, would be
substantially the same as the market value of the underlying tax-
exempt security to a third party at any time. The fund expects
that stand-by commitments generally will be available without the
payment of direct or indirect consideration. The fund does not
expect to assign any value to stand-by commitments.
YIELDS. The yields on tax-exempt securities depend on a variety
of factors, including general money market conditions, effective
marginal tax rates, the financial condition of the issuer,
general conditions of the tax-exempt security market, the size of
a particular offering, the maturity of the obligation and the
rating of the issue. The ratings of Moody's Investors Service,
Inc., Standard & Poor's and Fitch Investors Service, Inc.
represent their opinions as to the quality of the tax-exempt
securities which they undertake to rate. It should be
emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, tax-exempt
securities with the same maturity and interest rate but with
different ratings may have the same yield. Yield disparities may
occur for reasons not directly related to the investment quality
of particular issues or the general movement of interest rates,
due to such factors as changes in the overall demand or supply of
various types of tax-exempt securities or changes in the
investment objectives of investors. Subsequent to purchase by
the fund, an issue of tax-exempt securities or other investments
may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by the fund. Neither event
will require the elimination of an investment from the fund's
portfolio, but Putnam Management will consider such an event in
its determination of whether the fund should continue to hold an
investment in its portfolio.
"MORAL OBLIGATION" BONDS. The fund does not currently intend to
invest in so-called "moral obligation" bonds, where repayment is
backed by a moral commitment of an entity other than the issuer,
unless the credit of the issuer itself, without regard to the
"moral obligation," meets the investment criteria established for
investments by the fund.
ADDITIONAL RISKS. Securities in which the fund may invest,
including tax-exempt securities, are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the federal Bankruptcy Code
(including special provisions related to municipalities and other
public entities), and laws, if any, which may be enacted by
Congress or the state legislatures extending the time for payment
of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations. There is also the
possibility that as a result of litigation or other conditions
the power, ability or willingness of issuers to meet their
obligations for the payment of interest and principal on their
tax-exempt securities may be materially affected.
From time to time, proposals have been introduced before Congress
for the purpose of restricting or eliminating the federal income
tax-exemption for interest on debt obligations issued by states
and their political subdivisions. Federal tax laws limit the
types and amounts of tax-exempt bonds issuable for certain
purposes, especially for industrial development bonds and private
activity bonds. Such limits may affect the future supply and
yields of these types of tax-exempt securities. Further
proposals limiting the issuance of tax-exempt bonds may well be
introduced in the future. If it appeared that the availability
of tax-exempt securities for investment by the fund and the value
of the fund's portfolio could be materially affected by such
changes in law, the Trustees of the fund would reevaluate its
investment objective and policies and consider changes in the
structure of the fund or its dissolution.
SECURITY RATINGS
THE FOLLOWING RATINGS 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.
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 -- 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.
FITCH INVESTORS SERVICE, INC.
AAA -- Bonds considered to 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.
INVESTMENT RESTRICTIONS
AS FUNDAMENTAL INVESTMENT RESTRICTIONS, WHICH MAY NOT BE CHANGED
WITHOUT A VOTE OF A MAJORITY OF THE OUTSTANDING VOTING
SECURITIES, THE FUND MAY NOT AND WILL NOT:
(1) Borrow money in excess of 10% 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,
and then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such
borrowings will be repaid before any additional investments are
purchased.
(2) Underwrite securities issued by other persons except to the
extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under certain
federal securities laws.
(3) Purchase or sell real estate, although it may purchase
securities of issuers which deal in real estate, securities which
are secured by interests in real estate, and securities which
represent interests in real estate, and it may acquire and
dispose of real estate or interests in real estate acquired
through the exercise of its rights as a holder of debt
obligations secured by real estate or interests therein.
(4) Purchase or sell commodities or commodity contracts, except
that the fund may purchase and sell financial futures contracts
and options.
(5) Make loans, except by purchase of debt obligations in which
the fund may invest consistent with its investment policies, by
entering into repurchase agreements 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 (taken at current value).
(6) With respect to 75% of its total assets, 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 obligations
issued or guaranteed as to interest or principal by the U.S.
government or its agencies or instrumentalities or its political
subdivisions.
(7) With respect to 75% of its total assets, acquire more than
10% of the voting securities of any issuer.
(8) Purchase securities (other than securities of the U.S.
government, its agencies or instrumentalities or tax-exempt
securities, except obligations backed only by the assets and
revenues of nongovernmental issuers) if, as a result of such
purchase, more than 25% of the fund's total assets would be
invested in any one industry.
(9) Issue any class of securities which is senior to the fund's
shares of beneficial interest.
IT IS CONTRARY TO THE FUND'S PRESENT POLICY, WHICH MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL, TO:
(1) Invest in (a) securities which at the time of such
investment are not readily marketable, (b) securities restricted
as to resale (excluding securities determined by the Trustees of
the fund (or the person designated by the Trustees of the fund to
make such determinations) to be readily marketable), and (c)
repurchase agreements maturing in more than seven days, if, as a
result, more than 15% of the fund's net assets (taken at current
value) would be invested in securities described in (a), (b) and
(c) above.
(2) 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, and it may
acquire or dispose of such leases, rights, or contracts acquired
through the exercise of its rights as a holder of debt
obligations secured thereby.
(3) Make short sales of securities or maintain a short sale
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 equal in amount to, the
securities sold short.
(4) Invest in warrants (other than warrants acquired by the fund
as a part of a unit or attached to securities at the time of
purchase) if, as a result, such investments (valued at the lower
of cost or market) would exceed 5% of the value of the fund's net
assets; provided that not more than 2% of the fund's net assets
may be invested in warrants not listed on the New York or
American Stock Exchanges.
(5) Purchase or sell real property (including limited
partnership interests), except that the fund may (a) purchase or
sell readily marketable interests in real estate investment
trusts or readily marketable securities of companies which invest
in real estate, (b) purchase or sell securities that are secured
by interests in real estate or interests therein, or (c) acquire
real estate through exercise of its rights as a holder of
obligations secured by real estate or interests therein or sell
real estate so acquired.
(6) 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 who beneficially own more than 0.5% of the
securities of that issuer together own more than 5% of such
securities.
(7) Invest in securities of an issuer which, together with any
predecessors, controlling persons, general partners and
guarantors, have a record of less than three years' continuous
business operation or relevant business experience, if, as a
result, the aggregate of such investments would exceed 5% of the
value of the fund's net assets; provided, however, that this
restriction shall not apply to any obligations of the U.S.
government or its instrumentalities or agencies or for the
payment of which is pledged the faith, credit and taxing power of
any person authorized to issue tax-exempt securities.
(8) Invest in the securities of other registered open-end
investment companies, except as they may be acquired as part of a
merger or consolidation or acquisition of assets or by purchases
in the open market involving only customary brokerage commissions.
Although certain of the fund's fundamental investment restrictions
permit it to borrow money to a limited extent, the fund does not
currently intend to do so.
---------------------
All percentage limitations on investments will apply at the time
of the making of an investment and shall not be considered
violated unless an excess or deficiency occurs or exists
immediately after and as a result of such investment.
The Investment Company Act of 1940 provides that a "vote of a
majority of the outstanding voting securities" of the fund means
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.
CHARGES AND EXPENSES
MANAGEMENT FEES
Under a Management Contract dated April 8, 1994 the fund pays a
quarterly fee to Putnam Management based on the average net assets
of the fund, as determined at the close of each business day
during the quarter, at an annual rate of 0.60% of the first $500
million of the average net asset value of the fund, 0.50% of the
next $500 million, 0.45% of the next $500 million and 0.40% of any
excess over $1.5 billion. For the past two fiscal years, pursuant
to the Management Contract the fund incurred the following fees:
REFLECTING A
REDUCTION IN THE
FOLLOWING AMOUNTS
FISCAL MANAGEMENT PURSUANT TO AN
YEAR FEE PAID EXPENSE LIMITATION
- ------ ---------- -----------------
1995 $112,068 $0
1994 $ 7,718 $22,361
EXPENSE LIMITATION. In order to limit the fund's expenses,
Putnam Management has agreed to limit its compensation (and, to
the extent necessary, bear other expenses of the fund) until May
31, 1996, to the extent that expenses of the fund (exclusive of
brokerage, interest, taxes, deferred organizational and
extraordinary expenses, and payments under the fund's distribution
plans) would exceed an annual rate of 0.80% of the fund's average
net assets. For the purpose of determining any such limitation on
Putnam Management's compensation, expenses of the fund shall not
reflect the application of commissions or cash management credits
that may reduce designated fund expenses. With Trustee approval,
this expense limitation may be terminated earlier, in which event
shareholders would be notified and this SAI would be revised.
BROKERAGE COMMISSIONS
The following table shows brokerage commissions paid during the
fiscal periods indicated.
FISCAL BROKERAGE
YEAR COMMISSIONS
------ -----------
1995 $50,583
1994 $0
The following table shows transactions placed with brokers and
dealers during the most recent fiscal year to recognize research,
statistical and quotation services Putnam Management considered to
be particularly useful to it and its affiliates.
DOLLAR
VALUE PERCENT OF
OF THESE TOTAL AMOUNT OF
TRANSACTIONS TRANSACTIONS COMMISSIONS
- ------------ ------------ -----------
$398,459,467 6.31% $7,634
ADMINISTRATIVE EXPENSE REIMBURSEMENT
The fund reimbursed Putnam Management in the following amount for
administrative services during fiscal 1995, including the
following amount for compensation of certain officers of the fund
and contributions to the Putnam Investments, Inc. Profit Sharing
Retirement Plan for their benefit:
PORTION OF TOTAL
REIMBURSEMENT FOR
COMPENSATION
TOTAL AND
REIMBURSEMENT CONTRIBUTIONS
------------- ----------------
$1,446 $1,409
TRUSTEE FEES
Each Trustee receives a fee for his or her services. Each
Trustee also receives fees for serving as Trustee of other Putnam
funds. The Trustees periodically review their fees to assure
that such fees continue to be appropriate in light of their
responsibilities as well as in relation to fees paid to trustees
of other mutual fund complexes. The Trustees meet monthly over a
two-day period, except in August. The Compensation Committee,
which consists solely of Trustees not affiliated with Putnam
Management and is responsible for recommending Trustee
compensation, estimates that Committee and Trustee meeting time
together with the appropriate preparation requires the equivalent
of at least three business days per Trustee meeting. The
following table shows the year each Trustee was first elected a
Trustee of the Putnam funds, the fees paid to each Trustee by the
fund for fiscal 1995 and the fees paid to each Trustee by all of
the Putnam funds during calendar year 1995:
COMPENSATION TABLE
Total
Aggregate compensation
compensation from all
Trustees from the fund* Putnam funds**
- --------------------------------------------------------------
Jameson A. Baxter/1994 $131 $150,854
Hans H. Estin/1972 131 150,854
John A. Hill/1985*** 128 149,854
Elizabeth T. Kennan/1992 129 148,845
Lawrence J. Lasser/1992 131 150,854
Robert E. Patterson/1984 133 152,854
Donald S. Perkins/1982 131 150,854
William F. Pounds/1971 126 149,854
George Putnam/1957 131 150,854
George Putnam, III/1984 131 150,854
Eli Shapiro/1995**** 59 95,372
A.J.C. Smith/1986 130 149,854
W. Nicholas Thorndike/1992 133 152,854
* Reflects amounts paid for fiscal year 1995. Includes an
annual retainer and an attendance fee for each meeting
attended.
** Reflects total payments received from all Putnam funds in
the most recent calendar year. As of December 31, 1995,
there were 99 funds in the Putnam family.
*** Includes amounts of compensation deferred pursuant to a
Trustee Compensation Deferral Plan. The total amount of
deferred compensation payable to Mr. Hill by all Putnam
Funds as of September 30, 1995 was $26,395, including
income earned on such amounts.
**** Elected as a Trustee in April 1995.
The Trustees have approved Retirement Guidelines for Trustees of
the Putnam funds. These Guidelines provide generally that a
Trustee who retires after reaching age 72 and who has at least 10
years of continuous service will be eligible to receive a
retirement benefit from each Putnam fund for which he or she
served as a Trustee. The amount and form of such benefit is
subject to determination annually by the Trustees and, unless
otherwise determined by the Trustees, will be an annual cash
benefit payable for life equal to one-half of the Trustee
retainer fees paid by each fund at the time of retirement.
Several retired Trustees are currently receiving benefits
pursuant to the Guidelines and it is anticipated that the current
Trustees will receive similar benefits upon their retirement. A
Trustee who retired in calendar 1995 and was eligible to receive
benefits under these Guidelines would have received an annual
benefit of $66,749, based upon the aggregate retainer fees paid
by the Putnam funds for such year. The Trustees reserve the
right to amend or terminate such Guidelines and the related
payments at any time, and may modify or waive the foregoing
eligibility requirements when deemed appropriate.
For additional information concerning the Trustees, see
"Management" in Part II of this SAI.
SHARE OWNERSHIP
At December 31, 1995, the officers and Trustees of the fund as a
group owned less than 1% of the outstanding shares of each class,
and, except as noted below, to the knowledge of the fund no
person owned of record or beneficially 5% or more of the shares
of any class of the fund.
SHAREHOLDER NAME PERCENTAGE
CLASS AND ADDRESS OWNED
----- --------------------------- --------
A Merrill Lynch Pierce Fenner 29.60%
4800 Deer Lake East
Mutual Fund Operations, 3rd floor
Jacksonville, FL 32246-6483
DISTRIBUTION FEES
During fiscal 1995, the fund paid the following 12b-1 fees to
Putnam Mutual Funds:
CLASS A CLASS B
-------- ---------
$21,255 $36,008
<PAGE>
CLASS A SALES CHARGES AND CONTINGENT DEFERRED SALES CHARGES
Putnam Mutual Funds received sales charges with respect to class
A shares in the following amounts during the periods indicated:
SALES CHARGES
RETAINED BY PUTNAM CONTINGENT
TOTAL MUTUAL FUNDS DEFERRED
FRONT-END AFTER SALES
FISCAL YEAR SALES CHARGES DEALER CONCESSIONS CHARGES
- ----------- ------------- ------------------ --------
1995 $78,566 $9,815 $188
1994 $36,760 $5,494 $0
CLASS B CONTINGENT DEFERRED SALES CHARGES
Putnam Mutual Funds received contingent deferred sales charges
upon redemptions of class B shares in the following amounts
during the periods indicated:
CONTINGENT DEFERRED
FISCAL YEAR sales charges
- ----------- -------------------
1995 $8,498
1994 $10,654
INVESTOR SERVICING AND CUSTODY FEES AND EXPENSES
During the 1995 fiscal year, the fund incurred $31,678 in fees
and out-of-pocket expenses for investor servicing and custody
services provided by Putnam Fiduciary Trust Company.
INVESTMENT PERFORMANCE OF THE FUND
STANDARD PERFORMANCE MEASURES
(for periods ended September 30, 1995)
Class A Class B
Inception date: June 1, 1994 June 1, 1994
ANNUALIZED
TOTAL
RETURN NAV* POP** NAV CDSC
- -----------------------------------------------------------------
1 year 6.54% 3.03% 6.03% 3.03%
Life of class 4.08 1.49 3.63 1.44
<PAGE>
YIELD POP NAV
30-day
Yield 4.94% 4.57%
Tax-equivalent
yield*** 8.18% 7.57%
* net asset value
** public offering price
*** Assumes the maximum 39.6% federal tax rate. Results for
investors subject to lower tax rates would not be as
advantageous.
Data represent past performance and are not indicative of future
results. Total return and yield at POP for class A shares
reflect the deduction of the maximum sales charge of
3.25%. Total return at CDSC for class B shares reflects the
deduction of the applicable contingent deferred sales charge
("CDSC"). The maximum class B CDSC is 3.0%. See "Standard
performance measures" in Part II of this SAI for information on
how performance is calculated. Past performance is no guarantee
of future results.
EQUIVALENT YIELDS: TAX-EXEMPT VERSUS TAXABLE SECURITIES
The table below shows the effect of the tax status of tax-exempt securities
on the effective yield received by their
individual holders under the federal income tax laws
currently in effect for 1996. It gives the approximate yield a
taxable security must earn at various income levels to
produce after-tax yields equivalent to those of tax-exempt
securities yielding from 4.0% to 9.0%.
- ---------------------------------------------------------------------------
1995 Tax-exempt yield
Federal
Taxable Income* Marginal
Single*** Joint*** rate**4.0%4.5%5.0%5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0%
- -----------------------------------------------------------------------------
Equivalent taxable yield
[C] [C] [C] [C] [C] [C] [C] [C] [C]
$0 - 24,000 $0 - 40,100 15.00% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
8.24% 8.82% 9.41% 10.00% 10.59%
24,001 - 58,150 40,101 - 96,900 28.00% 5.56% 6.25% 6.94% 7.64% 8.33%
9.03% 9.72% 10.42% 11.11% 11.81% 12.50%
58,151 - 121,300 96,901 - 147,700 31.00% 5.80% 6.52% 7.25% 7.97% 8.70%
9.42% 10.14% 10.87% 11.59% 12.32% 13.04% 121,301 - 263,750
147,701 - 263,750 36.00% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16% 10.94%
11.72% 12.50% 13.28% 14.06%
over 263,750 over 263,750 39.60% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
11.59% 12.42% 13.25% 14.07% 14.90%
*This amount represents taxable income as defined in the Internal Revenue
Code of 1986, as amended (the "Code").
**These rates are the marginal federal income tax rates on taxable
income currently in effect for 1996 under the Code.
***The amount of taxable income in certain brackets may be affected by
the phase-out of personal exemptions and the
limitation on itemized deductions under the Code.
Of course, there is no assurance that the fund will achieve any
specific tax-exempt yield. While it is expected that
the fund will invest principally in obligations which pay interest
exempt from federal income tax, other income received
by the fund may be taxable. The table does not take into account any
state or local taxes payable on fund
distributions.
ADDITIONAL OFFICERS
In addition to the persons listed as officers of the fund in Part
II of this SAI, each of the following persons is also a Vice
President of the fund and Vice President of certain of the Putnam
funds. Officers of Putnam Management hold the same offices in
Putnam Management's parent company, Putnam Investments, Inc.
GARY N. COBURN. Senior Managing Director of Putnam Management.
Director, Putnam Investments, Inc.
JAMES E. ERICKSON. Managing Director of Putnam Management.
BLAKE E. ANDERSON. Senior Vice President of Putnam Management.
JAMES M. PRUSKO. Assistant Vice President of Putnam Management.
Prior to August, 1992, Mr. Prusko was a Sales and Trading
Associate at Salomon Brothers.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston,
Massachusetts 02109, are the fund's independent accountants,
providing audit services, tax return review and other tax
consulting services and assistance and consultation in connection
with the review of various Securities and Exchange Commission
filings. The Report of Independent Accountants, financial
highlights and financial statements included in the fund's Annual
Report for the fiscal year ended September 30, 1995, filed
electronically on November 30, 1995 (File No. 811-07151), are
incorporated by reference into this SAI. The financial
highlights included in the prospectus and incorporated by
reference into this SAI and the financial statements incorporated
by reference into the prospectus and this SAI have been so
included and incorporated in reliance upon the report of the
independent accountants, given on their authority as experts in
auditing and accounting.
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