Putnam
Tax-Free
Insured
Fund
Item 1. Report to Stockholders:
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The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
1-31-04
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
In recent months we have communicated with you about Putnam's commitment
to establishing high fiduciary standards within the investment
management industry. The firm's efforts took a step forward in January
with a series of initiatives that were outlined in a letter to
shareholders from Putnam President and CEO Ed Haldeman. Among other
things, Putnam is placing voluntary limits on fund expenses and reducing
sales loads. In addition, beginning this spring, shareholder
communications will provide enhanced disclosure, including a comparison
of fund costs with industry averages and a gauge of each fund's relative
risk. They will also disclose the number of shares held by Putnam
employees and discuss how the portfolio management team is compensated.
Another new measure, taking effect April 19, 2004, will impose a 2% fee
on shares that are sold within 5 days of purchase. This redemption fee
demonstrates Putnam's commitment to preventing short-term trading in its
funds, which can be detrimental to shareholders.
These changes serve to advance shareholder interests and provide a
framework to help you make financial decisions. We encourage you to
review the new disclosure as it is implemented and discuss it with your
financial advisor. While we are pleased with this progress, the Trustees
and Putnam are continuing to explore other measures that may provide
greater transparency and enhanced protection for long-term shareholders.
Putnam Tax-Free Insured Fund's solid six-month performance reflects
favorable economic and market conditions for the fixed-income markets
that helped bring interest rates down over the course of the period.
Despite surging stock market returns, the period was also a positive one
for municipal bonds, as low inflation and improved fiscal conditions for
municipalities across the country helped bolster bond prices. In the
following pages, your fund's management team discusses fund performance,
market trends, investment strategies, and sector performance that
contributed to returns. The management team also discusses its
expectations for the months ahead.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
March 17, 2004
Report from Fund Management
Fund highlights
* During the semiannual period ended January 31, 2004, Putnam Tax-Free
Insured Fund's class A shares had total returns of 5.53% at net asset
value (NAV) and 0.53% at public offering price (POP).
* Due to its emphasis on high-quality securities and a defensive
interest-rate positioning, the fund's performance at NAV underperformed
its benchmark index, the Lehman Municipal Bond Index, which returned
5.73% during the six-month period.
* As a result of its slightly lower interest-rate sensitivity, the fund
also underperformed the average return of 5.67% for the Lipper Insured
Municipal Debt Funds category, based on results at NAV.
* See the Performance Summary beginning on page 8 for complete fund
performance, comparative performance, and Lipper data.
Performance commentary
During the first half of its fiscal year, Putnam Tax-Free Insured Fund
benefited from an unusually positive confluence of factors that drove
solid returns in the bond market, as well as strong returns in the
equity market. The U.S. economy steamed forward, with robust growth of
8.2% in the third calendar quarter of 2003, and healthy, albeit somewhat
slower, growth in the fourth calendar quarter. However, with high
productivity, an accommodative Federal Reserve Board monetary policy,
and no apparent threat of inflation, bond yields -- fluctuating within a
broad range -- generally declined over the six-month period, helping
bolster returns (since bond prices move in the opposite direction of
yields). In this environment, bonds with lower credit quality and
greater interest-rate sensitivity generally outperformed higher-quality
bonds and those with less sensitivity to interest-rate changes. As a
result, your fund underperformed its benchmark index and Lipper category
average, due to its focus on higher-quality bonds and its slightly
defensive interest-rate sensitivity.
FUND PROFILE
Putnam Tax-Free Insured Fund invests in bonds that are insured as to
timely payment of principal and interest, escrowed by securities
guaranteed by the U.S. government, and/or bonds that are rated AAA (or
the equivalent), which is the highest credit rating available. The fund
is intended and may be appropriate for investors seeking high current
income free from federal income tax.
Market overview
The bond market experienced a significant sell-off just prior to the
semiannual period that drove yields higher and prices correspondingly
lower. Thereafter, yields drifted up and down through the end of 2003
with each bit of news that either challenged or supported the notion of
a sustained economic recovery. Overall, municipal bond yields trended
downward between August 1, 2003, and January 31, 2004, and were slightly
lower at the end of the period. In addition, the ratio of municipal bond
yields to comparable Treasury yields declined from about 90% to 80%
before rising again to about 85%, its long-term average, at the end of
the period. The decline of this ratio indicated that municipals
generally outperformed Treasuries during the period.
California's general obligation (GO) bonds reflected improving
confidence in California's future at the beginning of the period, as
shown by the narrowing yield spread (or difference) between California
GO bonds and AAA-rated bonds. However, shortly after Governor
Schwarzenegger took office, he made it plain that if voters did not
approve a $15 billion bond issuance, significant budget cuts would be
necessary to prevent the state from going into bankruptcy. Investor
reaction to this uncertainty caused the yield spread between California
GO bonds and AAA-rated bonds to widen, and we expect that it will remain
wide for some time.
Municipal bonds within the airline, tobacco, utilities, and basic
industrials sectors performed well. Airline-related bonds have benefited
from a rebound in business and leisure travel and lessening fears of
bankruptcies within the industry. Tobacco settlement bonds performed
well as favorable legal decisions improved the outlook for ongoing
litigation, while utilities and industrial bonds were helped by cyclical
increases in demand.
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MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 1/31/04
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Bonds
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Lehman Municipal Bond Index (tax-exempt bonds) 5.73%
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Lehman Aggregate Bond Index (broad bond market) 4.49%
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Lehman GNMA Index (Government National
Mortgage Association bonds) 3.66%
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Lehman Global Aggregate Bond Index (international bonds) 9.18%
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Equities
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S&P 500 Index (broad stock market) 15.23%
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Russell 2000 Index (stocks of small and midsize companies) 22.67%
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MSCI EAFE Index (international stocks) 25.35%
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These indexes provide an overview of performance in different market
sectors for the six months ended 1/31/04.
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Strategy overview
In the months prior to the beginning of the period, the fund's duration,
or interest-rate sensitivity, had been reduced -- a defensive
positioning -- which meant that we structured the maturities of the
bonds in the portfolio in an effort to reduce the impact of rising rates
on the fund's share price. When rates spiked in June and July, this
strategy was beneficial for the fund's relative performance. By early
August, our sense was that the sharp yield increases of June and July
had mostly run their course, so we changed the portfolio's duration to a
more neutral stance, meaning that we sought to make the fund no more or
less sensitive to interest-rate changes than its benchmark.
During the fall and winter months, with increasing evidence that the
economy was growing, we again began reducing the fund's duration so that
by the end of the period it had become more defensive. Since bond yields
generally declined during the period, this strategy detracted somewhat
from the fund's relative performance. However, as of the end of the
period, we believed that the market's overall sensitivity to a change in
rates was so high that if, in fact, the Fed were to raise rates (or even
hint it will do so), bond prices could decline. Consequently, we believe
a more defensive posture is warranted. There was an investment policy
change during the period, which called for the elimination from the
portfolio of bonds that pay interest that is subject to the alternative
minimum tax (AMT). According to several recent studies, significantly
more investors are projected to be subject to AMT in the future. As a
fund that is completely AMT-free, the fund may be able to gather assets
from investors seeking to invest in securities that pay interest that is
not subject to AMT, and shareholders of the fund may benefit from lower
expenses resulting from economies of scale of a larger asset base.
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
7/31/03 1/31/04
Average effective
maturity in years 9.2 8.1
Duration in years 6.4 5.9
Footnote reads:
This chart compares changes in the fund's duration (a measure of its
sensitivity to interest-rate changes) and its average effective maturity
(a weighted average of the holdings' maturities).
Average effective maturity also takes into account put and call
features, where applicable, and reflects prepayments for mortgage-backed
securities.
How fund sectors affected performance
All of the sectors in the fund had positive performance during the
period, although housing and tax-exempt refunded bonds lagged other
sectors. Housing bonds, which typically finance a variety of housing
projects around the country, are backed by mortgage payments. When
interest rates are low and large numbers of homeowners refinance their
mortgages, investors begin to worry that housing bonds will be hurt by
prepayments, and this concern can affect bond performance. During the
past six months, when bonds generally appreciated in price, housing
bonds did not participate fully in this appreciation because of
prepayment concerns. However, the housing bonds in the fund still
provided a solid income stream, so their performance was positive. Also,
the percentage of housing bonds in the fund was small, so the impact on
relative performance was not particularly significant.
Refunded bonds are created in a way that is similar to the refinancing of
a home mortgage. When municipalities borrow money at lower interest rates
to refinance older bonds issued when rates were higher, a refunded bond is
created. Unlike a home mortgage, however, the original municipal bond
remains outstanding, with a shorter potential maturity, as the call date
effectively becomes the maturity date. (The call date is an agreed-upon
date in the bond issue when the issuer can redeem, or call, the bond from
the borrower. It is advantageous for issuers if interest rates decline
before the bond matures.) Once the refinancing is completed, the
municipality uses the proceeds to buy a portfolio of U.S. Treasury
securities, creating an escrow account that provides the backing for
interest and principal payments on the refunded bonds. Refunded bonds
typically enjoy the equivalent of AAA-rated quality and are advantageous
because their interest and principal is backed by this escrow account. In
a declining-rate environment, however, these securities, because of their
shorter maturities, tend to appreciate less than longer-maturity bonds do.
Nevertheless, like the housing bonds in the fund, these securities still
paid their coupon income and had positive performance.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa/AAA (87.9%)
VMIG1/A-1+ (12.1%)
Footnote reads:
As a percentage of market value as of 1/31/04. A bond rated Baa or
higher is considered investment grade. The chart reflects Moody's and
Standard & Poor's ratings; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
Non-callable bonds performed well during the period. We added several
positions in 20- and 30-year non-callable bonds, which proved helpful
for the fund's returns. We also focused on creating a "barbell"
structure in the portfolio, concentrating holdings on the longer and
shorter-term ends of the yield curve and reducing exposure to
intermediate-term bonds. This can be beneficial when the yield curve, a
graphical representation of the yields of bonds of all maturities, is
steep, meaning that there is a significant difference between the yields
of long- and short-maturity bonds. The reason a barbell structure is
advantageous when the yield curve is steep is that, should the curve
flatten (narrowing the difference between long- and short-maturity bond
yields), intermediate-maturity bonds can underperform bonds with either
long or very short maturities. Since the curve is now so steep, we
believe it could flatten in the coming year and that a barbell structure
may enable the fund to take advantage of the shift.
Finally, because of the change in investment policy that entailed the
elimination of bonds that pay interest that is subject to AMT, we sold
the portfolio's relatively small portion of these securities during the
period, so that by November 2003, the fund held no AMT bonds.
Please note that all holdings discussed in this report are subject to
review in accordance with the fund's investment strategy and may vary
in the future.
The fund's management team
The fund is managed by the Putnam Tax Exempt Fixed-Income Team. The
members of the team are David Hamlin (Portfolio Leader), Paul Drury
(Portfolio Member), Susan McCormack (Portfolio Member), James St. John
(Portfolio Member), Richard Wyke (Portfolio Member), and Kevin Cronin.
OF SPECIAL INTEREST
Fund investment policy changed. Due to the prospect that significantly
large numbers of taxpayers could be subject to the Alternative Minimum
Tax (AMT) in the coming years, the fund changed its investment policy so
that the fund's assets will no longer be invested in AMT bonds. The
change in policy, which became effective on November 30, 2003, was voted
on by the fund's Trustees, but did not require a shareholder vote. The
following sentence was added to the Main Investment Strategies section
of the fund's prospectus on page two: "Currently, the fund does not
intend to invest in securities the interest on which is subject to the
AMT."
Putnam introduces a new redemption fee to protect long-term investors in
the funds. For shares purchased on or after April 19, 2004, a 2%
redemption fee will be applied to shares exchanged or sold within 5
calendar days of purchase. The fee applies to all Putnam funds except
money market funds, variable annuity funds, and closed-end funds.
Beginning on April 19, 2004, the 1% redemption fee currently applicable
to international, global, and taxable high-yield funds will be imposed
on shares that are exchanged or redeemed within 6 to 90 days of
purchase. Please see your fund's prospectus for additional information
or talk to your financial advisor.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
In its statement on January 28, 2004, the Federal Reserve Board said it
could "be patient" about raising short-term interest rates, marking a
slight, yet significant, change from its earlier position as it hinted
at the potential for raising rates in the future. As the bond market
responded, interest rates rose slightly. There is a general assumption
that with economic growth comes inflation and rising interest rates. In
our view, bond market prices already reflect the economy's strength.
In the short term, there is a risk that economic data could disappoint
or that some unexpected event could cause market instability. We believe
that either outcome could cause a flight to quality and a short-lived
period of lower rates. However, we believe interest rates could rise in
the long term and that the Fed may initiate a tightening cycle as early
as this summer. We feel any actions taken by the Fed in this election
year would probably be well planned and executed to limit potential
disruption to the financial markets.
In light of the increasingly large federal budget deficit, the prospect
for heavy issuance of Treasury debt continues to be a cloud over the
market. We will continue to monitor trends in the municipal bond market
to pursue the most compelling opportunities and help you achieve your
financial objectives.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Shares of this fund
are not insured, and their prices will fluctuate with market conditions.
Performance summary
This section shows your fund's performance during the first half of its
fiscal year, which ended January 31, 2004. In accordance with regulatory
requirements, we also include performance for the most current calendar
quarter-end. Performance should always be considered in light of a
fund's investment strategy. Data represent past performance. Past
performance does not guarantee future results. More recent returns may
be less or more than those shown. Investment return and principal value
will fluctuate and you may have a gain or a loss when you sell your
shares. For the most recent month-end performance, please visit
www.putnaminvestments.com.
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TOTAL RETURN FOR PERIODS ENDED 1/31/04
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Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (7/26/99) (6/1/95)
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NAV POP NAV CDSC NAV CDSC NAV POP
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6 months 5.53% 0.53% 5.25% 0.25% 5.19% 4.19% 5.46% 2.07%
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1 year 5.55 0.47 4.91 -0.09 4.69 3.69 5.30 1.93
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5 years 27.28 21.19 24.33 22.37 22.24 22.24 25.77 21.72
Annual average 4.94 3.92 4.45 4.12 4.10 4.10 4.69 4.01
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10 years 65.77 57.90 59.48 59.48 53.05 53.05 60.38 55.18
Annual average 5.18 4.67 4.78 4.78 4.35 4.35 4.84 4.49
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Annual average
(life of fund) 7.19 6.91 6.96 6.96 6.65 6.65 6.99 6.80
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Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for class A and M
shares reflect a sales charge of 4.75% and 3.25%, respectively (which
for class A shares does not reflect a reduction in sales charges that
went into effect on January 28, 2004; if this reduction had been in
place for all periods indicated, returns would have been higher). Class
B share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the
first year that is eliminated thereafter. Performance for class A, C,
and M shares is derived from the historical performance of class B
shares, adjusted for the applicable sales charge (or CDSC) and higher or
lower operating expenses for such shares.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/04
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Lehman Lipper Insured
Municipal Municipal Debt Funds
Bond Index category average*
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6 months 5.73% 5.67%
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1 year 6.18 5.50
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5 years 31.93 25.25
Annual average 5.70 4.60
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10 years 78.50 63.01
Annual average 5.97 4.99
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Annual average
(life of fund) 8.10 7.43
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Index and Lipper results should be compared to fund performance at net
asset value.
* Over the 6-month and 1-, 5-, and 10-year periods ended 1/31/04, there
were 53, 49, 42, and 26 funds, respectively, in this Lipper category.
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PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 1/31/04
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Class A Class B Class C Class M
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Distributions (number) 6 6 6 6
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Income 1 $0.275119 $0.225633 $0.214135 $0.252748
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Capital gains 1
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Long-term $0.204000 $0.204000 $0.204000 $0.204000
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Short-term $0.052500 $0.052500 $0.052500 $0.052500
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Total $0.531619 $0.482133 $0.470635 $0.509248
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Share value: NAV POP NAV NAV NAV POP
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7/31/03 $14.93 $15.67 $14.95 $14.95 $14.97 $15.47
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1/31/04 15.22 15.94* 15.25 15.25 15.27 15.78
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Current return (end of period)
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Current dividend rate 2 3.40% 3.25% 2.75% 2.60% 3.10% 3.00%
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Taxable equivalent 3 5.23 5.00 4.23 4.00 4.77 4.62
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Current 30-day SEC yield 4 2.62 2.50 1.93 1.78 2.30 2.23
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Taxable equivalent 3 4.03 3.85 2.97 2.74 3.54 3.43
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* Reflects a reduction in sales charges that took effect on January 28,
2004.
1 Capital gains, if any, are taxable for federal and, in most cases,
state purposes. For some investors, investment income may be subject to
the federal alternative minimum tax. Income from federally exempt funds
may be subject to state and local taxes.
2 Most recent distribution, excluding capital gains, annualized and
divided by NAV or POP at end of period.
3 Assumes maximum 35.00% federal tax rate for 2003. Results for
investors subject to lower tax rates would not be
as advantageous.
4 Based only on investment income, calculated using SEC guidelines.
Reflects an expense waiver in effect during the period, without which
yields would have been lower.
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TOTAL RETURN FOR PERIODS ENDED 12/31/03 (MOST RECENT CALENDAR QUARTER)
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Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (7/26/99) (6/1/95)
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NAV POP NAV CDSC NAV CDSC NAV POP
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6 months 0.89% -3.90% 0.56% -4.31% 0.46% -0.51% 0.79% -2.55%
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1 year 4.58 -0.42 3.86 -1.10 3.65 2.66 4.25 0.87
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5 years 28.30 22.21 25.36 23.38 23.15 23.15 26.72 22.58
Annual average 5.11 4.09 4.62 4.29 4.25 4.25 4.85 4.16
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10 years 66.90 58.99 60.46 60.46 54.06 54.06 61.31 56.02
Annual average 5.26 4.75 4.84 4.84 4.42 4.42 4.90 4.55
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Annual average
(life of fund) 7.20 6.91 6.96 6.96 6.65 6.65 6.99 6.80
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Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Net asset value (NAV) is the price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. The
NAV is calculated by dividing the net value of all the fund's assets by
the number of outstanding shares.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% (since reduced to 4.50%) maximum
sales charge for class A shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth year,
the CDSC no longer applies. The CDSC for class C shares is 1% for one
year after purchase.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without an initial sales charge).
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption (except on certain
redemptions of shares bought without an initial sales charge).
Comparative indexes
Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.
Lehman Global Aggregate Bond Index is an unmanaged index used as a broad
measure of international investment-grade bonds.
Lehman GNMA Index is an unmanaged index of Government National Mortgage
Association bonds.
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged
index of international stocks from Europe, Australasia, and the Far
East.
Russell 2000 Index is an unmanaged index of common stocks that generally
measure performance of small to midsize companies within the Russell
3000 Index.
S&P 500 Index is an unmanaged index of common stock performance.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper Inc. is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
A note about duplicate mailings
In response to investors' requests, the SEC has modified mailing
regulations for proxy statements, semiannual and annual reports, and
prospectuses. Putnam is now able to send a single copy of these
materials to customers who share the same address. This change will
automatically apply to all shareholders except those who notify us. If
you would prefer to receive your own copy, please call Putnam at
1-800-225-1581.
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. Our proxy voting guidelines and policies are
available on the Putnam Individual Investor Web site,
www.putnaminvestments.com, by calling Putnam's Shareholder Services at
1-800-225-1581, or on the SEC's Web site, www.sec.gov.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or loss
the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment
income ratios, and portfolio turnover in one summary table, reflecting
the five most recent reporting periods. In a semiannual report, the
highlight table also includes the current reporting period. For open-end
funds, a separate table is provided for each share class.
The fund's portfolio
January 31, 2004 (Unaudited)
Key to Abbreviations
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AMBAC AMBAC Indemnity Corporation
COP Certificate of Participation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
GNMA Coll. Government National Mortgage Association Collateralized
G.O. Bonds General Obligation Bonds
MBIA MBIA Insurance Company
PSFG Permanent School Fund Guaranteed
VRDN Variable Rate Demand Notes
XLCA XL Capital Assurance
Municipal bonds and notes (99.1%) (a)
Principal amount Rating (RAT) Value
Alabama (2.6%)
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$3,000,000 Alabama A&M U. Rev. Bonds, MBIA,
6 1/2s, 11/1/25 Aaa $3,330,000
7,500,000 Jefferson Cnty., Swr. Rev. Bonds,
FGIC, 5 3/4s, 2/1/38 AAA 8,681,250
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12,011,250
Alaska (2.6%)
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AK State Hsg. Fin. Corp. Rev. Bonds,
Ser. A
5,340,000 4.4s, 12/1/31 Aaa 5,553,600
6,000,000 MBIA, 5.9s, 12/1/19 Aaa 6,247,500
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11,801,100
Arkansas (0.4%)
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2,000,000 Little Rock G.O. Bonds (Cap. Impt.),
FSA, 3.95s, 4/1/19 Aaa 1,987,500
California (8.9%)
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2,105,000 Alvord, G.O. Bonds, Ser. A, MBIA,
5.9s, 2/1/20 Aaa 2,504,950
12,000,000 CA State Dept. of Wtr. Resources
Rev. Bonds, Ser. A, AMBAC, 5 1/2s,
5/1/13 Aaa 13,740,000
3,000,000 CA Statewide Cmnty. Dev. Auth. COP
(Motion Picture & TV Fund), AMBAC,
5.35s, 1/1/24 Aaa 3,131,250
2,475,000 Golden State Tobacco Securitization
Corp. Rev. Bonds (Tobacco
Settlement), Ser. B, AMBAC,
5s, 6/1/38 Aaa 2,515,219
7,000,000 San Diego Cnty., Wtr. Auth. COP,
FGIC, 5.681s, 4/23/08 (acquired
various dates from 7/17/97 to
8/13/02, cost $7,472,600) (RES) Aaa 8,015,000
2,000,000 San Diego, Unified School Dist. G.O.
Bonds (Election of 1998), Ser. E,
FSA, 5 1/4s, 7/1/19 Aaa 2,192,500
3,680,000 Santa Ana, Fin. Auth. Lease
Rev. Bonds (Police Admin. & Hldg.
Fac.), Ser. A, MBIA, 6 1/4s, 7/1/17 Aaa 4,554,000
3,905,000 Vallejo City, Unified School Dist.
G.O. Bonds, Ser. A, MBIA, 5.9s,
2/1/22 Aaa 4,622,544
--------------
41,275,463
Colorado (2.3%)
- -------------------------------------------------------------------------------
689,000 CO Hlth. Fac. Auth. Rev. Bonds
(Cmnty. Provider Pooled Loan
Program), Ser. A, FSA, 7 1/4s,
7/15/17 Aaa 691,012
5,000,000 Denver, City & Cnty. Arpt.
Rev. Bonds, MBIA, 5 1/2s, 11/15/25 Aaa 5,318,750
4,000,000 Weld Cnty. School Dist. G.O. Bonds,
FSA, 5 1/2s, 12/1/19 Aaa 4,490,000
--------------
10,499,762
District of Columbia (0.9%)
- -------------------------------------------------------------------------------
1,000,000 DC COP, AMBAC, 5 1/4s, 1/1/09 AAA 1,112,500
3,000,000 DC G.O. Bonds, Ser. A, FSA, 5 7/8s,
6/1/05 Aaa 3,180,000
--------------
4,292,500
Florida (6.7%)
- -------------------------------------------------------------------------------
13,675,000 Hernando Cnty., Rev. Bonds (Criminal
Justice Complex Fin.), FGIC, 7.65s,
7/1/16 Aaa 18,820,219
5,000,000 Orlando & Orange Cnty., Expressway
Auth. Rev. Bonds, FGIC, 8 1/4s,
7/1/14 Aaa 7,006,250
3,935,000 Sumter Cnty., School Dist.
Rev. Bonds (Multi Dist. Loan
Program), FSA, 7.15s, 11/1/15 Aaa 5,208,956
--------------
31,035,425
Georgia (1.5%)
- -------------------------------------------------------------------------------
3,360,000 Fulton Cnty., Dev. Auth. Rev. Bonds
(Klaus Pkg. & Fam. Hsg. Project),
MBIA, 5 1/4s, 11/1/20 Aaa 3,675,000
415,000 GA Muni. Elec. Pwr. Auth.
Rev. Bonds, Ser. Y, AMBAC, 6.4s,
1/1/13 Aaa 505,781
2,500,000 Muni. Elec. Auth. Rev. Bonds, 5s,
1/1/26 AAA 2,765,625
--------------
6,946,406
Idaho (1.7%)
- -------------------------------------------------------------------------------
7,760,000 ID Hlth. Fac. Auth. VRDN (St. Lukes
Med. Ctr.), FSA, 0.98s, 7/1/30 VMIG1 7,760,000
Illinois (7.0%)
- -------------------------------------------------------------------------------
5,500,000 Chicago, G.O. Bonds, Ser. A, AMBAC,
5 5/8s, 1/1/39 Aaa 6,022,500
Chicago, Board of Ed. G.O. Bonds,
Ser. A
1,000,000 FGIC, 5 1/4s, 12/1/20 Aaa 1,117,500
1,500,000 MBIA, 5 1/4s, 12/1/19 Aaa 1,633,125
4,000,000 Cook Cnty., G.O. Bonds, Ser. D,
AMBAC, 5 1/4s, 11/15/21 Aaa 4,300,000
1,000,000 Du Page Cnty., Cmnty. High School
Dist. G.O. Bonds (Dist. No. 108 -
Lake Park), FSA, 5.6s, 1/1/20 Aaa 1,120,000
5,000,000 IL G.O. Bonds, Ser. 1, MBIA, 5 1/4s,
10/1/19 Aaa 5,462,500
3,000,000 IL State G.O. Bonds, FGIC, 6s,
11/1/26 Aaa 3,592,500
Regl. Trans. Auth. Rev. Bonds
5,000,000 Ser. A, AMBAC, 8s, 6/1/17 Aaa 6,812,500
2,000,000 Ser. B, MBIA, 5 3/4s, 6/1/33 Aaa 2,342,500
--------------
32,403,125
Indiana (4.1%)
- -------------------------------------------------------------------------------
Brownsburg Ind. 1999 School Bldg.
Corp. Rev Bonds (1st Mtge.), Ser. A,
FSA
3,465,000 5 1/4s, 9/15/19 AAA 3,794,175
3,295,000 5 1/4s, 9/15/18 AAA 3,632,738
6,605,000 Center Grove, Bldg. Rev. Bonds,
AMBAC, 5 1/2s, 1/15/26 Aaa 7,199,450
1,000,000 Evansville Vanderburgh Pub. Leasing
Corp. Rev. Bonds (1st Mtge.), MBIA,
5 3/4s, 7/15/18 Aaa 1,138,750
3,135,000 IN Bond Bk. Rev. Bonds, AMBAC, 5s,
2/1/06 Aaa 3,338,775
--------------
19,103,888
Kansas (0.4%)
- -------------------------------------------------------------------------------
1,835,000 Olathe, Hlth. Fac. VRDN (Olathe Med.
Ctr.), Ser. A, AMBAC, 0.98s, 9/1/32 A-1+ 1,835,000
Louisiana (1.7%)
- -------------------------------------------------------------------------------
98,898 East Baton Rouge, Mtge. Fin. Auth.
Rev. Bonds (Single Fam.), Ser. B,
GNMA Coll., 8 1/4s, 2/25/11 AAA 99,887
3,000,000 LA Rev. Bonds, Ser. A, AMBAC,
5 3/8s, 6/1/19 Aaa 3,285,000
4,000,000 LA State U. & Agriculture &
Mechanical College Rev. Bonds, MBIA,
5 1/2s, 7/1/26 Aaa 4,260,000
--------------
7,644,887
Michigan (7.1%)
- -------------------------------------------------------------------------------
720,000 Detroit, Rev. Bonds, Ser. B, FGIC,
5 1/4s, 7/1/20 Aaa 774,900
13,380,000 Detroit, Swr. Disp. VRDN, Ser. B,
FSA, 1s, 7/1/33 VMIG1 13,380,000
500,000 Kent, Hosp. Fin. Auth. Rev. Bonds
(Spectrum Hlth. Care), Ser. A, MBIA,
5 1/2s, 1/15/17 AAA 562,500
5,000,000 MI State Hosp. Fin. Auth. Rev. Bonds
(Mercy Hlth. Svcs.), Ser. A, AMBAC,
6s, 8/15/34 Aaa 5,637,500
MI State Strategic Fund, Ltd.
Rev. Bonds (Detroit Edison Co.),
AMBAC
3,500,000 4.85s, 9/1/30 Aaa 3,902,500
4,000,000 7s, 5/1/21 Aaa 5,230,000
3,190,000 Northern Michigan U. VRDN, FGIC,
0.98s, 6/1/31 VMIG1 3,190,000
--------------
32,677,400
Mississippi (3.7%)
- -------------------------------------------------------------------------------
4,000,000 Mississippi Dev. Bank Special Oblig.
Rev. Bonds (Cap. & Equip.), Ser. A,
AMBAC, 5 5/8s, 7/1/31 AAA 4,585,000
MS Dev. Bk. Special Obligation
Rev. Bonds (Waste Wtr. & Solid Waste
Mgt.), Ser. A, FSA
1,855,000 5 3/8s, 2/1/19 Aaa 2,028,906
1,755,000 5 3/8s, 2/1/18 Aaa 1,932,694
7,500,000 MS State G.O. Bonds, Ser. A, MBIA,
5 1/4s, 11/1/20 AAA 8,400,000
--------------
16,946,600
Missouri (2.0%)
- -------------------------------------------------------------------------------
9,335,000 MO State Hlth. & Edl. Fac. Auth.
VRDN (Cox Hlth. Syst.), AMBAC,
1.03s, 6/1/22 VMIG1 9,335,000
Montana (0.4%)
- -------------------------------------------------------------------------------
1,725,000 Forsyth, Poll. Control Mandatory Put
Bonds (Avista Corp.), AMBAC, 5s,
10/1/32 Aaa 1,886,719
Nebraska (1.3%)
- -------------------------------------------------------------------------------
6,000,000 NE Investment Fin. Auth. Rev. Bonds,
MBIA, 6.66s, 12/8/16 Aaa 6,000,960
Nevada (1.8%)
- -------------------------------------------------------------------------------
4,000,000 Clark Cnty., Rev. Bonds, Ser. B,
FGIC, 5 1/4s, 7/1/20 Aaa 4,280,000
3,665,000 Washoe Cnty., Arpt. Auth.
Rev. Bonds, FSA, 5s, 7/1/11 Aaa 4,081,894
--------------
8,361,894
New Hampshire (1.2%)
- -------------------------------------------------------------------------------
5,000,000 NH State Tpk. Syst. Rev. Bonds,
FGIC, 6.806s, 11/1/17 Aaa 5,743,750
New Jersey (2.3%)
- -------------------------------------------------------------------------------
10,000,000 NJ Econ. Dev. Auth. Rev. Bonds
(School Fac. Construction), Ser. F,
FGIC, 5 1/4s, 6/15/21 Aaa 10,787,500
New York (9.1%)
- -------------------------------------------------------------------------------
7,135,000 Metropolitan Trans. Auth.
Rev. Bonds, Ser. A, FGIC, 5 1/2s,
11/15/19 Aaa 8,312,275
Nassau Cnty., Hlth. Care Syst.
Rev. Bonds (Nassau Hlth. Care
Corp.), FSA
4,610,000 6s, 8/1/13 Aaa 5,434,038
2,285,000 6s, 8/1/12 Aaa 2,673,450
10,800,000 NY City, Muni. Wtr. & Swr. Fin.
Auth. VRDN, Ser. G, FGIC, 1s,
6/15/24 VMIG1 10,800,000
NY State Dorm. Auth. Rev. Bonds
(Brooklyn Law School), Ser. B, XLCA
2,270,000 5 3/8s, 7/1/22 Aaa 2,465,788
2,215,000 5 3/8s, 7/1/20 Aaa 2,433,731
9,750,000 NY State Energy Research & Dev.
Auth. Poll. Control Rev. Bonds
(Niagara Mohawk Pwr. Corp.), Ser. A,
FGIC, 7.2s, 7/1/29 Aaa 10,176,465
--------------
42,295,747
North Carolina (1.4%)
- -------------------------------------------------------------------------------
6,000,000 Metropolitan Pier & Exposition Auth.
Rev. Bonds (McCormack Place
Expansion Project), FGIC,
5 1/2s, 12/15/24 Aaa 6,540,000
Ohio (2.1%)
- -------------------------------------------------------------------------------
6,765,000 Cleveland, Wtr. Wks. Rev. Bonds,
Ser. J, FSA, 5s, 1/1/06 Aaa 7,204,725
1,000,000 Cleveland-Cuyahoga Cnty., Port.
Auth. Rev. Bonds (Rock & Roll Hall
of Fame), FSA, 3.6s, 12/1/14 Aaa 995,160
1,535,000 Morley Library Dist. G.O. Bonds
(Lake Cnty. Dist. Library), AMBAC,
5 1/4s, 12/1/19 Aaa 1,680,825
45,000 OH Hsg. Fin. Agcy. Single Fam. Mtge.
Rev. Bonds, Ser. 85-A, FGIC, zero %,
1/15/15 Aaa 15,244
--------------
9,895,954
Oklahoma (0.7%)
- -------------------------------------------------------------------------------
3,000,000 OK City Arpt. Trust Rev. Bonds,
Ser. A, FSA, 5 1/4s, 7/1/21 Aaa 3,180,000
Pennsylvania (2.8%)
- -------------------------------------------------------------------------------
1,500,000 Delaware Valley, Regl. Fin. Auth.
Rev. Bonds, Ser. A, AMBAC, 5 1/2s,
8/1/28 Aaa 1,723,125
1,750,000 PA State Pub. School Bldg. Auth.
Rev. Bonds (Philadelphia School
Dist.), FSA, 5 1/2s, 6/1/28 Aaa 2,010,313
Philadelphia, School Dist. G.O.
Bonds, Ser. A, FSA Aaa
6,400,000 5 1/2s, 2/1/31 Aaa 6,904,000
2,000,000 5 1/2s, 2/1/18 Aaa 2,215,000
--------------
12,852,438
Puerto Rico (2.2%)
- -------------------------------------------------------------------------------
9,000,000 PR Elec. Pwr. Auth. Rev. Bonds,
Ser. NN, MBIA, 5 1/4s, 7/1/22 Aaa 10,215,000
Texas (11.3%)
- -------------------------------------------------------------------------------
2,100,000 Austin Rev. Bonds, MBIA, 5 1/4s,
5/15/19 Aaa 2,367,750
2,500,000 Dallas, Indpt. School Dist. G.O.
Bonds, PSFG, 5 1/4s, 2/15/19 Aaa 2,712,500
5,280,000 Houston, Arpt. Syst. Rev. Bonds,
FSA, 5s, 7/1/21 Aaa 5,524,200
9,250,000 Houston, Wtr. & Swr. Rev. Bonds,
Ser. A, FSA, 5 3/4s, 12/1/32 Aaa 10,972,813
North Central TX Hlth. Fac. Dev.
Corp. VRDN
4,290,000 (Dates Hosp. Prsbytrn Med. Ctr),
Ser. C, MBIA, 0.98s, 12/1/15 VMIG1 4,290,000
4,700,000 (Hosp. Presbyterian Med. Ctr.),
Ser. D, MBIA, 0.98s, 12/1/15 VMIG1 4,700,000
5,000,000 Rio Grande Valley Hlth. Fac. Dev.
Corp. Rev. Bonds, MBIA, 6.4s, 8/1/12 Aaa 5,062,250
4,000,000 San Antonio Wtr. Rev. Bonds, FSA,
5 1/2s, 5/15/20 Aaa 4,405,000
5,000,000 Tarrant Cnty., Hlth. Fac. Dev.
Rev. Bonds (TX Hlth. Res. Sys.),
Ser. A, MBIA, 5 3/4s, 2/15/15 Aaa 5,856,250
2,500,000 TX State G.O. Bonds, FSA, 5s,
10/1/11 AAA 2,809,375
3,150,000 Victoria G.O. Bonds, FGIC, 5 1/2s,
8/15/20 Aaa 3,492,563
--------------
52,192,701
Utah (3.0%)
- -------------------------------------------------------------------------------
UT State Pwr. Supply Rev. Bonds
(Intermountain Pwr. Agcy.), Ser. A,
MBIA
7,900,000 6.15s, 7/1/14 (prerefunded) Aaa 8,838,125
4,495,000 6.15s, 7/1/14 Aaa 5,011,921
--------------
13,850,046
Washington (5.9%)
- -------------------------------------------------------------------------------
2,680,000 Central Puget Sound, Regl. Trans.
Auth. Rev. Bonds, FGIC, 5 1/4s,
2/1/18 Aaa 3,031,750
10,000,000 Port of Seattle Rev. Bonds, Ser. A,
FGIC, 5 1/2s, 10/1/22 Aaa 10,775,000
WA State Pub. Pwr. Supply Syst.
Rev. Bonds
6,000,000 (Nuclear No. 3), Ser. B, MBIA,
7 1/8s, 7/1/16 Aaa 7,852,500
5,000,000 (Nuclear No. 1), Ser. A, AMBAC,
5.7s, 7/1/09 Aaa 5,531,250
--------------
27,190,500
- -------------------------------------------------------------------------------
Total Investments
(cost $430,404,033) $458,548,515
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $462,606,239.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at January 31, 2004 for the
securities listed. Ratings are generally ascribed to securities at the
time of issuance. While the agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at January 31, 2004. Securities rated by Putnam are indicated
by "/P" and are not publicly rated.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at January 31, 2004 was
$8,015,000 or 1.7% of net assets.
The rates shown on VRDN are the current interest rates shown at January
31, 2004.
The fund had the following industry group concentrations greater than
10% at January 31, 2004
(as a percentage of net assets):
Utilities 29.5%
Transportation 11.7
Health care 11.7
The fund had the following insurance concentrations greater than 10% at
January 31, 2004 (as a percentage of net assets):
FGIC 27.1%
MBIA 24.7
FSA 23.7
AMBAC 20.2
The accompanying notes are an integral part of these financial
statements.
Statement of assets and liabilities
January 31, 2004 (Unaudited)
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$430,404,033) (Note 1) $458,548,515
- -------------------------------------------------------------------------------
Cash 2,616,783
- -------------------------------------------------------------------------------
Interest and other receivables 4,371,576
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 267,621
- -------------------------------------------------------------------------------
Total assets 465,804,495
Liabilities
- -------------------------------------------------------------------------------
Distributions payable to shareholders 605,652
- -------------------------------------------------------------------------------
Payable for securities purchased 1,012,711
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,031,305
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 198,857
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 79,222
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 56,817
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 541
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 160,318
- -------------------------------------------------------------------------------
Other accrued expenses 52,833
- -------------------------------------------------------------------------------
Total liabilities 3,198,256
- -------------------------------------------------------------------------------
Net assets $462,606,239
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $435,604,728
- -------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (192,164)
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (950,807)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 28,144,482
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $462,606,239
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($321,028,385 divided by 21,086,709 shares) $15.22
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.50 of $15.22)* $15.94
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($128,810,732 divided by 8,448,352 shares)** $15.25
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($11,496,761 divided by 753,826 shares)** $15.25
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,270,361 divided by 83,219 shares) $15.27
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $15.27)*** $15.78
- -------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or
more and on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
*** On single retail sales of less than $50,000. On sales of $50,000 or more
and on group sales, the offering price is reduced.
The accompanying notes are an integral part of these financial
statements.
Statement of operations
Six months ended January 31, 2004 (Unaudited)
Interest income: $11,062,039
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,270,485
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 276,828
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 13,091
- -------------------------------------------------------------------------------
Administrative services (Note 2) 4,066
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 352,764
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 604,669
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 64,711
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 4,111
- -------------------------------------------------------------------------------
Other 58,556
- -------------------------------------------------------------------------------
Non-recurring costs (Note 5) 5,573
- -------------------------------------------------------------------------------
Costs assumed by Manager (Note 5) (5,573)
- -------------------------------------------------------------------------------
Total expenses 2,649,281
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (21,331)
- -------------------------------------------------------------------------------
Net expenses 2,627,950
- -------------------------------------------------------------------------------
Net investment income 8,434,089
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 4,776,535
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 13,958,793
- -------------------------------------------------------------------------------
Net gain on investments 18,735,328
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $27,169,417
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Six months ended Year ended
January 31 July 31
Decrease in net assets 2004* 2003
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $8,434,089 $19,790,355
- -------------------------------------------------------------------------------
Net realized gain on investments 4,776,535 9,620,709
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 13,958,793 (15,397,222)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 27,169,417 14,013,842
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From tax-exempt income
Class A (6,332,050) (14,369,544)
- -------------------------------------------------------------------------------
Class B (2,093,848) (5,127,156)
- -------------------------------------------------------------------------------
Class C (180,817) (404,425)
- -------------------------------------------------------------------------------
Class M (27,311) (74,312)
- -------------------------------------------------------------------------------
From net realized short-term gain on investments
Class A (1,116,737) (1,102,803)
- -------------------------------------------------------------------------------
Class B (456,430) (484,680)
- -------------------------------------------------------------------------------
Class C (41,167) (39,443)
- -------------------------------------------------------------------------------
Class M (4,466) (6,442)
- -------------------------------------------------------------------------------
From net realized long-term gain on investments
Class A (4,339,322) (7,592,845)
- -------------------------------------------------------------------------------
Class B (1,773,555) (3,337,034)
- -------------------------------------------------------------------------------
Class C (159,963) (271,570)
- -------------------------------------------------------------------------------
Class M (17,352) (44,356)
- -------------------------------------------------------------------------------
Increase (decrease) from capital share
transactions (Note 4) (82,645,665) 4,531,446
- -------------------------------------------------------------------------------
Total decrease in net assets (72,019,266) (14,309,322)
Net assets
- -------------------------------------------------------------------------------
Beginning of period 534,625,505 548,934,827
- -------------------------------------------------------------------------------
End of period (including distributions in
excess of net investment income and
undistributed net investment income of
$192,164 and $7,773, respectively) $462,606,239 $534,625,505
- -------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.93 $15.46 $15.18 $14.52 $14.72 $15.40
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .27 .58 .67 .71 .73 .72
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .56 (.16) .27 .66 (.20) (.56)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .83 .42 .94 1.37 .53 .16
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.28) (.59) (.66) (.71) (.73) (.72)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.26) (.36) -- -- -- (.12)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.54) (.95) (.66) (.71) (.73) (.84)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.22 $14.93 $15.46 $15.18 $14.52 $14.72
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.53* 2.71 6.38 9.63 3.86 0.96
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $321,028 $368,419 $363,096 $322,302 $260,637 $243,845
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .42* .84 .82 .83 .81 .94
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.77* 3.76 4.39 4.74 5.15 4.65
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.87* 42.88 54.72 36.91 22.45 35.60
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS B
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.95 $15.48 $15.20 $14.54 $14.74 $15.42
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .22 .48 .59 .65 .68 .72
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .57 (.16) .27 .66 (.20) (.56)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .79 .32 .86 1.31 .48 .16
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.23) (.49) (.58) (.65) (.68) (.72)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.26) (.36) -- -- -- (.12)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.49) (.85) (.58) (.65) (.68) (.84)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.25 $14.95 $15.48 $15.20 $14.54 $14.74
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.25* 2.04 5.81 9.18 3.44 1.00
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $128,811 $150,266 $171,801 $196,934 $238,508 $327,920
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .75* 1.49 1.35 1.23 1.21 .90
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.45* 3.10 3.86 4.34 4.75 4.69
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.87* 42.88 54.72 36.91 22.45 35.60
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS C
- ---------------------------------------------------------------------------------------------------------------------------------
For the
Six months period
ended July 26,
January 31 1999+ to
Per-share (Unaudited) Year ended July 31 July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.95 $15.49 $15.21 $14.53 $14.72 $14.83
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .21 .46 .55 .59 .62 .01
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .56 (.17) .27 .68 (.19) (.11)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .77 .29 .82 1.27 .43 (.10)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.21) (.47) (.54) (.59) (.62) (.01)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.26) (.36) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.47) (.83) (.54) (.59) (.62) (.01)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.25 $14.95 $15.49 $15.21 $14.53 $14.72
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.19* 1.82 5.53 8.89 3.11 (0.66)*
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $11,497 $13,793 $11,885 $9,638 $1,123 $1
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .82* 1.64 1.62 1.63 1.61 .03*
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.37* 2.95 3.58 3.88 4.33 .08*
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.87* 42.88 54.72 36.91 22.45 35.60
- ---------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS M
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.97 $15.50 $15.22 $14.56 $14.76 $15.39
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .25 .54 .62 .66 .69 .66
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .56 (.16) .28 .67 (.20) (.51)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .81 .38 .90 1.33 .49 .15
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.25) (.55) (.62) (.67) (.69) (.66)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.26) (.36) -- -- -- (.12)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.51) (.91) (.62) (.67) (.69) (.78)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.27 $14.97 $15.50 $15.22 $14.56 $14.76
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.46* 2.40 6.05 9.28 3.55 0.91
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,270 $2,148 $2,154 $1,696 $2,692 $1,866
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .57* 1.14 1.12 1.13 1.11 1.24
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.62* 3.45 4.08 4.45 4.82 4.35
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.87* 42.88 54.72 36.91 22.45 35.60
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
The accompanying notes are an integral part of these financial statements.
Notes to financial statements
January 31, 2004 (Unaudited)
Note 1
Significant accounting policies
Putnam Tax-Free Insured Fund (the "fund") is a series of Putnam Tax-Free
Income Trust (the "trust") which is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The fund pursues its objective of seeking high
current income exempt from federal income tax by investing in tax exempt
securities that are covered by insurance guaranteeing the timely payment
of principal and interest, are rated AAA or Aaa, or are backed by the
U.S. government.
The fund offers class A, class B, class C and class M shares. Class A
shares are sold with a maximum front-end sales charge of 4.50%. Prior to
January 28, 2004 the maximum front end sales charge for class A shares
was 4.75%. Class B shares, which convert to class A shares after
approximately eight years, do not pay a front-end sales charge but pay a
higher ongoing distribution fee than class A and class M shares, and are
subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class C shares have a higher
ongoing distribution fee than class B shares and have a one-year 1.00%
contingent deferred sales charge and do not convert to Class A shares.
Class M shares are sold with a maximum front end sales charge of 3.25%
and pay an ongoing distribution fee that is higher than class A shares
but lower than class B and class C shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
Effective April 19, 2004, a 2.00% redemption fee may apply to any shares
that are redeemed (either by selling or exchanging into another fund)
within 5 days of purchase.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in the financial
statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results could
differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are valued on the basis
of valuations provided by an independent pricing service, approved by
the Trustees. Such services use information with respect to transactions
in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. Restricted securities are valued at fair value
following procedures approved by the Trustees. Such valuations and
procedures are reviewed periodically by the Trustees.
B) Security transactions and related investment income Security
transactions are recorded on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on
the identified cost basis.
Interest income is recorded on the accrual basis. All premiums/discounts
are amortized/accreted on a yield-to-maturity basis. All premiums/discounts
are amortized/accreted on a yield-to-maturity basis. The premium in excess
of the call price, if any, is amortized to the call date; thereafter, any
remaining premium is amortized to maturity.
C) Line of credit During the period, the fund was entered into a
committed line of credit with certain banks. The line of credit
agreement included restrictions that the fund would maintain an asset
coverage ratio of at least 300% and that borrowings would not exceed
prospectus limitations. For the period ended August 6, 2003, the fund
had no borrowings against the line of credit. Effective August 6, 2003,
the fund no longer participated in a committed line of credit.
D) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986, as amended. Therefore, no
provision has been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on income
and capital gains.
The aggregate identified cost on a tax basis is $430,404,033, resulting
in gross unrealized appreciation and depreciation of $28,311,198 and
$166,716, respectively, or net unrealized depreciation of $28,144,482.
E) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid monthly. Distributions from capital gains, if any,
are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. Reclassifications are
made to the fund's capital accounts to reflect income and gains
available for distribution (or available capital loss carryovers) under
income tax regulations.
F) Expenses of the trust Expenses directly charged or attributable to
any fund will be paid from the assets of that fund. Generally, expenses
of the trust will be allocated among and charged to the assets of each
fund on a basis that the Trustees deem fair and equitable, which may be
based on the relative assets of each fund or the nature of the services
performed and relative applicability to each fund.
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on the lesser of (i) an annual rate of 0.50% of the average net
asset value of the fund or (ii) the following annual rates: 0.60% of the
first $500 million of average net assets, 0.50% of the next $500
million, 0.45% of the next $500 million, 0.40% of the next $5 billion,
0.375% of the next $5 billion, 0.355% of the next $5 billion, 0.34% of
the next $5 billion and 0.33% thereafter.
Effective January 28, 2004, Putnam Management has agreed to limit its
compensation (and, to the extent necessary bear other expenses) through
December 31, 2004 to the extent that the fund's net expenses as a
percentage of average net assets exceed the average expense ratio for
the fund's Lipper peer group of front-end load funds.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam, LLC. Putnam
Investor Services, a division of PFTC, provides investor servicing agent
functions to the fund. During six months ended January 31, 2004, the
fund paid 250,681 for these services.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the six months ended January 31,
2004, the fund's expenses were reduced by $21,331 under these
arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $726 has been allocated to the fund, and an additional fee for
each Trustees meeting attended. Trustees receive additional fees for
attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Trustee compensation and expenses in the
Statement of operations. Accrued pension liability is included in
Payable for Trustee compensation and expenses in the Statement of assets
and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B, class C and class M shares pursuant to rule 12b-1
under the Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Retail Management, a wholly-owned subsidiary of
Putnam, LLC and Putnam Retail Management GP, Inc., for services provided
and expenses incurred by it in distributing shares of the fund. The
Plans provide for payments by the fund to Putnam Retail Management at an
annual rate of up to 0.35%, 1.00%, 1.00% and 1.00% of the average net
assets attributable to class A, class B, class C and class M shares,
respectively. The Trustees have approved payment by the fund at the
annual rates of 0.20%, 0.85%, 1.00% and 0.50% of the average net assets
attributable to class A, class B, class C and class M shares,
respectively.
For the six months ended January 31, 2004, Putnam Retail Management,
acting as underwriter, received net commissions of $5,338 and $14 from
the sale of class A and class M shares, respectively, and received
$237,484 and $6,616 in contingent deferred sales charges from
redemptions of class B and class C shares, respectively. 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 as part of
an investment of $1 million or more. For the six months ended January
31, 2004, Putnam Retail Management, acting as underwriter, received
$12,066 and no monies on class A and class M redemptions, respectively.
Note 3
Purchases and sales of securities
During the six months ended January 31, 2004, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $54,623,331 and $181,192,620, respectively. There
were no purchases and sales of U.S. government securities.
Note 4
Capital shares
At January 31, 2004, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 1,163,697 $17,544,640
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 568,978 8,630,364
- ----------------------------------------------------------------
1,732,675 26,175,004
Shares repurchased (5,323,324) (80,920,658)
- ----------------------------------------------------------------
Net decrease (3,590,649) $(54,745,654)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 5,792,511 $89,388,859
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 632,380 9,775,790
- ----------------------------------------------------------------
6,424,891 99,164,649
Shares repurchased (5,234,878) (81,026,185)
- ----------------------------------------------------------------
Net increase 1,190,013 $18,138,464
- ----------------------------------------------------------------
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 207,150 $3,143,921
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 192,679 2,925,999
- ----------------------------------------------------------------
399,829 6,069,920
Shares repurchased (2,001,484) (30,488,152)
- ----------------------------------------------------------------
Net decrease (1,601,655) $(24,418,232)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 1,840,319 $28,474,156
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 193,767 3,000,465
- ----------------------------------------------------------------
2,034,086 31,474,621
Shares repurchased (3,081,309) (47,565,208)
- ----------------------------------------------------------------
Net decrease (1,047,223) $(16,090,587)
- ----------------------------------------------------------------
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 37,522 $569,551
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 20,212 306,943
- ----------------------------------------------------------------
57,734 876,494
Shares repurchased (226,200) (3,442,430)
- ----------------------------------------------------------------
Net decrease (168,466) $(2,565,936)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 469,861 $7,304,731
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 19,513 302,204
- ----------------------------------------------------------------
489,374 7,606,935
Shares repurchased (334,567) (5,197,211)
- ----------------------------------------------------------------
Net increase 154,807 $2,409,724
- ----------------------------------------------------------------
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 1,947 $29,448
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 2,855 43,399
- ----------------------------------------------------------------
4,802 72,847
Shares repurchased (65,048) (988,690)
- ----------------------------------------------------------------
Net decrease (60,246) $(915,843)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 24,513 $380,235
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 3,962 61,418
- ----------------------------------------------------------------
28,475 441,653
Shares repurchased (23,949) (367,808)
- ----------------------------------------------------------------
Net increase 4,526 $73,845
- ----------------------------------------------------------------
<NOTESTEXT>
Note 5
Regulatory matters and litigation
On November 13, 2003, Putnam Management agreed to entry of an order by the
Securities and Exchange Commission in partial resolution of administrative
and cease-and-desist proceedings initiated by the SEC on October 28, 2003
in connection with alleged excessive short-term trading by at least six
Putnam Management investment professionals. The SEC's findings reflect that
four of those employees engaged in such trading in funds over which they
had investment decision-making responsibility and had access to non-public
information regarding, among other things, current portfolio holdings and
valuations. The six individuals are no longer employed by Putnam
Management. Under the order, Putnam Management will make restitution for
losses attributable to excessive short-term trading by Putnam employees,
institute new employee trading restrictions and enhanced employee trading
compliance, retain an independent compliance consultant, and take other
remedial actions. Putnam Management neither admitted nor denied the order's
findings, which included findings that Putnam Management willfully violated
provisions of the federal securities laws. A civil monetary penalty and
other monetary relief, if any, will be determined at a later date. If a
hearing is necessary to determine the amounts of such penalty or other
relief, Putnam Management will be precluded from arguing that it did not
violate the federal securities laws in the manner described in the SEC
order, the findings set forth in the SEC order will be accepted as true by
the hearing officer and additional evidence may be presented. Putnam
Management, and not the investors in any Putnam fund, will bear all costs,
including restitution, civil penalties and associated legal fees.
Administrative proceedings instituted by the Commonwealth of Massachusetts
on October 28, 2003 against Putnam Management in connection with alleged
market timing activities by Putnam employees and by participants in some
Putnam-administered 401(k) plans are pending. Putnam Management has
committed to make complete restitution for any losses suffered by Putnam
shareholders as a result of any improper market-timing activities by Putnam
employees or within Putnam-administered 401(k) plans.
The SEC's and Commonwealth's allegations and related matters also serve
as the general basis for numerous lawsuits, including purported class
action lawsuits filed against Putnam Management and certain related
parties, including certain Putnam funds. Putnam Management has agreed to
bear any costs incurred by Putnam funds in connection with these
lawsuits. Based on currently available information, Putnam Management
believes that the likelihood that the pending private lawsuits and
purported class action lawsuits will have a material adverse financial
impact on the fund is remote, and the pending actions are not likely to
materially affect its ability to provide investment management services
to its clients, including the Putnam funds.
For the period ended January 31, 2004, Putnam Management has assumed
$5,573 of legal, shareholder servicing and communications, audit, and
Trustee fees incurred by the Fund in connection with these matters.
Review of these matters by counsel for Putnam Management and by separate
independent counsel for the Putnam funds and their independent Trustees
is continuing. In addition, Marsh & McLennan Companies, Inc., Putnam
Management's parent company, has engaged counsel to conduct a separate
review of Putnam Management's policies and controls related to
short-term trading. The fund may experience increased redemptions as a
result of these matters, which could result in increased transaction
costs and operating expenses.
Services for shareholders
Investor services
Help your investment grow Set up a program for systematic investing with
as little as $25 a month from a Putnam fund or from your own savings or
checking account. (Regular investing does not guarantee a profit or
protect against loss in a declining market.)
Switch funds easily* You can move money from one Putnam fund to another
within the same class of shares without a service charge.
Access your money easily You can have checks sent regularly or redeem
shares any business day at the then-current net asset value, which may
be more or less than the original cost of the shares. Class B and class
C shares carry a sales charge that is applied to certain withdrawals.
How to buy additional shares You may buy shares through your financial
advisor or directly from Putnam. To open an account by mail, send a
check made payable to the name of the fund along with a completed fund
application. To add to an existing account, complete the investment slip
found at the top of your Confirmation of Activity statement and return
it with a check payable to your fund.
For more information
Visit www.putnaminvestments.com A secure section of our Web site
contains complete information on your account, including balances and
transactions, updated daily. You may also conduct transactions, such as
exchanges, additional investments, and address changes. Log on today to
get your password.
Use our toll-free number 1-800-225-1581 Ask a helpful Putnam
representative or your financial advisor for details about any of these
or other services, or see your prospectus.
*This privilege is subject to change or termination. An exchange of
funds may result in a taxable event. Certain funds have imposed a 1%
redemption fee on total assets redeemed or exchanged within 90 days of
purchase. See a prospectus for details. For shares purchased on or after
April 19, 2004, a 2% redemption fee will be applied to shares exchanged
or sold within 5 days of purchase.
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds.
Investors should consider the investment objective, risks, charges, and
expenses of a fund before investing. For a prospectus containing this
and other information for any Putnam fund or product, call your
financial advisor at 1-800-225-1581 and ask for a prospectus. Please
read the prospectus carefully before investing.
Growth Funds
Discovery Growth Fund
Growth Opportunities Fund
Health Sciences Trust
International New Opportunities Fund*
New Opportunities Fund
OTC & Emerging Growth Fund
Small Cap Growth Fund
Vista Fund
Voyager Fund
Blend Funds
Capital Appreciation Fund
Capital Opportunities Fund
Europe Equity Fund*
Global Equity Fund*
Global Natural Resources Fund*
International Capital Opportunities Fund*
International Equity Fund*
Investors Fund
Research Fund
Tax Smart Equity Fund
Utilities Growth and Income Fund
Value Funds
Classic Equity Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
International Growth and Income Fund*
Mid Cap Value Fund
New Value Fund
Small Cap Value Fund+
Income Funds
American Government Income Fund
Diversified Income Trust
Global Income Trust*
High Yield Advantage Fund+*
High Yield Trust*
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund++
U.S. Government Income Trust
Tax-free Income Funds
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund++
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
Asset Allocation Funds
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* A 1% redemption fee on total assets redeemed or exchanged within 90
days of purchase may be imposed for all share classes of these funds.
+ Closed to new investors.
++ An investment in a money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
For shares purchased on or after April 19, 2004, a 2% redemption fee
will be applied to shares exchanged or sold within 5 days of purchase.
Check your account balances and the most recent month-end performance at
www.putnaminvestments.com.
Fund information
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust
Company
Legal Counsel
Ropes & Gray LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Treasurer and Principal
Financial Officer
Patricia C. Flaherty
Senior Vice President
Steven D. Krichmar
Vice President and
Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Beth S. Mazor
Vice President
Gordon H. Silver
Vice President
Mark C. Trenchard
Vice President and
BSA Compliance Officer
William H. Woolverton
Vice President and
Chief Legal Officer
Judith Cohen
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax-Free
Insured Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, the most recent copy of Putnam's
Quarterly Performance Summary, and Putnam's Quarterly Ranking Summary.
For more recent performance, please visit www.putnaminvestments.com.
Investors should consider the investment objective, risks, charges, and
expenses of a fund, which are described in its prospectus. For more
information or to request a prospectus, call 1-800-225-1581 toll free.
Please read the prospectus carefully before investing. The fund's
Statement of Additional Information contains additional information
about the fund's Trustees and is available without charge upon request
by calling 1-800-225-1581.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
Call 1-800-225-1581 or visit our Web site www.putnaminvestments.com.
SA043-211462 035/438/629/849 3/04
Not FDIC Insured May Lose Value No Bank Guarantee
Item 2. Code of Ethics:
- -----------------------
Not applicable
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
Not applicable
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
Not applicable
Items 5-6. [Reserved]
- ---------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. [Reserved]
- ------------------
Item 9. Submission of Matters to a Vote of Security Holders:
- ------------------------------------------------------------
Not applicable
Item 10. Controls and Procedures:
- ---------------------------------
(a) The registrant's principal executive officer and principal financial
officer have concluded, based on their evaluation of the
effectiveness of the design and operation of the registrant's
disclosure controls and procedures as of a date within 90 days of
the filing date of this report on Form N-CSR, that the design and
operation of such procedures are generally effective to provide
reasonable assurance that information required to be disclosed by
the investment company in the reports that it files or submits under
the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
Commission's rules and forms.
Although such officers reached the conclusion expressed in the
preceding paragraph, they are aware of matters that raise concerns
with respect to controls, each of which arose in connection with the
administration of 401(k) plans by Putnam Fiduciary Trust Company.
The first matter, which occurred in early 2001, involved the willful
circumvention of controls by certain Putnam employees in connection
with the correction of operational errors with respect to a 401(k)
client's investment in certain Putnam Funds, which led to losses in
five Putnam Funds (not including the registrant). Such officers
became aware of this matter in February 2004. The second matter,
which occurred in 2002, involved the willful circumvention by
certain Putnam employees of policies and procedures in connection
with the payment of Putnam corporate expenses. Such officers did
not learn that this matter involved a Putnam Fund until January
2004. Putnam has made restitution to the affected Funds,
implemented a number of personnel changes, including senior
personnel, begun to implement changes in procedures to address these
items and informed the SEC, the Funds' Trustees and independent
auditors. An internal investigation and review of procedures and
controls are currently ongoing.
In reaching the conclusion expressed herein, the registrant's
principal executive officer and principal financial officer
considered a number of factors, including the nature of the matters
described above, when the matters occurred, the individuals
involved, personnel changes that have occurred since these matters
occurred, the results to date of the current ongoing investigation
and the overall quality of controls at Putnam at this time.
(b) Changes in internal control over financial reporting:
Not applicable
Item 11. Exhibits:
- ------------------
(a) Not applicable
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002
are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: April 1, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Executive Officer
Date: April 1, 2004
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: April 1, 2004
Putnam
Tax-Free
High Yield
Fund
Item 1. Report to Stockholders:
- -------------------------------
The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
1-31-04
[GRAPHIC OMITTED: HARMONICA]
[SCALE LOGO OMITTED]
From the Trustees
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
In recent months we have communicated with you about Putnam's commitment
to establishing high fiduciary standards within the investment
management industry. The firm's efforts took a step forward in January
with a series of initiatives that were outlined in a letter to
shareholders from Putnam President and CEO Ed Haldeman. Among other
things, Putnam is placing voluntary limits on fund expenses and reducing
sales loads. In addition, beginning this spring, shareholder
communications will provide enhanced disclosure, including a comparison
of fund costs with industry averages and a gauge of each fund's relative
risk. They will also disclose the number of shares held by Putnam
employees and discuss how the portfolio management team is compensated.
Another new measure, taking effect April 19, 2004, will impose a 2% fee
on shares that are sold within 5 days of purchase. This redemption fee
demonstrates Putnam's commitment to preventing short-term trading in its
funds, which can be detrimental to shareholders.
These changes serve to advance shareholder interests and provide a
framework to help you make financial decisions. We encourage you to
review the new disclosure as it is implemented and discuss it with your
financial advisor. While we are pleased with this progress, the Trustees
and Putnam are continuing to explore other measures that may provide
greater transparency and enhanced protection for long-term shareholders.
During the six-month period ended January 31, 2004, Putnam Tax-Free High
Yield Fund performed well in absolute terms, although its results at net
asset value were slightly behind both its benchmark and Lipper peer
group average. The accompanying report from the fund's management team
discusses how the fund benefited from an overall -- if irregular -- rise
in bond prices and renewed investor interest in lower-rated bonds. The
fund's holdings in various sectors did well, but some larger positions
that have been in the fund for a long time held the fund back. The
report also addresses how the managers are using diversification in an
effort to reduce risk and still maintain a high current return.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
March 17, 2004
Report from Fund Management
Fund highlights
* Municipal high-yield bonds returned to favor with investors during the
six months ended January 31, 2004, helping Putnam Tax-Free High Yield
Fund to generate a 5.67% total return on class A shares at net asset
value (NAV) and 0.68% at public offering price (POP).
* The fund's result at NAV was slightly behind that of its benchmark,
the Lehman Municipal Bond Index, which returned 5.73% for the period. We
attribute this to a few older positions that hurt the fund's
performance.
* These same older positions also restrained the fund's progress
relative to its Lipper category, High Yield Municipal Debt Funds, which
averaged a return of 5.78% for the period.
* See the Performance Summary beginning on page 8 for complete fund
performance, comparative performance, and Lipper data.
Performance commentary
As interest rates trended irregularly downward, an overall rise in bond
prices created a favorable climate for bond investors during the six
months ended January 31, 2004. Demand for higher-yielding bonds
intensified as the prospect for an economic recovery appeared to
encourage yield-hungry investors to accept higher risks in pursuit of
greater returns. In this environment, your fund performed well, although
its progress was limited by negative results from a few lower-rated
holdings that have been in the portfolio for a long time. The largest of
these positions is composed of industrial development bonds (IDBs)
issued on behalf of the Hoover Group, discussed in detail on page 5.
The fund's duration also influenced its relative performance. Duration
is a measure of a portfolio's sensitivity to changes in interest rates;
a longer duration makes the fund more sensitive, and vice versa. With
interest rates near 45-year lows and indications of strong economic
recovery, we believed some increase in interest rates was possible. As a
result, it seemed more prudent to maintain a slightly shorter duration
than the benchmark and other comparable funds. Although this limited
your fund's upside potential, we continue to believe that some caution
is warranted.
FUND PROFILE
Putnam Tax-Free High Yield Fund seeks to provide a high level of current
income free from federal income tax by investing in a diversified
portfolio of lower-rated and investment-grade municipal bonds. The fund
is intended and may be appropriate for investors seeking tax-advantaged
income who are willing to accept some credit risk.
Market overview
The bond market experienced a significant sell-off just prior to the
semiannual period that drove yields higher and prices correspondingly
lower. Thereafter, yields drifted up and down through the end of 2003
with each bit of news that either challenged or supported the notion of
a sustained economic recovery. Overall, municipal bond yields trended
downward between August 1, 2003, and January 31, 2004, and were slightly
lower at the end of the period.
California's general obligation (GO) bonds were of interest during the
period. The difference in yield between California GO bonds and
AAA-rated bonds had been narrowing and at the start of the period seemed
to reflect investors' improving confidence in California's future.
However, shortly after Arnold Schwarzenegger took office as governor, he
made it plain that if voters did not approve a $15 billion bond
issuance, budget cuts would be necessary to prevent the state from going
into bankruptcy. Investor reaction to this uncertainty has driven the
yield spread between California GO bonds and AAA-rated bonds wider, and
we expect that it will remain wide for some time.
During the period, the ratio of municipal bond yields to comparable
Treasury yields dipped from about 90% to 80% and then back to about 85%,
its long-term average. Municipal bonds within the airline, tobacco,
utilities, and basic industrials sectors did well. Airline-related bonds
have benefited from a rebound in business and leisure travel and
lessening fears of bankruptcies within the industry. Tobacco settlement
bonds performed well as favorable legal decisions improved the outlook
for ongoing litigation. Utilities and industrial bonds were helped by
cyclical increases in demand. In addition, the municipal high-yield
market saw increased inflows as money was rotated out of corporate
high-yield bonds, which have performed strongly over the past year or
so.
- -------------------------------------------------------------------------------
MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 1/31/04
- -------------------------------------------------------------------------------
Bonds
- -------------------------------------------------------------------------------
Lehman Municipal Bond Index (tax-exempt bonds) 5.73%
- -------------------------------------------------------------------------------
Lehman Aggregate Bond Index (broad bond market) 4.49%
- -------------------------------------------------------------------------------
Lehman Government Bond Index (U.S. Treasury and agency
securities) 3.88%
- -------------------------------------------------------------------------------
Lehman Intermediate Treasury Bond Index
(intermediate-maturity U.S. Treasury bonds) 2.46%
- -------------------------------------------------------------------------------
Equities
- -------------------------------------------------------------------------------
S&P 500 Index (broad stock market) 15.23%
- -------------------------------------------------------------------------------
S&P Utilities Index (utilities stocks) 17.35%
- -------------------------------------------------------------------------------
Russell 2000 Growth Index (small-company growth stocks) 21.81%
- -------------------------------------------------------------------------------
These indexes provide an overview of performance in different market
sectors for the six months ended 1/31/04.
- -------------------------------------------------------------------------------
Strategy overview
Diversification remains the key to our strategy, especially among
lower-rated securities, as we continue our focus on maintaining high
income while reducing risk. We have been broadening the fund's
diversification at the lower levels of the quality spectrum by owning
smaller pieces of individual securities and diversifying among issuers
with similar credit quality and fundamentals.
We believe this strategy is particularly helpful for this fund because
while higher-quality bonds, such as Treasuries, tend to be more
sensitive to interest-rate changes, lower-rated bonds are affected by
changes in the outlook of the underlying issuer in addition to interest
rates. For example, a bond issued on behalf of a BBB-rated hospital will
be influenced by the outlook for the hospital's earnings, as well as by
interest rates and broad market trends. If the hospital's earnings are
affected by a change in management or a loss of market share, the value
of its bonds could decline even if bond prices generally are on the
rise. For this reason, we make sure that the share of assets we invest
in each category of lower-rated bonds is divided into smaller positions
- -- in different hospitals and different geographical regions, for
example -- than if the issue carried a higher rating.
With respect to sectors, our strategy has been to increase your fund's
holdings in tobacco settlement bonds to take advantage of low prices in
September. We have also increased the fund's exposure to the utilities
sector and begun to sell some of its airline-related positions on
strength. In addition, we have been expanding the fund's diversification
in the health-care sector, although we continue to favor bonds issued
for long-term care facilities.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY WEIGHTINGS COMPARED]
TOP INDUSTRY WEIGHTINGS COMPARED
as of 7/31/03 as of 1/31/04
Health care 32.0% 34.5%
Utilities 15.3% 19.2%
Transportation 7.4% 6.9%
Forest and
paper products 5.5% 4.8%
Housing 3.0% 3.0%
Footnote reads:
This chart shows how the fund's top weightings have changed over the
last six months. Weightings are shown as a percentage of market value.
Holdings will vary over time.
How fund holdings affected performance
During this semiannual period, we modestly increased the fund's exposure
to tobacco settlement bonds, which are issued by municipalities and
secured by cash payments made in satisfaction of legal judgments against
the tobacco industry. These bonds tend to be investment-grade debt, but
because they are subject to special risks, they generally offer higher
yields than other bonds of comparable quality. Among the special risks
of investing in tobacco bonds is the possibility that interest payments
could be affected by further litigation against the tobacco industry.
These bonds came under pressure from unfavorable rulings in the spring
of 2002, but the tobacco companies have been winning on appeals and many
of the bonds are selling at attractive prices. However, we continue to
approach this sector with caution, and it remains a relatively small
position. We increased your fund's holdings from 1.7% of net assets at
the beginning of the fiscal year to 3.3% at the end of January.
We've also increased the fund's holdings in industrial development bonds
(IDBs) issued for utilities, especially low-cost providers -- those that
use coal or hydroelectric power more than conventional resources. IDBs
are issued by municipalities to finance local expansion by various
businesses. Because they are backed by revenues from the companies
benefiting from the financing, IDB prices are affected by investor
perceptions of the health of the backing company or of the industry
group. Attractive valuations and improving credit quality have driven up
investor demand for these issues. Your fund has benefited both from
appreciation on the fund's existing holdings and new purchases made
during the fiscal period.
Airline-related IDBs have also done extremely well over the past year,
some rising from distressed levels. Prices of a few airline bonds are
now close to -- or have reached -- their levels before September 11,
2001. For example, the fund holds bonds issued by the Houston, Texas
Airport for Continental Airlines. Continental was the first major U.S.
carrier to report an operating profit since September 11, and the price
of these bonds has risen significantly. They are rated Caa2 by Moody's
and B- by Standard & Poor's; they mature in 2021 and 2029. However, the
industry is still grappling with high fuel prices, lofty debt levels,
and human resources costs, as well as competition from low-cost
carriers. Consequently, we have trimmed the fund's exposure to airline
IDBs to 2.8% at the end of the period from 3.5% last July, selling into
a rising market.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa/AAA (16.7%)
A (9.4%)
Baa/BBB (32.4%)
Ba/BB (21.8%)
B (12.8%)
CCC/Caa (1.6%)
D (1.5%)
VMIG1 and other (3.8%)
Footnote reads:
As a percentage of market value as of 1/31/04. A bond rated Baa or
higher is considered investment grade. The chart reflects Moody's and
Standard & Poor's ratings; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
We also enjoyed some success with IDBs issued for companies in other
industries. For example, the fund owns Dickinson, Michigan,
International Paper bonds, scheduled to mature in 2016. International
Paper is the largest paper products company in the United States and we
purchased these bonds in May 2002 when economic recovery was still far
from certain. As economic growth rebounded and yield-oriented investors
returned to the market, the price of the bonds rallied.
On the other hand, your fund's position in the Hoover Group, which
includes several series of bonds with different maturities, has
performed poorly. Hoover Group is a Georgia-based company that makes
large industrial containers for shipping products and raw materials. The
fund purchased IDBs issued for Hoover Group by Anniston, Alabama and
Forsyth County, Georgia in 1994. The poor economy and competitive
pricing have eroded revenues and the company is seeking concessions from
debt holders in order to avoid bankruptcy. The fund is negotiating with
the company, with the help of legal counsel. Although the future is
never assured, our renewed emphasis on broad diversification is designed
to help your fund avoid such situations in the future. Please note that
all holdings discussed in this report are subject to review in
accordance with the fund's investment strategy and may vary in the
future.
The fund's management team
The fund is managed by the Putnam Tax Exempt Fixed-Income Team. The
members of the team are David Hamlin (Portfolio Leader), Paul Drury
(Portfolio Member), Susan McCormack (Portfolio Member), James St. John
(Portfolio Member), Richard Wyke (Portfolio Member), and Kevin Cronin.
OF SPECIAL INTEREST
Putnam introduces a new redemption fee to protect long-term investors in
the funds. For shares purchased on or after April 19, 2004, a 2%
redemption fee will be applied to shares exchanged or sold within 5
calendar days of purchase. The fee applies to all Putnam funds except
money market funds, variable annuity funds, and closed-end funds.
Beginning on April 19, 2004, the 1% redemption fee currently applicable
to international, global, and taxable high-yield funds will be imposed
on shares that are exchanged or redeemed within 6 to 90 days of
purchase. Please see your fund's prospectus for additional information
or talk to your financial advisor.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
In its statement on January 28, 2004, the Federal Reserve Board said it
could "be patient" about raising short-term interest rates. This marked
a slight change from its earlier position and hinted at the potential
for raising rates in the future. As the bond market responded, interest
rates rose slightly. There is a general assumption that with economic
growth comes inflation and rising rates. In our view, bond market prices
already reflect a lot of the recent favorable economic news. Over the
short term, there is a risk that economic data could disappoint or some
unexpected event could cause market instability. Either could cause a
flight to quality and a short-lived period of lower rates. However, we
believe that rates will rise in the long term and that the Fed could
initiate a tightening cycle as early as this summer. Any actions taken
by the Fed in this election year are likely to be well planned and
executed to limit any potential disruption to the financial markets.
Putnam's Interest Rate Committee believes that the federal funds rate
could reach 2% by the first quarter of 2005 if economic growth continues
its upbeat pace. In light of the increasingly large federal budget
deficit, the prospect for heavy issuance of Treasury debt continues to
be a cloud over the market. We will continue to monitor trends in the
municipal bond market to pursue the most compelling opportunities in
pursuit of your fund's objectives.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Lower-rated bonds
may offer higher yields in return for more risk.
Performance summary
This section shows your fund's performance during the first half of its
fiscal year, which ended January 31, 2004. In accordance with regulatory
requirements, we also include performance for the most current calendar
quarter-end. Performance should always be considered in light of a
fund's investment strategy. Data represent past performance. Past
performance does not guarantee future results. More recent returns may
be less or more than those shown. Investment return and principal value
will fluctuate and you may have a gain or a loss when you sell your
shares. For the most recent month-end performance, please visit
www.putnaminvestments.com.
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 1/31/04
- -------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (2/1/99) (12/29/94)
- -------------------------------------------------------------------------------------------------------------------
NAV POP NAV CDSC NAV CDSC NAV POP
- -------------------------------------------------------------------------------------------------------------------
6 months 5.67% 0.68% 5.32% 0.32% 5.34% 4.34% 5.52% 2.11%
- -------------------------------------------------------------------------------------------------------------------
1 year 7.24 2.16 6.58 1.58 6.46 5.46 6.91 3.43
- -------------------------------------------------------------------------------------------------------------------
5 years 15.50 9.96 12.60 10.88 11.21 11.21 13.86 10.19
Annual average 2.92 1.92 2.40 2.09 2.15 2.15 2.63 1.96
- -------------------------------------------------------------------------------------------------------------------
10 years 51.17 44.01 42.76 42.76 39.45 39.45 46.12 41.38
Annual average 4.22 3.71 3.62 3.62 3.38 3.38 3.87 3.52
- -------------------------------------------------------------------------------------------------------------------
Annual average
(life of fund) 6.94 6.65 6.59 6.59 6.08 6.08 6.72 6.53
- -------------------------------------------------------------------------------------------------------------------
Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for class A and M
shares reflect a sales charge of 4.75% and 3.25%, respectively (which
for class A shares does not reflect a reduction in sales charges that
went into effect on January 28, 2004; if this reduction had been in
place for all periods indicated, returns would have been higher). Class
B share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the
first year that is eliminated thereafter. Performance for class A, C,
and M shares is derived from the historical performance of class B
shares, adjusted for the applicable sales charge (or CDSC) and higher or
lower operating expenses for such shares.
For a portion of the period, this fund limited expenses, without which
returns would have been lower.
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 12/31/03 (MOST RECENT CALENDAR QUARTER)
- -------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (2/1/99) (12/29/94)
- -------------------------------------------------------------------------------------------------------------------
NAV POP NAV CDSC NAV CDSC NAV POP
- -------------------------------------------------------------------------------------------------------------------
6 months 2.29% -2.54% 1.97% -3.00% 1.88% 0.89% 2.15% -1.14%
- -------------------------------------------------------------------------------------------------------------------
1 year 6.10 1.01 5.46 0.46 5.25 4.25 5.76 2.35
- -------------------------------------------------------------------------------------------------------------------
5 years 15.74 10.25 12.69 10.97 11.15 11.15 13.95 10.26
Annual average 2.97 1.97 2.42 2.10 2.14 2.14 2.65 1.97
- -------------------------------------------------------------------------------------------------------------------
10 years 51.46 44.23 43.05 43.05 39.69 39.69 46.34 41.56
Annual average 4.24 3.73 3.64 3.64 3.40 3.40 3.88 3.54
- -------------------------------------------------------------------------------------------------------------------
Annual average
(life of fund) 6.91 6.62 6.56 6.56 6.05 6.05 6.70 6.51
- -------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/04
- --------------------------------------------------------------------------------
Lehman Lipper High Yield
Municipal Municipal Debt Funds
Bond Index category average*
- --------------------------------------------------------------------------------
6 months 5.73% 5.78%
- --------------------------------------------------------------------------------
1 year 6.18 7.89
- --------------------------------------------------------------------------------
5 years 31.93 18.39
Annual average 5.70 3.39
- --------------------------------------------------------------------------------
10 years 78.50 57.10
Annual average 5.97 4.57
- --------------------------------------------------------------------------------
Annual average
(life of fund) 8.10 6.91
- --------------------------------------------------------------------------------
Index and Lipper results should be compared to fund performance at net
asset value.
* Over the 6-month and 1-, 5-, and 10-year periods ended 1/31/04, there
were 80, 80, 54, and 27 funds, respectively, in this Lipper category.
- -------------------------------------------------------------------------------------------------------------------
PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 1/31/04
- -------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class M
- -------------------------------------------------------------------------------------------------------------------
Distributions (number) 6 6 6 6
- -------------------------------------------------------------------------------------------------------------------
Income 1 $0.349980 $0.309574 $0.299762 $0.331195
- -------------------------------------------------------------------------------------------------------------------
Capital gains 1 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total $0.349980 $0.309574 $0.299762 $0.331195
- -------------------------------------------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
- -------------------------------------------------------------------------------------------------------------------
7/31/03 $12.31 $12.92 $12.33 $12.31 $12.31 $12.72
- -------------------------------------------------------------------------------------------------------------------
1/31/04 12.65 13.25* 12.67 12.66 12.65 13.07
- -------------------------------------------------------------------------------------------------------------------
Current return (end of period)
- -------------------------------------------------------------------------------------------------------------------
Current dividend rate 2 5.31% 5.07% 4.67% 4.51% 5.01% 4.85%
- -------------------------------------------------------------------------------------------------------------------
Taxable equivalent 3 8.17 7.80 7.18 6.94 7.71 7.46
- -------------------------------------------------------------------------------------------------------------------
Current 30-day SEC yield 4 4.71 4.50 4.03 3.87 4.40 4.26
- -------------------------------------------------------------------------------------------------------------------
Taxable equivalent 3 7.25 6.92 6.20 5.95 6.77 6.55
- -------------------------------------------------------------------------------------------------------------------
* Reflects a reduction in sales charges that took effect on January 28,
2004.
1 Capital gains, if any, are taxable for federal and, in most cases,
state purposes. For some investors, investment income may be subject to
the federal alternative minimum tax. Income from federally exempt funds
may be subject to state and local taxes.
2 Most recent distribution, excluding capital gains, annualized and
divided by NAV or POP at end of period.
3 Assumes maximum 35.00% federal tax rate for 2003. Results for
investors subject to lower tax rates would not be as advantageous.
4 Based only on investment income, calculated using SEC guidelines.
Reflects an expense waiver in effect during the period, without which
yields would have been lower.
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Net asset value (NAV) is the price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. The
NAV is calculated by dividing the net value of all the fund's assets by
the number of outstanding shares.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares (since reduced to 4.50%) and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth year,
the CDSC no longer applies. The CDSC for class C shares is 1% for one
year after purchase.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without an initial sales charge).
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption (except on certain
redemptions of shares bought without an initial sales charge).
Comparative indexes
Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.
Lehman Government Bond Index is an unmanaged index of U.S. Treasury and
agency securities.
Lehman Intermediate Treasury Bond Index is an unmanaged index of
Treasury bonds with maturities between 1 and 10 years.
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Russell 2000 Growth Index is an unmanaged index of those companies in
the Russell 2000 Index chosen for their growth orientation.
S&P 500 Index is an unmanaged index of common stock performance.
S&P Utilities Index is an unmanaged index of common stock issued by
utilities companies.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper Inc. is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
A note about duplicate mailings
In response to investors' requests, the SEC has modified mailing
regulations for proxy statements, semiannual and annual reports, and
prospectuses. Putnam is now able to send a single copy of these
materials to customers who share the same address. This change will
automatically apply to all shareholders except those who notify us. If
you would prefer to receive your own copy, please call Putnam at
1-800-225-1581.
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. Our proxy voting guidelines and policies are
available on the Putnam Individual Investor Web site,
www.putnaminvestments.com, by calling Putnam's Shareholder Services at
1-800-225-1581, or on the SEC's Web site, www.sec.gov.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or loss
the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment
income ratios, and portfolio turnover in one summary table, reflecting
the five most recent reporting periods. In a semiannual report, the
highlight table also includes the current reporting period. For open-end
funds, a separate table is provided for each share class.
The fund's portfolio
January 31, 2004 (Unaudited)
Key to Abbreviations
- -------------------------------------------------------------------------------
AMBAC AMBAC Indemnity Corporation
COP Certificate of Participation
FGIC Financial Guaranty Insurance Company
FRB Floating Rate Bonds
FSA Financial Security Assurance
G.O. Bonds General Obligation Bonds
IFB Inverse Floating Rate Bonds
MBIA MBIA Insurance Company
TRAN Tax Revenue Anticipation Notes
U.S. Govt. Coll. U.S. Government Collateralized
VRDN Variable Rate Demand Notes
Municipal bonds and notes (97.2%) (a)
Principal amount Rating (RAT) Value
Alabama (2.0%)
- -------------------------------------------------------------------------------
$3,080,000 Anniston, Indl. Dev. Rev. Bonds
(Hoover Group, Inc.), 8 1/2s, 9/1/10 D/P $1,078,000
5,120,000 DCH Hlth. Care Auth. Rev. Bonds,
5 1/4s, 6/1/18 A1 5,312,000
5,000,000 Jackson Cnty., Hlth. Care Auth.
Rev. Bonds, 5.7s, 5/1/19 BB+ 4,593,750
1,800,000 Jackson Cnty., Hlth. Care Auth.
TRAN, 7 7/8s, 5/1/19 AAA/P 1,860,948
6,380,000 Jefferson Cnty., Swr. Rev. Bonds
(Cap. Impt.), 5s, 2/1/41 Aaa 7,177,500
2,000,000 Phenix City, Indl. Dev. Board
Rev. Bonds (Mead Coated Board),
Ser. A, 5.3s, 4/1/27 Baa2 1,890,000
--------------
21,912,198
Arizona (1.8%)
- -------------------------------------------------------------------------------
1,000,000 AZ State Hlth. Fac. Auth. Rev. Bonds
(Bethesda Foundation Project),
Ser. A, 6.4s, 8/15/27 BB-/P 946,250
4,000,000 Casa Grande, Indl. Dev. Auth.
Rev. Bonds (Casa Grande Regl. Med.
Ctr.), Ser. A, 7 5/8s, 12/1/29 B-/P 4,200,000
Cochise Cnty., Indl. Dev. Auth.
Rev. Bonds (Sierra Vista Regl.
Hlth. Ctr.),
3,425,000 7 3/4s, 12/1/30 BB+/P 3,776,063
1,000,000 Ser. A, 6.2s, 12/1/21 BB+/P 1,022,500
5,500,000 Pima Cnty., Indl. Dev. Auth. Hlth.
Care Fac. Rev. Bonds, Ser. A,
8 1/2s, 11/15/32 B/P 5,740,625
Scottsdale, Indl. Dev. Auth.
Rev. Bonds (Westminster Village 1st.
Mtge.), Ser. A
1,500,000 8 1/4s, 6/1/15 BB-/P 1,575,000
2,300,000 8s, 6/1/11 BB-/P 2,409,250
--------------
19,669,688
Arkansas (1.5%)
- -------------------------------------------------------------------------------
7,600,000 AR State Hosp. Dev. Fin. Auth.
Rev. Bonds (WA Regl. Med. Ctr.),
7 3/8s, 2/1/29 Baa3 8,550,000
6,650,000 Northwest Regl. Arpt. Auth.
Rev. Bonds, 7 5/8s, 2/1/27 BB/P 7,265,125
--------------
15,815,125
California (8.8%)
- -------------------------------------------------------------------------------
3,000,000 ABAG Fin. Auth. COP (American
Baptist Homes), Ser. A, 5.85s,
10/1/27 BB+ 2,801,250
2,500,000 Brentwood, Infrastructure Auth.
Rev. Bonds, Ser. 94-1, 5 5/8s,
9/2/29 BB-/P 2,431,250
CA State Dept. of Wtr. Resources
Rev. Bonds, Ser. A
7,500,000 5 3/8s, 5/1/22 A3 7,837,500
3,400,000 5 1/4s, 5/1/20 A3 3,557,250
10,000,000 CA State Dept. of Wtr. Resources
VRDN, Ser. B-2, 0.98s, 5/1/22 VMIG1 10,000,000
1,000,000 CA Statewide Cmnty. Dev. Auth.
Multi-Fam. Rev. Bonds (Hsg. Equity
Res.), Ser. B, 5.2s, 12/1/29 Baa1 1,073,750
1,000,000 CA Statewide Cmnty. Dev. Auth.
Special Tax Rev. Bonds (Citrus
Garden Apt. Project - D1), 5 1/4s,
7/1/22 A 1,027,500
2,855,000 Chula Vista, Cmnty. Fac. Dist.
Special Tax (No. 08-1 Otay Ranch
Village Six), 6s, 9/1/33 BB-/P 2,847,863
18,000,000 Corona, COP (Vista Hosp. Syst.),
zero %, 7/1/29 (In default) (NON) D/P 360,000
3,000,000 Elk Grove CA Special Tax Rev. Bonds
(Poppy Ridge Cmnty. Facs. - No
03-01), 6s, 9/1/34 BB/P 2,996,250
1,750,000 Folsom, Special Tax (Cmnty. Facs.
Dist. No. 10), 5 7/8s, 9/1/28 BB/P 1,756,563
300,000 Foothill/Eastern Corridor Agcy.
Rev. Bonds (CA Toll Roads), 5 3/4s,
1/15/40 Baa3 308,625
7,835,000 Gilroy, Rev. Bonds (Bonfante Gardens
Park), 8s, 11/1/25 D/P 4,309,250
6,000,000 Golden State Tobacco Securitization
Corp. Rev. Bonds, Ser. B, 5 5/8s,
6/1/38 Baa2 6,037,500
7,000,000 Irvine, Impt. Board Act of 1915
VRDN, 1.00s, 9/2/23 VMIG1 7,000,000
1,000,000 Irvine, Impt. Board Act of 1915
Special Assmt. Bonds (Assmt. Dist.
No. 00-18-GRP 3), 5.55s, 9/2/26 BB+/P 1,003,750
3,500,000 Los Angeles, Regl. Arpt. Impt. Corp.
Lease Rev. Bonds, Ser. C, 7 1/2s,
12/1/24 B- 3,500,000
1,625,000 Orange Cnty., Cmnty. Fac. Dist.
Special Tax Bonds (Ladera Ranch -
No. 02-1), Ser. A, 5.55s, 8/15/33 BB/P 1,612,813
Redondo Beach, Redev. Agcy.
Multi-Fam. Hsg. Rev. Bonds (Heritage
Point)
2,925,000 Ser. B, 8 1/2s, 9/1/23 B+/P 2,972,531
4,690,000 Ser. A, 6 1/2s, 9/1/23 B+/P 4,766,213
1,500,000 Roseville, Special Tax (Cmnty. Fac.
Dist. No. 1-Crocker), 6s, 9/1/33 BB/P 1,503,750
700,000 Sacramento, Special Tax (North
Natomas Cmnty. Fac. 01-03), 6s,
9/1/28 BB/P 712,250
1,500,000 San Joaquin Hills, Trans. Corridor
Agcy. Rev. Bonds, Ser. A, 5 1/2s,
1/15/28 Baa3 1,432,500
2,770,000 Santaluz, Special Tax (Cmnty. Fac.
Dist. No. 2-Impt. Area No. 1),
6 3/8s, 9/1/30 BB/P 2,821,938
350,000 Southern CA Pub. Pwr. Auth. IFB
(Transmission), 10.347s, 7/1/12 Aa3 360,010
4,560,000 Sunnyvale, Special Tax Rev. Bonds
(Cmnty. Fac. Dist. No. 1), 7 3/4s,
8/1/32 BB-/P 4,588,500
10,500,000 Vallejo, COP (Marine World
Foundation), 7.2s, 2/1/26 BBB-/P 10,906,875
5,205,000 Valley Hlth. Syst. COP, 6 7/8s,
5/15/23 B+ 4,313,644
--------------
94,839,325
Colorado (0.6%)
- -------------------------------------------------------------------------------
5,000,000 CO Hlth. Fac. Auth.
Rev. Bonds (Evangelical Lutheran),
5.9s, 10/1/27 A3 5,143,750
1,500,000 CO Springs, Hosp. Rev. Bonds,
6 3/8s, 12/15/30 A3 1,623,750
--------------
6,767,500
Connecticut (1.8%)
- -------------------------------------------------------------------------------
CT State Dev. Auth. Rev. Bonds (East
Hills Woods)
4,311,796 Ser. A, 7 3/4s, 11/1/17 B-/P 3,605,739
457,428 Ser. B, zero %, 3/1/21 B-/P 28,017
2,000,000 CT State Dev. Auth. 1st. Mtg. Gross
Rev. Hlth. Care Rev. Bonds (The Elm
Street Park Baptist, Inc. Project),
5.85s, 12/1/33 BBB+ 2,065,000
6,000,000 CT State Dev. Auth. Poll. Control
Rev. Bonds (Western MA), Ser. A,
5.85s, 9/1/28 A3 6,337,500
6,500,000 CT State Hlth. & Edl. Fac. Auth.
Rev. Bonds (Edgehill), Ser. A,
6 7/8s, 7/1/27 AAA/P 6,849,310
--------------
18,885,566
District of Columbia (2.5%)
- -------------------------------------------------------------------------------
17,000,000 DC G.O. Bonds, Ser. A, 6 3/8s,
6/1/26 AAA 19,210,000
DC Tobacco Settlement Fin. Corp.
Rev. Bonds
2,500,000 6 3/4s, 5/15/40 Baa2 2,418,750
5,500,000 6 1/2s, 5/15/33 Baa2 5,273,125
--------------
26,901,875
Florida (4.1%)
- -------------------------------------------------------------------------------
9,260,000 Brevard Cnty., Hlth. Fac. Auth.
Rev. Bonds (Courtenay Springs),
7 3/4s, 11/15/24 AAA/P 9,932,183
3,105,000 Cap. Trust Agcy. Multi-Fam.
Rev. Bonds
(American Opportunity-Senior),
Ser. A, 5 7/8s, 12/1/38 Baa1 2,992,444
5,000,000 Cap. Trust Agcy. Rev. Bonds
(Seminole Tribe Convention), Ser. A,
10s, 10/1/33 (acquired 4/23/02, cost
$5,000,000) (RES) B/P 6,168,750
900,000 Fishhawk, Cmnty. Dev. Dist. II
Rev. Bonds, Ser. B, 5s, 11/1/07 BB-/P 913,500
5,180,000 FL State Fin. Dept. Gen. Svcs. IFB
(Rites-PA 414A), FSA, 9.216s,
7/1/11 (acquired 9/2/98, cost
$6,687,794) (RES) AAA/P 7,187,250
3,300,000 Lee Cnty., Indl. Dev. Auth. Hlth.
Care Fac. Rev. Bonds (Shell Point
Village Project), Ser. A, 5 1/2s,
11/15/29 BBB- 3,192,750
2,000,000 Middle Village Cmnty. Dev. Dist.
Special Assmt., Ser. A, 6s, 5/1/35 BB-/P 2,015,000
Orange Cnty., Hlth. Fac. Auth.
Rev. Bonds
2,400,000 (Orlando Regl. Hlth. Care), 5 3/4s,
12/1/32 A2 2,478,000
3,750,000 (Adventist Hlth. Syst.), 5 5/8s,
11/15/32 A 3,904,688
1,800,000 St. Johns Cnty., Hlth. Care Indl.
Dev. Auth. Rev. Bonds (Glenmoor St.
Johns Project), Ser. A, 8s, 1/1/30 B-/P 1,755,000
1,000,000 Verandah, West Cmnty. Dev. Dist.
Rev. Bonds (Cap. Impt.), Ser. A,
6 5/8s, 5/1/33 BB-/P 1,016,250
2,250,000 Westchester Cmnty. Dev. Dist. No. 1
Special Assmt. (Cmnty.
Infrastructure), 6 1/8s, 5/1/35 BB-/P 2,283,750
--------------
43,839,565
Georgia (3.2%)
- -------------------------------------------------------------------------------
2,000,000 Atlanta, Waste Wtr. VRDN, Ser. C,
FSA, 1.00s, 11/1/41 VMIG1 2,000,000
8,000,000 Burke Cnty., Poll. Control Dev.
Auth. Mandatory Put Bonds (GA Power
Co.), 4.45s, 1/1/32 A2 8,470,000
3,400,000 Effingham Cnty., Indl. Dev. Auth.
Rev. Bonds (Pacific Corp.), 6 1/2s,
6/1/31 Ba3 3,361,750
6,000,000 Forsyth Cnty., Hosp. Auth.
Rev. Bonds (GA Baptist Hlth. Care
Syst.), U.S. Govt. Coll., 6 3/8s,
10/1/28 AAA 7,372,500
9,500,000 Forsyth Cnty., Indl. Dev. Auth.
Rev. Bonds (Hoover Group, Inc.),
8 1/2s, 12/1/05 Ba3 3,325,000
6,875,000 Rockdale Cnty., Dev. Auth. Solid
Waste Disp. Rev. Bonds (Visay Paper,
Inc.), 7 1/2s, 1/1/26 BB+/P 6,969,531
3,160,000 Savannah, Econ. Dev. Auth. Poll.
Control Rev. Bonds (Stone Container
Corp.), 8 1/8s, 7/1/15 B/P 3,290,887
--------------
34,789,668
Illinois (2.9%)
- -------------------------------------------------------------------------------
1,500,000 Chicago, Special Assmt. Bonds (Lake
Shore East), 6 3/4s, 12/1/32 B+/P 1,554,375
4,000,000 Chicago, O'Hare Intl. Arpt.
Rev. Bonds (United Airlines, Inc.),
Ser. A, 6 3/4s, 11/1/11 (In default)
(NON) D/P 1,200,000
5,000,000 Chicago, Wtr. Rev. Bonds, AMBAC,
5 3/4s, 11/1/30 Aaa 5,843,750
1,050,000 IL Dev. Fin. Auth. Rev. Bonds (Mercy
Hsg. Corp.), 7s, 8/1/24 Baa1 1,101,986
IL Hlth. Fac. Auth. Rev. Bonds
880,000 (Cmnty. Rehab. Providers Fac.),
8 1/4s,8/1/12 (In default) (NON) D/P 874,500
2,385,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, 7 7/8s, 7/1/20 (In default)
(NON) D/P 1,270,013
4,330,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, 7 7/8s, 7/1/20 (Prerefunded) AAA/P 4,811,713
3,065,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, 7 1/2s, 3/1/14 AAA/P 3,110,607
215,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, 7 1/4s, 3/1/04 B/P 216,011
1,000,000 (St. Benedict), Ser. 03A-1, 6.9s,
11/15/33 B+/P 1,008,750
IL Hlth. Fac. Auth. Rev. Bonds
6,000,000 (Elmhurst Memorial Hlth. Care),
5 5/8s, 1/1/28 A2 6,195,000
3,900,000 IL Hlth. Fac. Auth. VRDN (Bromenn
Hlth. care), 0.98s, 8/15/32 A-1+ 3,900,000
--------------
31,086,705
Indiana (0.7%)
- -------------------------------------------------------------------------------
900,000 Plainfield, Indl. Econ. Dev.
Rev. Bonds (Earl M. Jorgensen Co.),
8 1/2s, 9/1/04 B-/P 909,459
2,200,000 Rockport, Poll. Control Mandatory
Put Bonds (Indiana Michigan Pwr.
Co.), Ser. C, 2 5/8s, 4/1/25 BBB 2,194,500
4,000,000 Rockport, Poll. Control
Rev. Bonds (Indiana-Michigan Pwr.),
Ser. A, 4.9s, 6/1/25 Baa2 4,220,000
--------------
7,323,959
Iowa (1.8%)
- -------------------------------------------------------------------------------
IA Fin. Auth. Hlth. Care Fac.
Rev. Bonds (Care Initiatives)
15,020,000 9 1/4s, 7/1/25 BBB-/P 18,005,225
895,000 9.15s, 7/1/09 BBB-/P 1,043,794
105,000 Marion Hlth. Care Fac. Rev. Bonds
(First Mtg.), Ser. IA, 6 1/2s,
1/1/29 CCC/P 95,681
--------------
19,144,700
Kansas (0.3%)
- -------------------------------------------------------------------------------
Lenexa, Hlth. Care Rev. Bonds
(LakeView Village)
2,250,000 Ser. C, 6 7/8s, 5/15/32 BB+ 2,359,688
1,200,000 Ser. B, 6 1/4s, 5/15/26 BB+ 1,210,500
--------------
3,570,188
Kentucky (1.3%)
- -------------------------------------------------------------------------------
2,935,000 Kenton Cnty., Arpt. Board Rev. Bonds
(Special Fac. - Delta Airlines,
Inc.), 7 1/8s, 2/1/21 B3 2,843,281
610,000 Kentucky Econ. Dev. Fin. Auth.
Rev. Bonds (First Mtg.), Ser. IA,
6 1/2s, 1/1/29 CCC/P 555,863
KY Econ. Dev. Fin. Auth. Hlth. Syst.
Rev. Bonds (Norton Healthcare,
Inc.), Ser. A
6,250,000 6 5/8s, 10/1/28 BBB/P 6,578,125
3,740,000 6 1/8s, 10/1/10 BBB/P 4,034,525
--------------
14,011,794
Louisiana (3.3%)
- -------------------------------------------------------------------------------
3,000,000 LA Hlth. Ed. Auth. Rev. Bonds
(Lambert House), Ser. A, 6.2s,
1/1/28 B+/P 2,973,750
5,335,000 LA Local Govt. Env. Fac. Cmnty. Dev.
Auth. Rev. Bonds (St. James Place),
Ser. A, 8s, 11/1/19 B-/P 4,694,800
7,750,000 LA Pub. Fac. Auth. Hosp. Rev. Bonds
(Lake Charles Memorial Hosp.
Project), 8 5/8s, 12/1/30 CCC/P 6,422,813
7,000,000 Port of New Orleans, Indl. Dev.
Rev. Bonds (Continental Grain Co.),
7 1/2s, 7/1/13 BB- 7,113,470
3,000,000 St. Charles Parish, Poll. Control
Rev. Bonds, Ser. A, 4.9s, 6/1/30 Baa3 3,097,500
Tangipahoa Parish Hosp. Svcs.
Rev. Bonds (North Oaks Med. Ctr.
Project), Ser. A
1,000,000 5s, 2/1/30 A 977,500
1,000,000 5s, 2/1/25 A 992,500
9,000,000 W. Feliciana Parish, Solid Waste
Disp. Rev. Bonds (Kaiser Aluminum),
7.7s, 12/1/14 Ba1 9,301,050
--------------
35,573,383
Maine (0.3%)
- -------------------------------------------------------------------------------
3,500,000 Rumford, Solid Waste Disp.
Rev. Bonds (Boise Cascade Corp.),
6 7/8s, 10/1/26 Ba2 3,530,625
Maryland (0.9%)
- -------------------------------------------------------------------------------
5,000,000 Howard Cnty., Rev. Bonds, Ser. A,
U.S. Govt. Coll., 8s, 5/15/29 AAA 6,562,500
MD State Hlth. & Higher Edl. Fac.
Auth. Rev. Bonds
2,000,000 (Mercy Ridge), Ser. A, 6s, 4/1/35 BB+/P 2,005,000
1,500,000 (Medstar Health), 5 1/2s, 8/15/33 Baa2 1,468,125
--------------
10,035,625
Massachusetts (4.8%)
- -------------------------------------------------------------------------------
Atlas Boston Tax Exempt Rev. Bonds
1,165,000 Ser. 99-1, 7 1/4s, 1/1/35 (In
default) (NON) D/P 5,825
2,220,000 Ser. 1, 6.65s, 1/1/35 (In default)
(NON) D/P 777,000
5,000,000 MA G.O. Bonds, Ser. C, MBIA, 5 1/4s,
8/1/18 Aaa 5,606,250
4,055,000 MA State Dev. Fin. Agcy. Rev. Bonds
(Alden Place), 6 3/4s, 7/1/30 B/P 3,872,525
5,600,000 MA State Hlth. & Edl. Fac. Auth. IFB
(Boston U.), Ser. L, AMBAC, 10.653s,
7/1/25 Aaa 5,745,208
MA State Hlth. & Edl. Fac. Auth.
Rev. Bonds
5,750,000 (Civic Investments), Ser. A, 9s,
12/15/15 BB/P 6,634,063
4,000,000 (Jordan Hosp.), Ser. E, 6 3/4s,
10/1/33 BBB- 4,055,000
4,900,000 (Winchester Hosp.), Ser. E, 6 3/4s,
7/1/30 BBB 5,236,875
5,850,000 (UMass Memorial), Ser. C, 6 5/8s,
7/1/32 Baa2 6,113,250
2,200,000 (Berkshire Hlth. Syst.), Ser. E,
6 1/4s, 10/1/31 BBB+ 2,279,750
4,500,000 (Hlth. Care Syst. Covenant Hlth.),
Ser. E, 6s, 7/1/31 A- 4,696,875
2,630,000 (Caritas Christi Oblig. Group),
Ser. A, 5 1/4s, 7/1/08 BBB 2,679,313
1,855,000 MA State Indl. Fin. Agcy. R (TNG
Marina Bay LLC Project), 7 1/2s,
12/1/27 B/P 1,892,100
MA State Indl. Fin. Agcy. Rev. Bonds
2,378,153 (Evanswood Bethzatha Corp.), 8s,
1/15/27 (In default) (NON) D/P 2,973
1,664,711 (1st. Mtge. Evanswood Bethzatha-A),
7 7/8s, 1/15/20 (In default) (NON) D/P 2,081
1,850,000 (Sr. Living Fac. Forge Hill), 7s,
4/1/17 B/P 1,757,500
--------------
51,356,588
Michigan (4.9%)
- -------------------------------------------------------------------------------
2,251,000 Ann Arbor, Econ. Dev. Corp. Ltd.
Oblig. Rev. Bonds (Glacier Hills,
Inc.), State & Local Govt.
Coll., 8 3/8s, 1/15/19 AAA 3,044,478
2,000,000 Delta Cnty., Econ. Dev. Corp.
Rev. Bonds, Ser. A, 6 1/4s, 4/15/27 Baa2 2,102,500
10,000,000 Dickinson Cnty., Econ. Dev. Corp.
Rev. Bonds, (Intl. Paper Co.
Project), Ser. A, 5 3/4s, 6/1/16 Baa2 10,775,000
1,500,000 Flint, Hosp. Bldg. Auth. Rev. Bonds
(Hurley Med. Ctr.), 6s, 7/1/20 Baa3 1,464,375
Garden City, Hosp. Fin. Auth.
Rev. Bonds (Garden City Hosp. OB
Group), Ser. A
3,000,000 5 3/4s, 9/1/17 Ba2 2,512,500
2,000,000 5 5/8s, 9/1/10 Ba2 1,837,500
4,600,000 Macomb Cnty., Hosp. Fin. Auth.
Rev. Bonds (Mt. Clemens Gen. Hosp.),
Ser. B, 5 7/8s, 11/15/34 BBB- 4,335,500
MI State Strategic Fund Solid Waste
Disp. Rev. Bonds
4,850,000 (Genesee Pwr. Station), 7 1/2s,
1/1/21 B/P 4,092,188
3,500,000 (SD Warren Co.), Ser. C, 7 3/8s,
1/15/22 BB/P 3,521,875
7,500,000 MI State Strategic Fund, Ltd. IFB
(Rites-PA 334), MBIA, 11.308s,
9/1/25 (acquired 3/9/98, cost
$9,018,750) (RES) AAA/P 8,906,250
5,000,000 Midland Cnty., Econ. Dev. Corp.
Rev. Bonds, 6 3/4s, 7/23/09 Ba3 5,243,750
5,495,000 Waterford, Econ. Dev. Corp.
Rev. Bonds (Canterbury Hlth.), 6s,
1/1/39 B-/P 3,915,188
2,000,000 Wayne Charter Cnty., Special Arpt.
Fac. Rev. Bonds (Northwest Airlines,
Inc.), 6s, 12/1/29 CCC/P 1,672,500
--------------
53,423,604
Minnesota (0.8%)
- -------------------------------------------------------------------------------
2,600,000 Chaska, Indl. Dev. Rev. Bonds
(Lifecore Biomedical, Inc. Project),
10 1/4s, 9/1/20 BB/P 2,688,062
3,700,000 Minneapolis & St. Paul, Metropolitan
Arpt. Comm. Special Fac. Rev. Bonds
(Northwest Airlines, Inc.), Ser. A,
7s, 4/1/25 CCC/P 3,658,375
2,075,000 Minneapolis, Rev. Bonds (Walker
Methodist Sr. Svcs.), Ser. A, 6s,
11/15/28 B+/P 1,691,125
800,000 Sauk Rapids Hlth. Care & Hsg. Fac.
Rev. Bonds (Good Shepherd Lutheran
Home), 6s, 1/1/34 B/P 794,000
--------------
8,831,562
Missouri (1.4%)
- -------------------------------------------------------------------------------
3,250,000 Cape Girardeau Cnty., Indl. Dev.
Auth. Hlth. Care Fac. Rev. Bonds
(St. Francis Med. Ctr.),
Ser. A, 5 1/2s, 6/1/27 A 3,327,188
2,000,000 MO State Hlth. & Edl. Fac. Auth.
VRDN (MO Valley College), 0.95s,
10/1/31 A-1+ 2,000,000
St. Louis Arpt. Rev. Bonds (Lambert
St. Louis Intl.), Ser. A, FSA
4,150,000 5 1/4s, 7/1/11 Aaa 4,710,250
4,495,000 5 1/4s, 7/1/10 Aaa 5,107,444
--------------
15,144,882
Montana (0.2%)
- -------------------------------------------------------------------------------
2,000,000 MT State Board Inv. Exempt Fac.
Rev. Bonds (Still Water Mining
Project), 8s, 7/1/20 Ba3 1,975,000
Nebraska (0.2%)
- -------------------------------------------------------------------------------
Kearney, Indl. Dev. Rev. Bonds
142,042 (Great Platte River), 8s, 9/1/12 D/P 142,036
1,582,933 (Cap. Appn. Great Platte River),
zero %, 9/1/12 D/P 7,915
2,000,000 NE Investment Fin. Auth. Hosp. IFB
(Bishop Clarkson Memorial Hosp.),
MBIA, 11.941s, 12/8/16 Aaa 1,990,640
--------------
2,140,591
Nevada (1.3%)
- -------------------------------------------------------------------------------
1,500,000 Clark Cnty., Impt. Dist. (Special
Impt. Dist. No. 142-LOC Impt.),
6.1s, 8/1/18 BB-/P 1,516,875
5,350,000 Clark Cnty., Indl. Dev. Rev. Bonds
(Southwest Gas Corp. Project),
Ser. C, 5.45s, 3/1/38 Baa2 5,811,438
Henderson, Local Impt. Dist. Special
Assmt. Bonds (No. T-14)
3,000,000 5.8s, 3/1/23 BB-/P 3,003,750
2,650,000 5.55s, 3/1/17 BB-/P 2,653,313
810,000 Las Vegas, Special Impt. Dist. No.
809 Rev. Bonds (Summerlin Area),
5.65s, 6/1/23 BB/P 785,700
--------------
13,771,076
New Hampshire (2.7%)
- -------------------------------------------------------------------------------
NH Higher Ed. & Hlth. Fac. Auth.
Rev. Bonds
8,500,000 (1st. Mtge.-Rivermead Peterborough),
8 1/2s, 7/1/24 AAA 8,926,445
5,900,000 (Havenwood-Heritage Heights), 7.35s,
1/1/18 BB/P 6,150,750
3,000,000 (Rivermead at Peterborough), 5 3/4s,
7/1/28 BB/P 2,730,000
2,200,000 NH Hlth. & Ed. Fac. Auth. Rev. Bonds
(Huntington at Nashua), Ser. A,
6 7/8s, 5/1/33 B/P 2,158,750
NH State Bus. Fin. Auth. Rev. Bonds
2,500,000 (Alice Peck Day Hlth. Syst.),
Ser. A, 7s, 10/1/29 BB+/P 2,509,375
3,855,000 (Franklin Regl. Hosp. Assn.),
Ser. A, 6.05s, 9/1/29 BB-/P 3,411,675
3,550,000 (Proctor Academy), Ser. A, 5.6s,
6/1/28 Baa2 3,629,875
8,551,027 NH State Bus. Fin. Auth. Poll.
Control & Solid Waste Rev. Bonds
(Crown Paper Co.), 7 3/4s,
1/1/22 (In default) (NON) D 10,689
--------------
29,527,559
New Jersey (4.7%)
- -------------------------------------------------------------------------------
5,000,000 Camden Cnty., Impt. Auth.
Rev. Bonds, 8.4s, 4/1/24 (acquired
4/12/94, cost $4,991,808) (In
default) (NON)(RES) D/P 4,150,000
NJ Econ. Dev. Auth. Rev. Bonds
7,000,000 (Winchester Gardens), Ser. A,
8 5/8s, 11/1/25 BB-/P 7,463,750
1,500,000 (1st Mtge.-Cranes Mill), Ser. A,
7 1/2s, 2/1/27 BB-/P 1,571,250
900,000 (Cedar Crest Village, Inc.), Ser. A,
7s, 11/15/16 BB-/P 922,500
9,000,000 (Newark Arpt. Marriot Hotel), 7s,
10/1/14 Ba3 8,943,750
500,000 (First Mtge. Presbyterian), Ser. A,
6 3/8s, 11/1/31 BB/P 503,750
3,000,000 (United Methodist Homes), Ser. A-1,
6 1/4s, 7/1/33 BB+ 3,007,500
500,000 (First Mtge. Presbyterian), Ser. A,
6 1/4s, 11/1/20 BB/P 510,000
5,220,000 NJ Econ. Dev. Auth. Assisted Living
Rev. Bonds (Meridian Assisted
Living), 6 3/4s, 8/1/30 B/P 4,267,350
NJ Hlth. Care Fac. Fin. Auth.
Rev. Bonds
4,000,000 (Trinitas Hosp. Oblig. Group),
7 1/2s, 7/1/30 Baa3 4,405,000
2,000,000 (Columbus Regl. Hosp.), Ser. A,
7 1/2s, 7/1/21 B2 1,807,500
3,500,000 (Raritan Bay Med. Ctr.), 7 1/4s,
7/1/27 BB+/P 3,600,380
5,000,000 (South Jersey Hosp.), 6s, 7/1/12 Baa1 5,650,000
1,750,000 NJ State Ed. Fac. Auth. Rev. Bonds
(Stevens Inst. of Tech.), Ser. C,
5 1/4s, 7/1/32 A- 1,767,500
2,000,000 Tobacco Settlement Fin. Corp.
Rev. Bonds, 6 3/4s, 6/1/39 Baa2 1,980,000
--------------
50,550,230
New Mexico (0.7%)
- -------------------------------------------------------------------------------
5,500,000 Farmington, Poll. Control Rev. Bonds
(Tucson Elec. Pwr. Co. San Juan),
Ser. A, 6.95s, 10/1/20 Ba3 5,795,625
2,200,000 Farmington, Poll. Control VRDN (AZ
Pub. Svc. Co.), Ser. B, 1.03s,
9/1/24 VMIG1 2,200,000
--------------
7,995,625
New York (8.6%)
- -------------------------------------------------------------------------------
2,250,000 Colonie, Indl. Dev. Agcy. Rev. Bonds
(Cap. Compost & Waste), Ser. A,
3 3/8s, 6/1/21 D/P 258,750
1,250,000 Huntington, Hsg. Auth. Rev. Bonds
(Gurwin Jewish Sr. Residence),
Ser. A, 6s, 5/1/39 B+/P 1,162,500
2,000,000 Nassau Cnty, Interim Fin. Auth.
Rev. Bonds, Ser. B, MBIA, 5s,
11/15/11 Aaa 2,257,500
1,575,000 Nassau Cnty., Indl. Dev. Agcy.
Rev. Bonds (North Shore Hlth. Syst.
Project D), 5 1/4s, 11/1/07 A3 1,704,938
8,000,000 NY City, G.O. Bonds, Ser. C, 5 1/2s,
8/1/13 A2 8,910,000
6,280,000 NY City, Rev. Bonds, 10.531s, 8/1/06
(acquired 9/12/97, cost $7,384,526)
(RES) AAA/P 7,543,850
NY City, Indl. Dev. Agcy. Rev. Bonds
6,000,000 (Paper Inc.), 7.8s, 1/1/16 B+/P 6,300,000
2,075,000 (British Airways), 7 5/8s, 12/1/32 BB+ 2,100,938
3,250,000 (Brooklyn Navy Yard Cogen.
Partners), 5.65s, 10/1/28 BBB- 2,985,938
500,000 NY City, Indl. Dev. Agcy. Civic Fac.
Rev. Bonds (Brooklyn Polytech. U.
Project J), 6 1/8s, 11/1/30 BB+ 402,500
5,000,000 NY City, Indl. Dev. Agcy. Special
Arpt. Fac. Rev. Bonds (Airis JFK I
LLC), Ser. A, 5 1/2s, 7/1/28 Baa3 4,968,750
3,325,000 NY City, Indl. Dev. Agcy. Special
Fac. Rev. Bonds (British Airways),
5 1/4s, 12/1/32 BB+ 2,556,094
5,500,000 NY City, Transitional Fin. Auth.
Rev. Bonds (Future Tax), Ser. C,
FSA, 5 1/4s, 8/1/10 Aaa 6,263,125
1,785,000 NY State Dorm. Auth. Rev. Bonds
(Lenox Hill Hosp.), 5 3/4s, 7/1/12 A3 2,005,894
8,000,000 NY State Energy Resource & Dev.
Auth. Poll. Control IFB, FGIC,
12.948s, 7/1/29 (acquired 12/19/94,
cost $8,353,120) (RES) Aaa 8,699,840
4,500,000 NY State Env. Fac. Corp. Rev. Bonds,
MBIA, 6s, 6/15/12 Aaa 5,411,250
11,185,000 NY State Env. Fac. Corp. Poll.
Control FRB (PA 198), MBIA, 10.543s,
6/15/10 (acquired 10/22/97, cost
$13,449,963) (RES) AAA 15,421,301
5,000,000 Onondaga Cnty., Indl. Dev. Agcy.
Rev. Bonds (Solvay Paperboard, LLC),
7s, 11/1/30 BB-/P 5,312,500
5,000,000 Suffolk Cnty., Indl. Dev. Agcy.
Rev. Bonds (Peconic Landings),
Ser. A, 8s, 10/1/20 B+/P 5,150,000
3,800,000 Suffolk Cnty., Indl. Dev. Agcy.
Civic Fac. Rev. Bonds (Southampton
Hosp. Assn.), Ser. B, 7 5/8s, 1/1/30 B-/P 3,833,250
--------------
93,248,918
North Carolina (2.7%)
- -------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Syst.
Rev. Bonds, Ser. C
7,500,000 5 3/8s, 1/1/17 BBB 7,950,000
3,400,000 5 3/8s, 1/1/16 BBB 3,633,750
2,000,000 5.3s, 1/1/15 BBB 2,137,500
4,500,000 NC Med. Care Comm. Retirement Fac.
Rev. Bonds (1st Mtge.-Givens
Estates Project), Ser. A, 6 1/2s,
7/1/32 BB-/P 4,618,125
NC State Muni. Pwr. Agcy. Rev. Bonds
4,000,000 (No. 1, Catawba Elec.), Ser. B,
6 1/2s, 1/1/20 Baa1 4,470,000
6,000,000 Ser. A, 5 1/2s, 1/1/13 Baa1 6,615,000
--------------
29,424,375
Ohio (2.2%)
- -------------------------------------------------------------------------------
Marion Cnty., Hlth. Care Fac.
Rev. Bonds (United Church Homes)
900,000 6 3/8s, 11/15/10 BBB- 923,625
750,000 6.3s, 11/15/15 BBB- 763,125
1,000,000 OH State Env. Impt. Rev. Bonds (USX
Corp.), 5 5/8s, 5/1/29 Baa1 1,018,750
OH State Higher Edl. Fac. FRB
(Kenyon College Project)
2,500,000 4.95s, 7/1/37 A2 2,631,250
5,000,000 4.85s, 7/1/37 A2 5,268,750
6,500,000 OH State Solid Waste Mandatory Put
Bonds, 4.85s, 11/1/22 BBB 6,930,625
6,000,000 OH State Wtr. Dev. Auth. Poll.
Control Fac. Rev. Bonds, 6.1s,
8/1/20 Baa2 6,112,500
700,000 OH State Wtr. Dev. Auth. Solid Waste
Disp. Rev. Bonds (Bay Shore Power
Co.), Ser. A, 5 7/8s, 9/1/20 BB+/P 674,625
--------------
24,323,250
Oklahoma (0.6%)
- -------------------------------------------------------------------------------
OK Dev. Fin. Auth. Rev. Bonds
1,600,000 (Continuing Care Retirement),
Ser. A, 8s, 2/1/32 B/P 1,606,000
3,075,000 (Hillcrest Hlth. Care), Ser. A,
5 5/8s, 8/15/29 B1 2,417,719
2,350,000 Ottawa Cnty., Fin. Auth. Indl.
Rev. Bonds (Doane Products Co.),
7 1/4s, 6/1/17 B-/P 1,944,625
--------------
5,968,344
Oregon (0.6%)
- -------------------------------------------------------------------------------
6,700,000 Multnomah Cnty., Hosp. Fac. Auth.
Rev. Bonds (Terwilliger Plaza
Project), 6 1/2s, 12/1/29 BB-/P 6,683,250
Pennsylvania (5.5%)
- -------------------------------------------------------------------------------
6,500,000 Allegheny Cnty., Hosp. Dev. Auth.
Rev. Bonds (Hlth. Syst.), Ser. B,
9 1/4s, 11/15/15 B2 7,068,750
1,150,000 Allentown, Hosp. Auth. Rev. Bonds
(Sacred Heart Hosp.), Ser. A,
6 3/4s, 11/15/14 Baa3 1,154,313
8,605,000 Carbon Cnty., Indl. Dev. Auth.
Rev. Bonds (Panther Creek Partners),
6.65s, 5/1/10 BBB- 9,347,181
1,700,000 Chester Cnty., Hlth. & Ed. Fac.
Auth. Rev. Bonds (Jenners Pond,
Inc.), 7 5/8s, 7/1/34 BB-/P 1,740,375
3,750,000 Dauphin Cnty., Gen. Auth. Rev. Bonds
(Office & Pkg.), Ser. A, 6s, 1/15/25 D/P 1,743,750
1,500,000 Lancaster Cnty., Hosp. Auth.
Rev. Bonds (Gen. Hosp.), 5 1/2s,
3/15/26 A- 1,526,250
Lehigh Cnty., Gen. Purpose Auth.
Rev. Bonds
2,250,000 (St. Luke's Hosp. - Bethlehem),
5 3/8s, 8/15/33 Baa2 2,258,438
2,860,000 (Lehigh Valley Hosp. Hlth. Network),
Ser. A, 5 1/4s, 7/1/32 A2 2,870,725
1,750,000 New Morgan, Indl. Dev. Auth. Solid
Waste Disp. Rev. Bonds (New Morgan
Landfill Co., Inc.), 6 1/2s, 4/1/19 BB- 1,673,438
2,000,000 PA Econ. Dev. Fin. Auth.
Rev. Bonds (Amtrak Project), Ser. A,
6 3/8s, 11/1/41 A3 2,042,500
9,000,000 PA State Econ. Dev. Fin. Auth. Res.
Recvy. Rev. Bonds (Colver), Ser. E,
8.05s, 12/1/15 BBB-/P 9,462,510
PA State Higher Edl. Fac. Auth.
Rev. Bonds
1,500,000 (Widener U.), 5.4s, 7/15/36 BBB+ 1,524,375
1,345,000 (Philadelphia College of Osteopathic
Med.), 5s, 12/1/13 A 1,464,369
Philadelphia, Hosp. & Higher Ed.
Fac. Auth. Rev. Bonds
4,875,853 (Graduate Hlth. Syst. Oblig. Group),
7 1/4s, 7/1/18 (In default) (NON) Ca 6,095
3,000,000 (Jeanses Hosp. Project), 5 7/8s,
7/1/17 Baa2 3,018,750
Scranton, G.O. Bonds, Ser. C
3,060,000 7.1s, 9/1/31 AAA/P 3,890,025
1,000,000 7s, 9/1/22 AAA/P 1,265,000
2,500,000 West Cornwall, Tpk. Muni. Auth.
Rev. Bonds (Elizabethtown College
Project), 6s, 12/15/27 BBB+ 2,615,625
2,600,000 West Shore, Area Hosp. Auth.
Rev. Bonds (Holy Spirit Hosp.),
6 1/4s, 1/1/32 BBB+ 2,681,250
2,000,000 York Cnty., Indl. Dev. Auth.
Rev. Bonds, Ser. A, 5 1/2s, 9/1/20 Baa1 2,022,500
--------------
59,376,219
Puerto Rico (0.7%)
- -------------------------------------------------------------------------------
7,400,000 PR Indl. Tourist Edl. Med. & Env.
Control Fac. Rev. Bonds (Cogen.
Fac.-AES PR), 6 5/8s, 6/1/26 Baa3 7,797,750
Rhode Island (0.1%)
- -------------------------------------------------------------------------------
710,000 Tobacco Settlement Fin. Corp.
Rev. Bonds, Ser. A, 6 1/4s, 6/1/42 Baa2 650,538
South Carolina (3.9%)
- -------------------------------------------------------------------------------
Connector 2000 Assn., Inc. SC Toll
Road Rev. Bonds
5,215,000 (SR-Southern Connector), Ser. A,
5 3/8s, 1/1/38 B- 2,972,550
4,465,000 (Cap. Appn. Sub.), Ser. C, zero %,
1/1/21 B-/P 128,369
5,500,000 (Cap. Appn. Sub.), Ser. C, zero %,
1/1/20 B-/P 158,125
4,200,000 (Cap. Appn. Sub.), Ser. C, zero %,
1/1/14 B-/P 152,250
4,100,000 (Cap. Appn. Sub.), Ser. C, zero %,
1/1/13 B-/P 148,625
1,000,000 (Cap. Appn. Sub.), Ser. C, zero %,
1/1/12 B-/P 37,500
3,175,000 Florence Cnty., Indl. Dev. Auth.
Rev. Bonds (Stone Container Corp.),
7 3/8s, 2/1/07 B/P 3,230,817
2,275,000 Lexington Cnty. Rev. Bonds, 5 1/2s,
11/1/32 A2 2,343,250
4,000,000 SC Hosp. Auth. Rev. Bonds (Med. U.),
Ser. A, 6 1/2s, 8/15/32 BBB+ 4,190,000
SC Jobs Econ. Dev. Auth. Rev. Bonds
10,355,000 (St. Francis Hosp.-Franciscan
Sisters), 7s, 7/1/15 BBB+/P 10,607,351
5,000,000 (Palmetto Hlth. Alliance), Ser. C,
6s, 8/1/20 Baa2 5,168,750
3,800,000 SC Jobs Econ. Dev. Auth. Hosp. Fac.
Rev. Bonds (Palmetto Hlth.
Alliance), Ser. A, 7 3/8s, 12/15/21 Baa2 4,887,750
9,000,000 SC Tobacco Settlement Rev. Mgt.
Rev. Bonds, Ser. B, 6 3/8s, 5/15/30 Baa2 8,448,750
--------------
42,474,087
South Dakota (0.1%)
- -------------------------------------------------------------------------------
1,650,000 SD Edl. Enhancement Funding Corp.
Rev. Bonds, Ser. B, 6 1/2s, 6/1/32 Baa2 1,581,938
Tennessee (1.5%)
- -------------------------------------------------------------------------------
1,000,000 Elizabethton, Hlth. & Edl. Fac.
Board Rev. Bonds (Hosp. Ref. &
Impt.), Ser. B, 8s, 7/1/33 Baa2 1,165,000
7,500,000 Johnson City, Hlth. & Edl. Fac.
Board Hosp. Rev. Bonds (Mountain
States Hlth.), Ser. A, 7 1/2s,
7/1/33 Baa2 8,493,750
Memphis-Shelby Cnty., Arpt. Auth.
Rev. Bonds (Federal Express Corp.)
4,000,000 5.05s, 9/1/12 Baa2 4,325,000
2,500,000 4 1/2s, 7/1/14 Baa2 2,565,625
--------------
16,549,375
Texas (4.4%)
- -------------------------------------------------------------------------------
6,850,000 Abilene, Hlth. Fac. Dev. Corp.
Rev. Bonds (Sears Methodist
Retirement), Ser. A, 5.9s, 11/15/25 BB+/P 6,524,625
3,985,000 Crawford Ed. Fac. Rev. Bonds (U. St.
Thomas), 5 3/8s, 10/1/27 BBB+ 3,980,019
2,500,000 Dallas-Fort Worth, Intl. Arpt. Fac.
Impt. Rev. Bonds (American Airlines,
Inc.), 8 1/4s, 11/1/36 Caa2 1,956,250
3,000,000 Dallas-Fort Worth, Intl. Arpt. Fac.
Impt. Corp. Rev. Bonds (American
Airlines, Inc.), 6 3/8s, 5/1/35 Caa2 2,167,500
500,000 Georgetown, Hlth. Fac. Dev. Corp.
Rev. Bonds, 6 1/4s, 8/15/29 BB+ 482,500
Houston, Arpt. Syst. Rev. Bonds
7,000,000 (Special Fac. - Continental
Airlines, Inc.), Ser. E, 6 3/4s,
7/1/21 B- 6,475,000
3,000,000 (Continental Airlines, Inc.),
Ser. C, 5.7s, 7/15/29 B- 2,362,500
5,500,000 Lufkin, Hlth. Fac. Dev. Corp.
Rev. Bonds (Memorial Hlth. Syst. of
East TX), 5.7s, 2/15/28 BBB- 5,032,500
5,265,000 Round Rock, Hotel Occupancy Tax
Rev. Bonds (Convention Ctr.
Complex), 5.85s, 12/1/24 BBB/P 5,337,394
4,500,000 Sam Rayburn Muni. Pwr. Agcy.
Rev. Bonds, 6s, 10/1/21 Baa2 4,713,750
Tomball, Hosp. Auth. Rev. Bonds
(Tomball Regl. Hosp.)
6,250,000 6 1/8s, 7/1/23 Baa2 6,394,375
2,095,000 6s, 7/1/25 Baa2 2,136,900
--------------
47,563,313
Utah (1.1%)
- -------------------------------------------------------------------------------
1,000,000 Carbon Cnty., Solid Waste Disp.
Rev. Bonds (Laidlaw Env.), Ser. A,
7 1/2s, 2/1/10 BB- 1,028,750
5,500,000 Tooele Cnty., Harbor & Term. Dist.
Port Fac. Rev. Bonds (Union
Pacific), Ser. A, 5.7s, 11/1/26 Baa2 5,582,500
4,480,000 UT Cnty., Env. Impt. Rev. Bonds
(Marathon Oil Project), 5.05s,
11/1/17 Baa1 4,872,000
--------------
11,483,250
Virginia (3.0%)
- -------------------------------------------------------------------------------
6,250,000 Henrico Cnty. Econ. Dev. Auth.
Rev. Bonds (United Methodist),
Ser. A, 6.7s, 6/1/27 BB+/P 6,414,063
2,000,000 Henrico Cnty., Indl. Dev. Auth. IFB
(Bon Secours Hlth. Syst.), FSA,
10.61s, 8/23/27 Aaa 2,757,500
2,500,000 James Cnty., Indl. Dev. Auth.
Rev. Bonds (1st. Mtge.
Williamsburg), Ser. A, 6 1/8s,
3/1/32 BB-/P 2,537,500
4,000,000 Peninsula Ports Auth. Rev. Bonds (VA
Baptist Homes), Ser. A, 7 3/8s,
12/1/32 B+/P 4,175,000
5,250,000 Pocahontas Parkway Assn. Toll Rd.
Rev. Bonds, Ser. A, 5 1/2s, 8/15/28 BB 4,350,938
Roanoke Cnty. Indl. Dev. Auth.
Rev. Bonds (Res. Care Fac.), Ser. A
2,000,000 6.3s, 7/1/35 B+/P 2,015,000
1,000,000 4.4s, 7/1/08 B+/P 1,005,000
1,000,000 Russell Cnty. Indl. Dev. Auth. Poll.
Control Rev. Bonds (Appalachian Pwr.
Co.), Ser. I, 2.7s, 11/1/07 Baa2 1,002,500
9,010,000 Suffolk, Redev. & Hsg. Auth.
Rev. Bonds (Beach-Oxford Apts.),
6 1/4s, 10/1/33 BB-/P 8,041,425
--------------
32,298,926
Washington (0.9%)
- -------------------------------------------------------------------------------
4,970,000 Tobacco Settlement Auth. of WA
Rev. Bonds, 6 1/2s, 6/1/26 Baa2 4,920,300
5,500,000 Washington Cnty., Hsg. & Redev.
Auth. Rev. Bonds (Healtheast),
5 1/2s, 11/15/27 Ba2 4,812,500
--------------
9,732,800
West Virginia (0.6%)
- -------------------------------------------------------------------------------
3,475,000 Mason Cnty., Poll. Control FRB
(Appalachian Pwr. Co. Project),
Ser. L, 5 1/2s, 10/1/22 Baa2 3,527,125
4,495,000 Princeton, Hosp. Rev. Bonds (Cmnty.
Hosp. Assn., Inc.), 6.1s, 5/1/29 B2 3,197,069
--------------
6,724,194
Wisconsin (0.6%)
- -------------------------------------------------------------------------------
Badger Tobacco Settlement
Asset Securitization Corp.
Rev. Bonds
1,000,000 7s, 6/1/28 Baa2 1,022,500
5,500,000 6 3/8s, 6/1/32 Baa2 5,176,875
--------------
6,199,375
Wyoming (0.6%)
- -------------------------------------------------------------------------------
5,350,000 Sweetwater Cnty., Poll. Control
Rev. Bonds (Idaho Power Co.
Project), Ser. A, 6.05s, 7/15/26 A3 5,543,938
1,400,000 Uinta Cnty. Poll. Control VRDN
(Chevron USA, Inc.), 0.88s, 12/1/22 VMIG1 1,400,000
--------------
6,943,938
--------------
Total Municipal bonds and notes
(cost $1,057,722,513) $1,051,438,046
Preferred stocks (1.0%) (a)
Number of shares Value
- -------------------------------------------------------------------------------
2,000,000 Charter Mac. Equity Trust 144A
Ser. A, 6.625% cum. pfd. (acquired
6/11/99, cost $2,000,000) (RES) $2,145,000
8,000,000 MuniMae Tax Exempt Bond Subsidiary,
LLC 144A Ser. B, 7 3/4s cum. pfd. 8,850,000
--------------
Total Preferred stocks
(cost $10,000,000) $10,995,000
Common stocks (0.1%) (a)
Number of shares Value
- -------------------------------------------------------------------------------
184,103 Tembec, Inc. (Canada) (NON) $1,197,092
- -------------------------------------------------------------------------------
Total Investments (cost $1,076,779,798) $1,063,630,138
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,081,833,850.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at January 31, 2004 for the
securities listed. Ratings are generally ascribed to securities at the
time of issuance. While the agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at January 31, 2004. Securities rated by Putnam are indicated
by "/P" and are not publicly rated.
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at January 31, 2004 was
$60,222,241 or 5.6% of net assets.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
The rates shown on VRDN, mandatory put bonds and Floating Rate Bonds
(FRB) are the current interest rates shown at January 31, 2004.
The rates shown on IFB, which are securities paying interest rates that
vary inversely to changes in the market interest rates, are the current
interest rates shown at January 31, 2004.
The fund had the following industry group concentrations greater than
10% at January 31, 2004 (as a percentage of
net assets):
Health care 34.5
Utilities 19.2
The accompanying notes are an integral part of these financial
statements.
Statement of assets and liabilities
January 31, 2004 (Unaudited)
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$1,076,779,798) (Note 1) $1,063,630,138
- -------------------------------------------------------------------------------
Cash 7,594,876
- -------------------------------------------------------------------------------
Interest and other receivables 15,616,839
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 317,954
- -------------------------------------------------------------------------------
Receivable for securities sold 3,269,566
- -------------------------------------------------------------------------------
Total assets 1,090,429,373
Liabilities
- -------------------------------------------------------------------------------
Distributions payable to shareholders 2,368,852
- -------------------------------------------------------------------------------
Payable for securities purchased 3,468,843
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,542,531
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 545,048
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 173,372
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 120,542
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,518
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 303,737
- -------------------------------------------------------------------------------
Other accrued expenses 71,080
- -------------------------------------------------------------------------------
Total liabilities 8,595,523
- -------------------------------------------------------------------------------
Net assets $1,081,833,850
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,267,147,503
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 1,784,303
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (173,948,296)
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments (13,149,660)
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $1,081,833,850
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($864,825,030 divided by 68,355,448 shares) $12.65
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.50 of $12.65)* $13.25
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($198,831,383 divided by 15,690,412 shares)** $12.67
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($10,830,506 divided by 855,711 shares)** $12.66
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($7,346,931 divided by 580,706 shares) $12.65
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $12.65)*** $13.07
- -------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25000 or
more and on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
*** On single retail sales of less than $50,000. On sales of $50,000 or more
and on group sales, the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
Statement of operations
Six months ended January 31, 2004 (Unaudited)
Interest income: $37,153,461
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 3,461,574
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 629,783
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 20,578
- -------------------------------------------------------------------------------
Administrative services (Note 2) 9,199
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 952,245
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 909,472
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 57,538
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 23,070
- -------------------------------------------------------------------------------
Other 97,005
- -------------------------------------------------------------------------------
Non-recurring costs (Note 5) 13,623
- -------------------------------------------------------------------------------
Costs assumed by Manager (Note 5) (13,623)
- -------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2) (565)
- -------------------------------------------------------------------------------
Total expenses 6,159,899
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (17,569)
- -------------------------------------------------------------------------------
Net expenses 6,142,330
- -------------------------------------------------------------------------------
Net investment income 31,011,131
- -------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (43,114,943)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 76,441,625
- -------------------------------------------------------------------------------
Net gain on investments 33,326,682
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $64,337,813
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Six months ended Year ended
January 31 July 31
Decrease in net assets 2004* 2003
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $31,011,131 $76,752,234
- -------------------------------------------------------------------------------
Net realized loss on investments (43,114,943) (46,006,262)
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 76,441,625 (14,729,467)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 64,337,813 16,016,505
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From ordinary income
Class A -- (17,230)
- -------------------------------------------------------------------------------
Class B -- (3,945)
- -------------------------------------------------------------------------------
Class C -- (187)
- -------------------------------------------------------------------------------
Class M -- (171)
- -------------------------------------------------------------------------------
From tax-exempt income
Class A (26,524,763) (62,725,610)
- -------------------------------------------------------------------------------
Class B (5,266,629) (13,041,582)
- -------------------------------------------------------------------------------
Class C (274,404) (610,914)
- -------------------------------------------------------------------------------
Class M (244,396) (601,649)
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (196,389,732) (113,047,446)
- -------------------------------------------------------------------------------
Total decrease in net assets (164,362,111) (174,032,229)
Net assets
- -------------------------------------------------------------------------------
Beginning of period 1,246,195,961 1,420,228,190
- -------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $1,784,303 and
$3,083,364, respectively) $1,081,833,850 $1,246,195,961
- -------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.31 $12.88 $13.39 $13.27 $14.13 $14.61
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .34 (c) .74 .83 .80 .80 .81
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .35 (.57) (.52) .11 (.85) (.48)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .69 .17 .31 .91 (.05) .33
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.35) (.74) (.82) (.79) (.81) (.81)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.35) (.74) (.82) (.79) (.81) (.81)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.65 $12.31 $12.88 $13.39 $13.27 $14.13
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.67* 1.34 2.38 7.10 (.24) 2.25
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $864,825 $1,000,769 $1,115,695 $1,145,710 $1,114,842 $1,157,920
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .46* (c) .91 .90 .88 .86 .87
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.70* (c) 5.83 6.31 6.01 5.95 5.56
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.64* 28.90 19.87 17.95 12.05 12.16
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an expense limitation in effect during the period. As a
result of such limitation the expenses of the fund reflect a reduction
of less than 0.01% of the average net assets (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS B
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.33 $12.90 $13.41 $13.29 $14.15 $14.62
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .30 (c) .67 .76 .73 .73 .74
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .35 (.57) (.52) .12 (.86) (.47)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .65 .10 .24 .85 (.13) .27
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.31) (.67) (.75) (.73) (.73) (.74)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.67) (.75) (.73) (.73) (.74)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.67 $12.33 $12.90 $13.41 $13.29 $14.15
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.32* 0.82 1.88 6.55 (.82) 1.81
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $198,831 $222,970 $281,825 $356,506 $441,174 $743,456
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .78* (c) 1.43 1.40 1.39 1.44 1.37
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.37* (c) 5.32 5.83 5.49 5.36 5.03
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.64* 28.90 19.87 17.95 12.05 12.16
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an expense limitation in effect during the period. As a
result of such limitation the expenses of the fund reflect a reduction
of less than 0.01% of the average net assets (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS C
- ----------------------------------------------------------------------------------------------------------------------------
Six months For the
ended period
January 31 Feb 1, 1999+
Per-share (Unaudited) Year ended July 31 to July 31
operating performance 2004 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.31 $12.89 $13.39 $13.27 $14.13 $14.73
- ----------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income .29 (c) .64 .72 .69 .69 .36
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .36 (.58) (.51) .12 (.85) (.60)
- ----------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .65 .06 .21 .81 (.16) (.24)
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------------
From net
investment income (.30) (.64) (.71) (.69) (.70) (.36)
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (.30) (.64) (.71) (.69) (.70) (.36)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.66 $12.31 $12.89 $13.39 $13.27 $14.13
- ----------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.34* 0.45 1.64 6.25 (1.05) 1.58*
- ----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $10,831 $12,028 $11,002 $6,779 $3,945 $2,738
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .86* (c) 1.71 1.70 1.68 1.66 .83*
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.30* (c) 5.02 5.46 5.20 5.16 2.47*
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.64* 28.90 19.87 17.95 12.05 12.16
- ----------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an expense limitation in effect during the period. As a
result of such limitation the expenses of the fund reflect a reduction
of less than 0.01% of the average net assets (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS M
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.31 $12.89 $13.39 $13.27 $14.14 $14.61
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .32 (c) .70 .79 .76 .77 .77
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .35 (.58) (.51) .12 (.87) (.47)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .67 .12 .28 .88 (.10) .30
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.33) (.70) (.78) (.76) (.77) (.77)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.33) (.70) (.78) (.76) (.77) (.77)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.65 $12.31 $12.89 $13.39 $13.27 $14.14
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.52* 0.96 2.16 6.79 (.62) 2.01
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $7,347 $10,429 $11,706 $11,474 $13,745 $23,693
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .61* (c) 1.21 1.20 1.18 1.16 1.17
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.54* (c) 5.54 6.00 5.70 5.65 5.27
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.64* 28.90 19.87 17.95 12.05 12.16
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an expense limitation in effect during the period. As a
result of such limitation the expenses of the fund reflect a reduction
of less than 0.01% of the average net assets (Note 2).
The accompanying notes are an integral part of these financial
statements.
Notes to financial statements
January 31, 2004 (unaudited)
Note 1
Significant accounting policies
Putnam Tax-Free High Yield Fund (the "fund") is a series of Putnam
Tax-Free Income Trust (the "trust") which is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund pursues its objective of seeking
high current income exempt from federal income tax by investing
primarily in high-yielding, lower rated tax-exempt securities
constituting a portfolio that Putnam Investment Management, LLC ("Putnam
Management"), the fund's manager, an indirect wholly-owned subsidiary of
Putnam, LLC, believes does not involve undue risk to income or
principal. The fund invests in higher yielding, lower rated bonds that
have a higher rate of default due to the nature of the investments.
The fund offers class A, class B, class C, and class M shares. Class A
shares are sold with a maximum front-end sales charge of 4.50%. Prior to
January 28, 2004, the maximum front-end sales charge for class shares
was 4.75%. Class B shares, which convert to class A shares after
approximately eight years, do not pay a front-end sales charge but pay a
higher ongoing distribution fee than class A and class M shares, and are
subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class C shares have a higher
ongoing distribution fee than class B shares and have a one-year 1.00%
contingent deferred sales charge and do not convert to Class A shares.
Class M shares are sold with a maximum front end sales charge of 3.25%
and pay an ongoing distribution fee that is higher than class A shares
but lower than class B and class C shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
Effective April 19, 2004, a 2.00% redemption fee may apply to any shares
that are redeemed (either by selling or exchanging into another fund)
within 5 days of purchase.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in the financial
statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results could
differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are valued on the basis
of valuations provided by an independent pricing service, approved by
the Trustees. Such services use information with respect to transactions
in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. Investments for which market quotations are readily
available are valued at the last reported sales price on their principal
exchange, or official closing price for certain markets. If no sales are
reported -- as in the case of some securities traded over-the-counter --
a security is valued at its last reported bid price. Restricted
securities are valued at fair value following procedures approved by the
Trustees. Such valuations and procedures are reviewed periodically by
the Trustees. Short-term investments having remaining maturities of 60
days or less are valued at amortized cost, which approximates fair
value.
B) Security transactions and related investment income Security
transactions are recorded on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on
the identified cost basis. Interest income is recorded on the accrual
basis.
Non-cash dividends, if any, are recorded at the fair market value of the
securities received. All premiums/discounts are amortized/accreted on a
yield-to-maturity basis. The premium in excess of the call price, if
any, is amortized to the call date; thereafter, any remaining premium is
amortized to maturity.
C) Line of credit During the period, the fund was entered into a
committed line of credit with certain banks. The line of credit
agreement included restrictions that the fund would maintain an asset
coverage ratio of at least 300% and that borrowings would not exceed
prospectus limitations. For the period ended August 6, 2003, the fund
had no borrowings against the line of credit. Effective August 6, 2003,
the fund no longer participated in a committed line of credit.
D) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986, as amended. Therefore, no
provision has been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on income
and capital gains.
At July 31, 2003, the fund had a capital loss carryover of approximately
$72,899,436 available to the extent allowed by tax law to offset future
capital gains, if any. The amount of the carryover and the expiration
dates are:
Loss Carryover Expiration
- --------------------------------
$12,477,080 July 31, 2004
21,345,454 July 31, 2006
23,390,767 July 31, 2007
7,813,842 July 31, 2008
1,682,906 July 31, 2009
1,466,587 July 31, 2010
4,722,800 July 31, 2011
Pursuant to federal income tax regulations applicable to regulated
investment companies, the fund has elected to defer to its fiscal year
ending July 31, 2004 approximately $51,751,776 of losses recognized
during the period November 1, 2002 to July 31, 2003.
The aggregate identified cost on a tax basis is $1,076,684,105,
resulting in gross unrealized appreciation and depreciation of
$56,460,114 and $69,514,081, respectively, or net unrealized
depreciation of $13,053,967.
E) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid monthly. Distributions from capital gains, if any,
are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. Reclassifications are
made to the fund's capital accounts to reflect income and gains
available for distribution (or available capital loss carryovers) under
income tax regulations.
F) Expenses of the trust Expenses directly charged or attributable to
any fund will be paid from the assets of that fund. Generally, expenses
of the trust will be allocated among and charged to the assets of each
fund on a basis that the Trustees deem fair and equitable, which may be
based on the relative assets of each fund or the nature of the services
performed and relative applicability to each fund.
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on the following annual rates: 0.65% of the first $500 million
of average net assets, 0.55% of the next $500 million, 0.50% of the next
$500 million, 0.45% of the next $5 billion, 0.425% of the next $5
billion, 0.405% of the next $5 billion, and 0.39% of the next $5 billion
and 0.38% thereafter.
Effective January 28, 2004, Putnam Management has agreed to limit its
compensation (and, to the extent necessary bear other expenses) through
December 31, 2004 to the extent that the fund's net expenses as a
percentage of average net assets exceed the average expense ratio for
the fund's Lipper peer group of front-end load funds.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam, LLC. Putnam
Investor Services, a division of PFTC, provides investor servicing agent
functions to the fund. During the six months ended January 31, 2004 the
fund paid PFTC $527,172 for these services.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the six months ended January 31,
2004, the fund's expenses were reduced by $17,569 under these
arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $1,901 has been allocated to the fund, and an additional fee for
each Trustees meeting attended. Trustees receive additional fees for
attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan"),
which allows the Trustees to defer the receipt of all or a portion of
Trustees fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Trustee compensation and expenses in the
Statement of operations. Accrued pension liability is included in
Payable for Trustee compensation and expenses in the Statement of assets
and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B, class C and class M shares pursuant to rule 12b-1
under the Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Retail Management, a wholly-owned subsidiary of
Putnam, LLC and Putnam Retail Management GP, Inc., for services provided
and expenses incurred by it in distributing shares of the fund. The
Plans provide for payments by the fund to Putnam Retail Management at an
annual rate of up to 0.35%, 1.00%, 1.00% and 1.00% of the average net
assets attributable to class A, class B, class C and class M shares,
respectively. The Trustees have approved payment by the fund at the
annual rates of 0.20%, 0.85%, 1.00% and 0.50% of the average net assets
attributable to class A, class B, class C and class M shares,
respectively.
For the six months ended January 31, 2004, Putnam Retail Management,
acting as underwriter, received net commissions of $18,644 and $89 from
the sale of class A and class M shares, respectively, and received
$327,548 and $142 in contingent deferred sales charges from redemptions
of class B and class C shares, respectively. 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 as part of an investment
of $1 million or more. For the six months ended January 31, 2004, Putnam
Retail Management, acting as underwriter, received $4,649 on class A
redemptions.
Note 3
Purchases and sales of securities
During the six months ended January 31, 2004, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $110,212,705 and $319,822,714, respectively.
There were no purchases and sales of U.S. government securities.
Note 4
Capital shares
At January 31, 2004, there were an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 1,761,437 $21,877,038
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 1,283,002 16,031,819
- ----------------------------------------------------------------
3,044,439 37,908,857
Shares repurchased (15,988,322) (199,528,178)
- ----------------------------------------------------------------
Net decrease (12,943,883) $(161,619,321)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 7,302,265 $92,127,348
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 2,953,632 37,186,069
- ----------------------------------------------------------------
10,255,897 129,313,417
Shares repurchased (15,560,514) (195,724,936)
- ----------------------------------------------------------------
Net decrease (5,304,617) $(66,411,519)
- ----------------------------------------------------------------
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 636,126 $7,947,562
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 209,561 2,622,890
- ----------------------------------------------------------------
845,687 10,570,452
Shares repurchased (3,239,662) (40,498,189)
- ----------------------------------------------------------------
Net decrease (2,393,975) $(29,927,737)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 1,854,677 $23,435,847
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 512,488 6,465,446
- ----------------------------------------------------------------
2,367,165 29,901,293
Shares repurchased (6,122,644) (77,328,504)
- ----------------------------------------------------------------
Net decrease (3,755,479) $(47,427,211)
- ----------------------------------------------------------------
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 86,527 $1,075,423
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 11,135 138,884
- ----------------------------------------------------------------
97,662 1,214,307
Shares repurchased (218,682) (2,722,956)
- ----------------------------------------------------------------
Net decrease (121,020) $(1,508,649)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 345,325 $4,381,427
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 25,053 308,458
- ----------------------------------------------------------------
370,378 4,689,885
Shares repurchased (247,328) (3,113,145)
- ----------------------------------------------------------------
Net increase 123,050 $1,576,740
- ----------------------------------------------------------------
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 15,574 $194,373
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 13,412 167,483
- ----------------------------------------------------------------
28,986 361,856
Shares repurchased (295,478) (3,695,881)
- ----------------------------------------------------------------
Net decrease (266,492) $(3,334,025)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 47,097 $565,889
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 31,500 421,804
- ----------------------------------------------------------------
78,597 987,693
Shares repurchased (139,917) (1,773,149)
- ----------------------------------------------------------------
Net decrease (61,320) $(785,456)
- ----------------------------------------------------------------
Note 5
Regulatory matters and litigation
On November 13, 2003, Putnam Management agreed to entry of an order by
the Securities and Exchange Commission in partial resolution of
administrative and cease-and-desist proceedings initiated by the SEC on
October 28, 2003 in connection with alleged excessive short-term trading
by at least six Putnam Management investment professionals. The SEC's
findings reflect that four of those employees engaged in such trading in
funds over which they had investment decision-making responsibility and
had access to non-public information regarding, among other things,
current portfolio holdings and valuations. The six individuals are no
longer employed by Putnam Management. Under the order, Putnam Management
will make restitution for losses attributable to excessive short-term
trading by Putnam employees, institute new employee trading restrictions
and enhanced employee trading compliance, retain an independent
compliance consultant, and take other remedial actions. Putnam
Management neither admitted nor denied the order's findings, which
included findings that Putnam Management willfully violated provisions
of the federal securities laws. A civil monetary penalty and other
monetary relief, if any, will be determined at a later date. If a
hearing is necessary to determine the amounts of such penalty or other
relief, Putnam Management will be precluded from arguing that it did not
violate the federal securities laws in the manner described in the SEC
order, the findings set forth in the SEC order will be accepted as true
by the hearing officer and additional evidence may be presented. Putnam
Management, and not the investors in any Putnam fund, will bear all
costs, including restitution, civil penalties and associated legal fees.
Administrative proceedings instituted by the Commonwealth of
Massachusetts on October 28, 2003 against Putnam Management in
connection with alleged market timing activities by Putnam employees and
by participants in some Putnam-administered 401(k) plans are pending.
Putnam Management has committed to make complete restitution for any
losses suffered by Putnam shareholders as a result of any improper
market-timing activities by Putnam employees or within
Putnam-administered 401(k) plans.
The SEC's and Commonwealth's allegations and related matters also serve
as the general basis for numerous lawsuits, including purported class
action lawsuits filed against Putnam Management and certain related
parties, including certain Putnam funds. Putnam Management has agreed to
bear any costs incurred by Putnam funds in connection with these
lawsuits. Based on currently available information, Putnam Management
believes that the likelihood that the pending private lawsuits and
purported class action lawsuits will have a material adverse financial
impact on the fund is remote, and the pending actions are not likely to
materially affect its ability to provide investment management services
to its clients, including the Putnam funds.
For the period ended January 31, 2004, Putnam Management has assumed
$13,623 of legal, shareholder servicing and communication, audit, and
Trustee fees incurred by the Fund in connection with these matters.
Review of these matters by counsel for Putnam Management and by separate
independent counsel for the Putnam funds and their independent Trustees
is continuing. In addition, Marsh & McLennan Companies, Inc., Putnam
Management's parent company, has engaged counsel to conduct a separate
review of Putnam Management's policies and controls related to
short-term trading. The fund may experience increased redemptions as a
result of these matters, which could result in increased transaction
costs and operating expenses.
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds.
Investors should consider the investment objective, risks, charges, and
expenses of a fund before investing. For a prospectus containing this
and other information for any Putnam fund or product, call your
financial advisor at 1-800-225-1581 and ask for a prospectus. Please
read the prospectus carefully before investing.
Growth Funds
Discovery Growth Fund
Growth Opportunities Fund
Health Sciences Trust
International New Opportunities Fund*
New Opportunities Fund
OTC & Emerging Growth Fund
Small Cap Growth Fund
Vista Fund
Voyager Fund
Blend Funds
Capital Appreciation Fund
Capital Opportunities Fund
Europe Equity Fund*
Global Equity Fund*
Global Natural Resources Fund*
International Capital Opportunities Fund*
International Equity Fund*
Investors Fund
Research Fund
Tax Smart Equity Fund
Utilities Growth and Income Fund
Value Funds
Classic Equity Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
International Growth and Income Fund*
Mid Cap Value Fund
New Value Fund
Small Cap Value Fund+
Income Funds
American Government Income Fund
Diversified Income Trust
Global Income Trust*
High Yield Advantage Fund+*
High Yield Trust*
Income Fund
Intermediate U.S. Government Income Fund
Money Market Fund++
U.S. Government Income Trust
Tax-free Income Funds
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund++
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
Asset Allocation Funds
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* A 1% redemption fee on total assets redeemed or exchanged within 90
days of purchase may be imposed for all share classes of these funds.
+ Closed to new investors.
++ An investment in a money market fund is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government
agency. Although the funds seek to preserve your investment at $1.00
per share, it is possible to lose money by investing in the fund.
For shares purchased on or after April 19, 2004, a 2% redemption fee
will be applied to shares exchanged or sold within 5 days of purchase.
Check your account balances and the most recent month-end performance at
www.putnaminvestments.com.
Fund information
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Treasurer and Principal Financial Officer
Patricia C. Flaherty
Senior Vice President
Steven D. Krichmar
Vice President and Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Beth S. Mazor
Vice President
Gordon H. Silver
Vice President
Mark C. Trenchard
Vice President and BSA Compliance Officer
William H. Woolverton
Vice President and
Chief Legal Officer
Judith Cohen
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax-Free
High Yield Fund. It may also be used as sales literature when preceded
or accompanied by the current prospectus, the most recent copy of
Putnam's Quarterly Performance Summary, and Putnam's Quarterly Ranking
Summary. For more recent performance, please visit
www.putnaminvestments.com. Investors should consider the investment
objective, risks, charges, and expenses of a fund, which are described
in its prospectus. For more information or to request a prospectus, call
1-800-225-1581 toll free. Please read the prospectus carefully before
investing. The fund's Statement of Additional Information contains
additional information about the fund's Trustees and is available
without charge upon request by calling 1-800-225-1581.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
Call 1-800-225-1581 or visit our Web site
www.putnaminvestments.com.
SA042-211467 036/679/851 3/04
Not FDIC Insured May Lose Value No Bank Guarantee
Item 2. Code of Ethics:
- -----------------------
Not applicable
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
Not applicable
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
Not applicable
Items 5-6. [Reserved]
- ---------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. [Reserved]
- ------------------
Item 9. Submission of Matters to a Vote of Security Holders:
- ------------------------------------------------------------
Not applicable
Item 10. Controls and Procedures:
- ---------------------------------
(a) The registrant's principal executive officer and principal financial
officer have concluded, based on their evaluation of the
effectiveness of the design and operation of the registrant's
disclosure controls and procedures as of a date within 90 days of
the filing date of this report on Form N-CSR, that the design and
operation of such procedures are generally effective to provide
reasonable assurance that information required to be disclosed by
the investment company in the reports that it files or submits under
the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
Commission's rules and forms.
Although such officers reached the conclusion expressed in the
preceding paragraph, they are aware of matters that raise concerns
with respect to controls, each of which arose in connection with the
administration of 401(k) plans by Putnam Fiduciary Trust Company.
The first matter, which occurred in early 2001, involved the willful
circumvention of controls by certain Putnam employees in connection
with the correction of operational errors with respect to a 401(k)
client's investment in certain Putnam Funds, which led to losses in
five Putnam Funds (not including the registrant). Such officers
became aware of this matter in February 2004. The second matter,
which occurred in 2002, involved the willful circumvention by
certain Putnam employees of policies and procedures in connection
with the payment of Putnam corporate expenses. Such officers did
not learn that this matter involved a Putnam Fund until January
2004. Putnam has made restitution to the affected Funds,
implemented a number of personnel changes, including senior
personnel, begun to implement changes in procedures to address these
items and informed the SEC, the Funds' Trustees and independent
auditors. An internal investigation and review of procedures and
controls are currently ongoing.
In reaching the conclusion expressed herein, the registrant's
principal executive officer and principal financial officer
considered a number of factors, including the nature of the matters
described above, when the matters occurred, the individuals
involved, personnel changes that have occurred since these matters
occurred, the results to date of the current ongoing investigation
and the overall quality of controls at Putnam at this time.
(b) Changes in internal control over financial reporting:
Not applicable
Item 11. Exhibits:
- ------------------
(a) Not applicable
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002
are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: April 1, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Executive Officer
Date: April 1, 2004
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: April 1, 2004
Putnam
Tax-Free
High Yield
Fund
Item 1. Report to Stockholders:
- -------------------------------
The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
1-31-04
[GRAPHIC OMITTED: HARMONICA]
[SCALE LOGO OMITTED]
From the Trustees
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
In recent months we have communicated with you about Putnam's commitment
to establishing high fiduciary standards within the investment
management industry. The firm's efforts took a step forward in January
with a series of initiatives that were outlined in a letter to
shareholders from Putnam President and CEO Ed Haldeman. Among other
things, Putnam is placing voluntary limits on fund expenses and reducing
sales loads. In addition, beginning this spring, shareholder
communications will provide enhanced disclosure, including a comparison
of fund costs with industry averages and a gauge of each fund's relative
risk. They will also disclose the number of shares held by Putnam
employees and discuss how the portfolio management team is compensated.
Another new measure, taking effect April 19, 2004, will impose a 2% fee
on shares that are sold within 5 days of purchase. This redemption fee
demonstrates Putnam's commitment to preventing short-term trading in its
funds, which can be detrimental to shareholders.
These changes serve to advance shareholder interests and provide a
framework to help you make financial decisions. We encourage you to
review the new disclosure as it is implemented and discuss it with your
financial advisor. While we are pleased with this progress, the Trustees
and Putnam are continuing to explore other measures that may provide
greater transparency and enhanced protection for long-term shareholders.
During the six-month period ended January 31, 2004, Putnam Tax-Free High
Yield Fund performed well in absolute terms, although its results at net
asset value were slightly behind both its benchmark and Lipper peer
group average. The accompanying report from the fund's management team
discusses how the fund benefited from an overall -- if irregular -- rise
in bond prices and renewed investor interest in lower-rated bonds. The
fund's holdings in various sectors did well, but some larger positions
that have been in the fund for a long time held the fund back. The
report also addresses how the managers are using diversification in an
effort to reduce risk and still maintain a high current return.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
March 17, 2004
Report from Fund Management
Fund highlights
* Municipal high-yield bonds returned to favor with investors during the
six months ended January 31, 2004, helping Putnam Tax-Free High Yield
Fund to generate a 5.67% total return on class A shares at net asset
value (NAV) and 0.68% at public offering price (POP).
* The fund's result at NAV was slightly behind that of its benchmark,
the Lehman Municipal Bond Index, which returned 5.73% for the period. We
attribute this to a few older positions that hurt the fund's
performance.
* These same older positions also restrained the fund's progress
relative to its Lipper category, High Yield Municipal Debt Funds, which
averaged a return of 5.78% for the period.
* See the Performance Summary beginning on page 8 for complete fund
performance, comparative performance, and Lipper data.
Performance commentary
As interest rates trended irregularly downward, an overall rise in bond
prices created a favorable climate for bond investors during the six
months ended January 31, 2004. Demand for higher-yielding bonds
intensified as the prospect for an economic recovery appeared to
encourage yield-hungry investors to accept higher risks in pursuit of
greater returns. In this environment, your fund performed well, although
its progress was limited by negative results from a few lower-rated
holdings that have been in the portfolio for a long time. The largest of
these positions is composed of industrial development bonds (IDBs)
issued on behalf of the Hoover Group, discussed in detail on page 5.
The fund's duration also influenced its relative performance. Duration
is a measure of a portfolio's sensitivity to changes in interest rates;
a longer duration makes the fund more sensitive, and vice versa. With
interest rates near 45-year lows and indications of strong economic
recovery, we believed some increase in interest rates was possible. As a
result, it seemed more prudent to maintain a slightly shorter duration
than the benchmark and other comparable funds. Although this limited
your fund's upside potential, we continue to believe that some caution
is warranted.
FUND PROFILE
Putnam Tax-Free High Yield Fund seeks to provide a high level of current
income free from federal income tax by investing in a diversified
portfolio of lower-rated and investment-grade municipal bonds. The fund
is intended and may be appropriate for investors seeking tax-advantaged
income who are willing to accept some credit risk.
Market overview
The bond market experienced a significant sell-off just prior to the
semiannual period that drove yields higher and prices correspondingly
lower. Thereafter, yields drifted up and down through the end of 2003
with each bit of news that either challenged or supported the notion of
a sustained economic recovery. Overall, municipal bond yields trended
downward between August 1, 2003, and January 31, 2004, and were slightly
lower at the end of the period.
California's general obligation (GO) bonds were of interest during the
period. The difference in yield between California GO bonds and
AAA-rated bonds had been narrowing and at the start of the period seemed
to reflect investors' improving confidence in California's future.
However, shortly after Arnold Schwarzenegger took office as governor, he
made it plain that if voters did not approve a $15 billion bond
issuance, budget cuts would be necessary to prevent the state from going
into bankruptcy. Investor reaction to this uncertainty has driven the
yield spread between California GO bonds and AAA-rated bonds wider, and
we expect that it will remain wide for some time.
During the period, the ratio of municipal bond yields to comparable
Treasury yields dipped from about 90% to 80% and then back to about 85%,
its long-term average. Municipal bonds within the airline, tobacco,
utilities, and basic industrials sectors did well. Airline-related bonds
have benefited from a rebound in business and leisure travel and
lessening fears of bankruptcies within the industry. Tobacco settlement
bonds performed well as favorable legal decisions improved the outlook
for ongoing litigation. Utilities and industrial bonds were helped by
cyclical increases in demand. In addition, the municipal high-yield
market saw increased inflows as money was rotated out of corporate
high-yield bonds, which have performed strongly over the past year or
so.
- -------------------------------------------------------------------------------
MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 1/31/04
- -------------------------------------------------------------------------------
Bonds
- -------------------------------------------------------------------------------
Lehman Municipal Bond Index (tax-exempt bonds) 5.73%
- -------------------------------------------------------------------------------
Lehman Aggregate Bond Index (broad bond market) 4.49%
- -------------------------------------------------------------------------------
Lehman Government Bond Index (U.S. Treasury and agency
securities) 3.88%
- -------------------------------------------------------------------------------
Lehman Intermediate Treasury Bond Index
(intermediate-maturity U.S. Treasury bonds) 2.46%
- -------------------------------------------------------------------------------
Equities
- -------------------------------------------------------------------------------
S&P 500 Index (broad stock market) 15.23%
- -------------------------------------------------------------------------------
S&P Utilities Index (utilities stocks) 17.35%
- -------------------------------------------------------------------------------
Russell 2000 Growth Index (small-company growth stocks) 21.81%
- -------------------------------------------------------------------------------
These indexes provide an overview of performance in different market
sectors for the six months ended 1/31/04.
- -------------------------------------------------------------------------------
Strategy overview
Diversification remains the key to our strategy, especially among
lower-rated securities, as we continue our focus on maintaining high
income while reducing risk. We have been broadening the fund's
diversification at the lower levels of the quality spectrum by owning
smaller pieces of individual securities and diversifying among issuers
with similar credit quality and fundamentals.
We believe this strategy is particularly helpful for this fund because
while higher-quality bonds, such as Treasuries, tend to be more
sensitive to interest-rate changes, lower-rated bonds are affected by
changes in the outlook of the underlying issuer in addition to interest
rates. For example, a bond issued on behalf of a BBB-rated hospital will
be influenced by the outlook for the hospital's earnings, as well as by
interest rates and broad market trends. If the hospital's earnings are
affected by a change in management or a loss of market share, the value
of its bonds could decline even if bond prices generally are on the
rise. For this reason, we make sure that the share of assets we invest
in each category of lower-rated bonds is divided into smaller positions
- -- in different hospitals and different geographical regions, for
example -- than if the issue carried a higher rating.
With respect to sectors, our strategy has been to increase your fund's
holdings in tobacco settlement bonds to take advantage of low prices in
September. We have also increased the fund's exposure to the utilities
sector and begun to sell some of its airline-related positions on
strength. In addition, we have been expanding the fund's diversification
in the health-care sector, although we continue to favor bonds issued
for long-term care facilities.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY WEIGHTINGS COMPARED]
TOP INDUSTRY WEIGHTINGS COMPARED
as of 7/31/03 as of 1/31/04
Health care 32.0% 34.5%
Utilities 15.3% 19.2%
Transportation 7.4% 6.9%
Forest and
paper products 5.5% 4.8%
Housing 3.0% 3.0%
Footnote reads:
This chart shows how the fund's top weightings have changed over the
last six months. Weightings are shown as a percentage of market value.
Holdings will vary over time.
How fund holdings affected performance
During this semiannual period, we modestly increased the fund's exposure
to tobacco settlement bonds, which are issued by municipalities and
secured by cash payments made in satisfaction of legal judgments against
the tobacco industry. These bonds tend to be investment-grade debt, but
because they are subject to special risks, they generally offer higher
yields than other bonds of comparable quality. Among the special risks
of investing in tobacco bonds is the possibility that interest payments
could be affected by further litigation against the tobacco industry.
These bonds came under pressure from unfavorable rulings in the spring
of 2002, but the tobacco companies have been winning on appeals and many
of the bonds are selling at attractive prices. However, we continue to
approach this sector with caution, and it remains a relatively small
position. We increased your fund's holdings from 1.7% of net assets at
the beginning of the fiscal year to 3.3% at the end of January.
We've also increased the fund's holdings in industrial development bonds
(IDBs) issued for utilities, especially low-cost providers -- those that
use coal or hydroelectric power more than conventional resources. IDBs
are issued by municipalities to finance local expansion by various
businesses. Because they are backed by revenues from the companies
benefiting from the financing, IDB prices are affected by investor
perceptions of the health of the backing company or of the industry
group. Attractive valuations and improving credit quality have driven up
investor demand for these issues. Your fund has benefited both from
appreciation on the fund's existing holdings and new purchases made
during the fiscal period.
Airline-related IDBs have also done extremely well over the past year,
some rising from distressed levels. Prices of a few airline bonds are
now close to -- or have reached -- their levels before September 11,
2001. For example, the fund holds bonds issued by the Houston, Texas
Airport for Continental Airlines. Continental was the first major U.S.
carrier to report an operating profit since September 11, and the price
of these bonds has risen significantly. They are rated Caa2 by Moody's
and B- by Standard & Poor's; they mature in 2021 and 2029. However, the
industry is still grappling with high fuel prices, lofty debt levels,
and human resources costs, as well as competition from low-cost
carriers. Consequently, we have trimmed the fund's exposure to airline
IDBs to 2.8% at the end of the period from 3.5% last July, selling into
a rising market.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa/AAA (16.7%)
A (9.4%)
Baa/BBB (32.4%)
Ba/BB (21.8%)
B (12.8%)
CCC/Caa (1.6%)
D (1.5%)
VMIG1 and other (3.8%)
Footnote reads:
As a percentage of market value as of 1/31/04. A bond rated Baa or
higher is considered investment grade. The chart reflects Moody's and
Standard & Poor's ratings; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
We also enjoyed some success with IDBs issued for companies in other
industries. For example, the fund owns Dickinson, Michigan,
International Paper bonds, scheduled to mature in 2016. International
Paper is the largest paper products company in the United States and we
purchased these bonds in May 2002 when economic recovery was still far
from certain. As economic growth rebounded and yield-oriented investors
returned to the market, the price of the bonds rallied.
On the other hand, your fund's position in the Hoover Group, which
includes several series of bonds with different maturities, has
performed poorly. Hoover Group is a Georgia-based company that makes
large industrial containers for shipping products and raw materials. The
fund purchased IDBs issued for Hoover Group by Anniston, Alabama and
Forsyth County, Georgia in 1994. The poor economy and competitive
pricing have eroded revenues and the company is seeking concessions from
debt holders in order to avoid bankruptcy. The fund is negotiating with
the company, with the help of legal counsel. Although the future is
never assured, our renewed emphasis on broad diversification is designed
to help your fund avoid such situations in the future. Please note that
all holdings discussed in this report are subject to review in
accordance with the fund's investment strategy and may vary in the
future.
The fund's management team
The fund is managed by the Putnam Tax Exempt Fixed-Income Team. The
members of the team are David Hamlin (Portfolio Leader), Paul Drury
(Portfolio Member), Susan McCormack (Portfolio Member), James St. John
(Portfolio Member), Richard Wyke (Portfolio Member), and Kevin Cronin.
OF SPECIAL INTEREST
Putnam introduces a new redemption fee to protect long-term investors in
the funds. For shares purchased on or after April 19, 2004, a 2%
redemption fee will be applied to shares exchanged or sold within 5
calendar days of purchase. The fee applies to all Putnam funds except
money market funds, variable annuity funds, and closed-end funds.
Beginning on April 19, 2004, the 1% redemption fee currently applicable
to international, global, and taxable high-yield funds will be imposed
on shares that are exchanged or redeemed within 6 to 90 days of
purchase. Please see your fund's prospectus for additional information
or talk to your financial advisor.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
In its statement on January 28, 2004, the Federal Reserve Board said it
could "be patient" about raising short-term interest rates. This marked
a slight change from its earlier position and hinted at the potential
for raising rates in the future. As the bond market responded, interest
rates rose slightly. There is a general assumption that with economic
growth comes inflation and rising rates. In our view, bond market prices
already reflect a lot of the recent favorable economic news. Over the
short term, there is a risk that economic data could disappoint or some
unexpected event could cause market instability. Either could cause a
flight to quality and a short-lived period of lower rates. However, we
believe that rates will rise in the long term and that the Fed could
initiate a tightening cycle as early as this summer. Any actions taken
by the Fed in this election year are likely to be well planned and
executed to limit any potential disruption to the financial markets.
Putnam's Interest Rate Committee believes that the federal funds rate
could reach 2% by the first quarter of 2005 if economic growth continues
its upbeat pace. In light of the increasingly large federal budget
deficit, the prospect for heavy issuance of Treasury debt continues to
be a cloud over the market. We will continue to monitor trends in the
municipal bond market to pursue the most compelling opportunities in
pursuit of your fund's objectives.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Lower-rated bonds
may offer higher yields in return for more risk.
Performance summary
This section shows your fund's performance during the first half of its
fiscal year, which ended January 31, 2004. In accordance with regulatory
requirements, we also include performance for the most current calendar
quarter-end. Performance should always be considered in light of a
fund's investment strategy. Data represent past performance. Past
performance does not guarantee future results. More recent returns may
be less or more than those shown. Investment return and principal value
will fluctuate and you may have a gain or a loss when you sell your
shares. For the most recent month-end performance, please visit
www.putnaminvestments.com.
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 1/31/04
- -------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (2/1/99) (12/29/94)
- -------------------------------------------------------------------------------------------------------------------
NAV POP NAV CDSC NAV CDSC NAV POP
- -------------------------------------------------------------------------------------------------------------------
6 months 5.67% 0.68% 5.32% 0.32% 5.34% 4.34% 5.52% 2.11%
- -------------------------------------------------------------------------------------------------------------------
1 year 7.24 2.16 6.58 1.58 6.46 5.46 6.91 3.43
- -------------------------------------------------------------------------------------------------------------------
5 years 15.50 9.96 12.60 10.88 11.21 11.21 13.86 10.19
Annual average 2.92 1.92 2.40 2.09 2.15 2.15 2.63 1.96
- -------------------------------------------------------------------------------------------------------------------
10 years 51.17 44.01 42.76 42.76 39.45 39.45 46.12 41.38
Annual average 4.22 3.71 3.62 3.62 3.38 3.38 3.87 3.52
- -------------------------------------------------------------------------------------------------------------------
Annual average
(life of fund) 6.94 6.65 6.59 6.59 6.08 6.08 6.72 6.53
- -------------------------------------------------------------------------------------------------------------------
Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for class A and M
shares reflect a sales charge of 4.75% and 3.25%, respectively (which
for class A shares does not reflect a reduction in sales charges that
went into effect on January 28, 2004; if this reduction had been in
place for all periods indicated, returns would have been higher). Class
B share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the
first year that is eliminated thereafter. Performance for class A, C,
and M shares is derived from the historical performance of class B
shares, adjusted for the applicable sales charge (or CDSC) and higher or
lower operating expenses for such shares.
For a portion of the period, this fund limited expenses, without which
returns would have been lower.
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 12/31/03 (MOST RECENT CALENDAR QUARTER)
- -------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (2/1/99) (12/29/94)
- -------------------------------------------------------------------------------------------------------------------
NAV POP NAV CDSC NAV CDSC NAV POP
- -------------------------------------------------------------------------------------------------------------------
6 months 2.29% -2.54% 1.97% -3.00% 1.88% 0.89% 2.15% -1.14%
- -------------------------------------------------------------------------------------------------------------------
1 year 6.10 1.01 5.46 0.46 5.25 4.25 5.76 2.35
- -------------------------------------------------------------------------------------------------------------------
5 years 15.74 10.25 12.69 10.97 11.15 11.15 13.95 10.26
Annual average 2.97 1.97 2.42 2.10 2.14 2.14 2.65 1.97
- -------------------------------------------------------------------------------------------------------------------
10 years 51.46 44.23 43.05 43.05 39.69 39.69 46.34 41.56
Annual average 4.24 3.73 3.64 3.64 3.40 3.40 3.88 3.54
- -------------------------------------------------------------------------------------------------------------------
Annual average
(life of fund) 6.91 6.62 6.56 6.56 6.05 6.05 6.70 6.51
- -------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/04
- --------------------------------------------------------------------------------
Lehman Lipper High Yield
Municipal Municipal Debt Funds
Bond Index category average*
- --------------------------------------------------------------------------------
6 months 5.73% 5.78%
- --------------------------------------------------------------------------------
1 year 6.18 7.89
- --------------------------------------------------------------------------------
5 years 31.93 18.39
Annual average 5.70 3.39
- --------------------------------------------------------------------------------
10 years 78.50 57.10
Annual average 5.97 4.57
- --------------------------------------------------------------------------------
Annual average
(life of fund) 8.10 6.91
- --------------------------------------------------------------------------------
Index and Lipper results should be compared to fund performance at net
asset value.
* Over the 6-month and 1-, 5-, and 10-year periods ended 1/31/04, there
were 80, 80, 54, and 27 funds, respectively, in this Lipper category.
- -------------------------------------------------------------------------------------------------------------------
PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 1/31/04
- -------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class M
- -------------------------------------------------------------------------------------------------------------------
Distributions (number) 6 6 6 6
- -------------------------------------------------------------------------------------------------------------------
Income 1 $0.349980 $0.309574 $0.299762 $0.331195
- -------------------------------------------------------------------------------------------------------------------
Capital gains 1 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total $0.349980 $0.309574 $0.299762 $0.331195
- -------------------------------------------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
- -------------------------------------------------------------------------------------------------------------------
7/31/03 $12.31 $12.92 $12.33 $12.31 $12.31 $12.72
- -------------------------------------------------------------------------------------------------------------------
1/31/04 12.65 13.25* 12.67 12.66 12.65 13.07
- -------------------------------------------------------------------------------------------------------------------
Current return (end of period)
- -------------------------------------------------------------------------------------------------------------------
Current dividend rate 2 5.31% 5.07% 4.67% 4.51% 5.01% 4.85%
- -------------------------------------------------------------------------------------------------------------------
Taxable equivalent 3 8.17 7.80 7.18 6.94 7.71 7.46
- -------------------------------------------------------------------------------------------------------------------
Current 30-day SEC yield 4 4.71 4.50 4.03 3.87 4.40 4.26
- -------------------------------------------------------------------------------------------------------------------
Taxable equivalent 3 7.25 6.92 6.20 5.95 6.77 6.55
- -------------------------------------------------------------------------------------------------------------------
* Reflects a reduction in sales charges that took effect on January 28,
2004.
1 Capital gains, if any, are taxable for federal and, in most cases,
state purposes. For some investors, investment income may be subject to
the federal alternative minimum tax. Income from federally exempt funds
may be subject to state and local taxes.
2 Most recent distribution, excluding capital gains, annualized and
divided by NAV or POP at end of period.
3 Assumes maximum 35.00% federal tax rate for 2003. Results for
investors subject to lower tax rates would not be as advantageous.
4 Based only on investment income, calculated using SEC guidelines.
Reflects an expense waiver in effect during the period, without which
yields would have been lower.
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Net asset value (NAV) is the price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. The
NAV is calculated by dividing the net value of all the fund's assets by
the number of outstanding shares.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares (since reduced to 4.50%) and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth year,
the CDSC no longer applies. The CDSC for class C shares is 1% for one
year after purchase.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without an initial sales charge).
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption (except on certain
redemptions of shares bought without an initial sales charge).
Comparative indexes
Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.
Lehman Government Bond Index is an unmanaged index of U.S. Treasury and
agency securities.
Lehman Intermediate Treasury Bond Index is an unmanaged index of
Treasury bonds with maturities between 1 and 10 years.
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Russell 2000 Growth Index is an unmanaged index of those companies in
the Russell 2000 Index chosen for their growth orientation.
S&P 500 Index is an unmanaged index of common stock performance.
S&P Utilities Index is an unmanaged index of common stock issued by
utilities companies.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper Inc. is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
A note about duplicate mailings
In response to investors' requests, the SEC has modified mailing
regulations for proxy statements, semiannual and annual reports, and
prospectuses. Putnam is now able to send a single copy of these
materials to customers who share the same address. This change will
automatically apply to all shareholders except those who notify us. If
you would prefer to receive your own copy, please call Putnam at
1-800-225-1581.
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. Our proxy voting guidelines and policies are
available on the Putnam Individual Investor Web site,
www.putnaminvestments.com, by calling Putnam's Shareholder Services at
1-800-225-1581, or on the SEC's Web site, www.sec.gov.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or loss
the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment
income ratios, and portfolio turnover in one summary table, reflecting
the five most recent reporting periods. In a semiannual report, the
highlight table also includes the current reporting period. For open-end
funds, a separate table is provided for each share class.
The fund's portfolio
January 31, 2004 (Unaudited)
Key to Abbreviations
- -------------------------------------------------------------------------------
AMBAC AMBAC Indemnity Corporation
COP Certificate of Participation
FGIC Financial Guaranty Insurance Company
FRB Floating Rate Bonds
FSA Financial Security Assurance
G.O. Bonds General Obligation Bonds
IFB Inverse Floating Rate Bonds
MBIA MBIA Insurance Company
TRAN Tax Revenue Anticipation Notes
U.S. Govt. Coll. U.S. Government Collateralized
VRDN Variable Rate Demand Notes
Municipal bonds and notes (97.2%) (a)
Principal amount Rating (RAT) Value
Alabama (2.0%)
- -------------------------------------------------------------------------------
$3,080,000 Anniston, Indl. Dev. Rev. Bonds
(Hoover Group, Inc.), 8 1/2s, 9/1/10 D/P $1,078,000
5,120,000 DCH Hlth. Care Auth. Rev. Bonds,
5 1/4s, 6/1/18 A1 5,312,000
5,000,000 Jackson Cnty., Hlth. Care Auth.
Rev. Bonds, 5.7s, 5/1/19 BB+ 4,593,750
1,800,000 Jackson Cnty., Hlth. Care Auth.
TRAN, 7 7/8s, 5/1/19 AAA/P 1,860,948
6,380,000 Jefferson Cnty., Swr. Rev. Bonds
(Cap. Impt.), 5s, 2/1/41 Aaa 7,177,500
2,000,000 Phenix City, Indl. Dev. Board
Rev. Bonds (Mead Coated Board),
Ser. A, 5.3s, 4/1/27 Baa2 1,890,000
--------------
21,912,198
Arizona (1.8%)
- -------------------------------------------------------------------------------
1,000,000 AZ State Hlth. Fac. Auth. Rev. Bonds
(Bethesda Foundation Project),
Ser. A, 6.4s, 8/15/27 BB-/P 946,250
4,000,000 Casa Grande, Indl. Dev. Auth.
Rev. Bonds (Casa Grande Regl. Med.
Ctr.), Ser. A, 7 5/8s, 12/1/29 B-/P 4,200,000
Cochise Cnty., Indl. Dev. Auth.
Rev. Bonds (Sierra Vista Regl.
Hlth. Ctr.),
3,425,000 7 3/4s, 12/1/30 BB+/P 3,776,063
1,000,000 Ser. A, 6.2s, 12/1/21 BB+/P 1,022,500
5,500,000 Pima Cnty., Indl. Dev. Auth. Hlth.
Care Fac. Rev. Bonds, Ser. A,
8 1/2s, 11/15/32 B/P 5,740,625
Scottsdale, Indl. Dev. Auth.
Rev. Bonds (Westminster Village 1st.
Mtge.), Ser. A
1,500,000 8 1/4s, 6/1/15 BB-/P 1,575,000
2,300,000 8s, 6/1/11 BB-/P 2,409,250
--------------
19,669,688
Arkansas (1.5%)
- -------------------------------------------------------------------------------
7,600,000 AR State Hosp. Dev. Fin. Auth.
Rev. Bonds (WA Regl. Med. Ctr.),
7 3/8s, 2/1/29 Baa3 8,550,000
6,650,000 Northwest Regl. Arpt. Auth.
Rev. Bonds, 7 5/8s, 2/1/27 BB/P 7,265,125
--------------
15,815,125
California (8.8%)
- -------------------------------------------------------------------------------
3,000,000 ABAG Fin. Auth. COP (American
Baptist Homes), Ser. A, 5.85s,
10/1/27 BB+ 2,801,250
2,500,000 Brentwood, Infrastructure Auth.
Rev. Bonds, Ser. 94-1, 5 5/8s,
9/2/29 BB-/P 2,431,250
CA State Dept. of Wtr. Resources
Rev. Bonds, Ser. A
7,500,000 5 3/8s, 5/1/22 A3 7,837,500
3,400,000 5 1/4s, 5/1/20 A3 3,557,250
10,000,000 CA State Dept. of Wtr. Resources
VRDN, Ser. B-2, 0.98s, 5/1/22 VMIG1 10,000,000
1,000,000 CA Statewide Cmnty. Dev. Auth.
Multi-Fam. Rev. Bonds (Hsg. Equity
Res.), Ser. B, 5.2s, 12/1/29 Baa1 1,073,750
1,000,000 CA Statewide Cmnty. Dev. Auth.
Special Tax Rev. Bonds (Citrus
Garden Apt. Project - D1), 5 1/4s,
7/1/22 A 1,027,500
2,855,000 Chula Vista, Cmnty. Fac. Dist.
Special Tax (No. 08-1 Otay Ranch
Village Six), 6s, 9/1/33 BB-/P 2,847,863
18,000,000 Corona, COP (Vista Hosp. Syst.),
zero %, 7/1/29 (In default) (NON) D/P 360,000
3,000,000 Elk Grove CA Special Tax Rev. Bonds
(Poppy Ridge Cmnty. Facs. - No
03-01), 6s, 9/1/34 BB/P 2,996,250
1,750,000 Folsom, Special Tax (Cmnty. Facs.
Dist. No. 10), 5 7/8s, 9/1/28 BB/P 1,756,563
300,000 Foothill/Eastern Corridor Agcy.
Rev. Bonds (CA Toll Roads), 5 3/4s,
1/15/40 Baa3 308,625
7,835,000 Gilroy, Rev. Bonds (Bonfante Gardens
Park), 8s, 11/1/25 D/P 4,309,250
6,000,000 Golden State Tobacco Securitization
Corp. Rev. Bonds, Ser. B, 5 5/8s,
6/1/38 Baa2 6,037,500
7,000,000 Irvine, Impt. Board Act of 1915
VRDN, 1.00s, 9/2/23 VMIG1 7,000,000
1,000,000 Irvine, Impt. Board Act of 1915
Special Assmt. Bonds (Assmt. Dist.
No. 00-18-GRP 3), 5.55s, 9/2/26 BB+/P 1,003,750
3,500,000 Los Angeles, Regl. Arpt. Impt. Corp.
Lease Rev. Bonds, Ser. C, 7 1/2s,
12/1/24 B- 3,500,000
1,625,000 Orange Cnty., Cmnty. Fac. Dist.
Special Tax Bonds (Ladera Ranch -
No. 02-1), Ser. A, 5.55s, 8/15/33 BB/P 1,612,813
Redondo Beach, Redev. Agcy.
Multi-Fam. Hsg. Rev. Bonds (Heritage
Point)
2,925,000 Ser. B, 8 1/2s, 9/1/23 B+/P 2,972,531
4,690,000 Ser. A, 6 1/2s, 9/1/23 B+/P 4,766,213
1,500,000 Roseville, Special Tax (Cmnty. Fac.
Dist. No. 1-Crocker), 6s, 9/1/33 BB/P 1,503,750
700,000 Sacramento, Special Tax (North
Natomas Cmnty. Fac. 01-03), 6s,
9/1/28 BB/P 712,250
1,500,000 San Joaquin Hills, Trans. Corridor
Agcy. Rev. Bonds, Ser. A, 5 1/2s,
1/15/28 Baa3 1,432,500
2,770,000 Santaluz, Special Tax (Cmnty. Fac.
Dist. No. 2-Impt. Area No. 1),
6 3/8s, 9/1/30 BB/P 2,821,938
350,000 Southern CA Pub. Pwr. Auth. IFB
(Transmission), 10.347s, 7/1/12 Aa3 360,010
4,560,000 Sunnyvale, Special Tax Rev. Bonds
(Cmnty. Fac. Dist. No. 1), 7 3/4s,
8/1/32 BB-/P 4,588,500
10,500,000 Vallejo, COP (Marine World
Foundation), 7.2s, 2/1/26 BBB-/P 10,906,875
5,205,000 Valley Hlth. Syst. COP, 6 7/8s,
5/15/23 B+ 4,313,644
--------------
94,839,325
Colorado (0.6%)
- -------------------------------------------------------------------------------
5,000,000 CO Hlth. Fac. Auth.
Rev. Bonds (Evangelical Lutheran),
5.9s, 10/1/27 A3 5,143,750
1,500,000 CO Springs, Hosp. Rev. Bonds,
6 3/8s, 12/15/30 A3 1,623,750
--------------
6,767,500
Connecticut (1.8%)
- -------------------------------------------------------------------------------
CT State Dev. Auth. Rev. Bonds (East
Hills Woods)
4,311,796 Ser. A, 7 3/4s, 11/1/17 B-/P 3,605,739
457,428 Ser. B, zero %, 3/1/21 B-/P 28,017
2,000,000 CT State Dev. Auth. 1st. Mtg. Gross
Rev. Hlth. Care Rev. Bonds (The Elm
Street Park Baptist, Inc. Project),
5.85s, 12/1/33 BBB+ 2,065,000
6,000,000 CT State Dev. Auth. Poll. Control
Rev. Bonds (Western MA), Ser. A,
5.85s, 9/1/28 A3 6,337,500
6,500,000 CT State Hlth. & Edl. Fac. Auth.
Rev. Bonds (Edgehill), Ser. A,
6 7/8s, 7/1/27 AAA/P 6,849,310
--------------
18,885,566
District of Columbia (2.5%)
- -------------------------------------------------------------------------------
17,000,000 DC G.O. Bonds, Ser. A, 6 3/8s,
6/1/26 AAA 19,210,000
DC Tobacco Settlement Fin. Corp.
Rev. Bonds
2,500,000 6 3/4s, 5/15/40 Baa2 2,418,750
5,500,000 6 1/2s, 5/15/33 Baa2 5,273,125
--------------
26,901,875
Florida (4.1%)
- -------------------------------------------------------------------------------
9,260,000 Brevard Cnty., Hlth. Fac. Auth.
Rev. Bonds (Courtenay Springs),
7 3/4s, 11/15/24 AAA/P 9,932,183
3,105,000 Cap. Trust Agcy. Multi-Fam.
Rev. Bonds
(American Opportunity-Senior),
Ser. A, 5 7/8s, 12/1/38 Baa1 2,992,444
5,000,000 Cap. Trust Agcy. Rev. Bonds
(Seminole Tribe Convention), Ser. A,
10s, 10/1/33 (acquired 4/23/02, cost
$5,000,000) (RES) B/P 6,168,750
900,000 Fishhawk, Cmnty. Dev. Dist. II
Rev. Bonds, Ser. B, 5s, 11/1/07 BB-/P 913,500
5,180,000 FL State Fin. Dept. Gen. Svcs. IFB
(Rites-PA 414A), FSA, 9.216s,
7/1/11 (acquired 9/2/98, cost
$6,687,794) (RES) AAA/P 7,187,250
3,300,000 Lee Cnty., Indl. Dev. Auth. Hlth.
Care Fac. Rev. Bonds (Shell Point
Village Project), Ser. A, 5 1/2s,
11/15/29 BBB- 3,192,750
2,000,000 Middle Village Cmnty. Dev. Dist.
Special Assmt., Ser. A, 6s, 5/1/35 BB-/P 2,015,000
Orange Cnty., Hlth. Fac. Auth.
Rev. Bonds
2,400,000 (Orlando Regl. Hlth. Care), 5 3/4s,
12/1/32 A2 2,478,000
3,750,000 (Adventist Hlth. Syst.), 5 5/8s,
11/15/32 A 3,904,688
1,800,000 St. Johns Cnty., Hlth. Care Indl.
Dev. Auth. Rev. Bonds (Glenmoor St.
Johns Project), Ser. A, 8s, 1/1/30 B-/P 1,755,000
1,000,000 Verandah, West Cmnty. Dev. Dist.
Rev. Bonds (Cap. Impt.), Ser. A,
6 5/8s, 5/1/33 BB-/P 1,016,250
2,250,000 Westchester Cmnty. Dev. Dist. No. 1
Special Assmt. (Cmnty.
Infrastructure), 6 1/8s, 5/1/35 BB-/P 2,283,750
--------------
43,839,565
Georgia (3.2%)
- -------------------------------------------------------------------------------
2,000,000 Atlanta, Waste Wtr. VRDN, Ser. C,
FSA, 1.00s, 11/1/41 VMIG1 2,000,000
8,000,000 Burke Cnty., Poll. Control Dev.
Auth. Mandatory Put Bonds (GA Power
Co.), 4.45s, 1/1/32 A2 8,470,000
3,400,000 Effingham Cnty., Indl. Dev. Auth.
Rev. Bonds (Pacific Corp.), 6 1/2s,
6/1/31 Ba3 3,361,750
6,000,000 Forsyth Cnty., Hosp. Auth.
Rev. Bonds (GA Baptist Hlth. Care
Syst.), U.S. Govt. Coll., 6 3/8s,
10/1/28 AAA 7,372,500
9,500,000 Forsyth Cnty., Indl. Dev. Auth.
Rev. Bonds (Hoover Group, Inc.),
8 1/2s, 12/1/05 Ba3 3,325,000
6,875,000 Rockdale Cnty., Dev. Auth. Solid
Waste Disp. Rev. Bonds (Visay Paper,
Inc.), 7 1/2s, 1/1/26 BB+/P 6,969,531
3,160,000 Savannah, Econ. Dev. Auth. Poll.
Control Rev. Bonds (Stone Container
Corp.), 8 1/8s, 7/1/15 B/P 3,290,887
--------------
34,789,668
Illinois (2.9%)
- -------------------------------------------------------------------------------
1,500,000 Chicago, Special Assmt. Bonds (Lake
Shore East), 6 3/4s, 12/1/32 B+/P 1,554,375
4,000,000 Chicago, O'Hare Intl. Arpt.
Rev. Bonds (United Airlines, Inc.),
Ser. A, 6 3/4s, 11/1/11 (In default)
(NON) D/P 1,200,000
5,000,000 Chicago, Wtr. Rev. Bonds, AMBAC,
5 3/4s, 11/1/30 Aaa 5,843,750
1,050,000 IL Dev. Fin. Auth. Rev. Bonds (Mercy
Hsg. Corp.), 7s, 8/1/24 Baa1 1,101,986
IL Hlth. Fac. Auth. Rev. Bonds
880,000 (Cmnty. Rehab. Providers Fac.),
8 1/4s,8/1/12 (In default) (NON) D/P 874,500
2,385,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, 7 7/8s, 7/1/20 (In default)
(NON) D/P 1,270,013
4,330,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, 7 7/8s, 7/1/20 (Prerefunded) AAA/P 4,811,713
3,065,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, 7 1/2s, 3/1/14 AAA/P 3,110,607
215,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, 7 1/4s, 3/1/04 B/P 216,011
1,000,000 (St. Benedict), Ser. 03A-1, 6.9s,
11/15/33 B+/P 1,008,750
IL Hlth. Fac. Auth. Rev. Bonds
6,000,000 (Elmhurst Memorial Hlth. Care),
5 5/8s, 1/1/28 A2 6,195,000
3,900,000 IL Hlth. Fac. Auth. VRDN (Bromenn
Hlth. care), 0.98s, 8/15/32 A-1+ 3,900,000
--------------
31,086,705
Indiana (0.7%)
- -------------------------------------------------------------------------------
900,000 Plainfield, Indl. Econ. Dev.
Rev. Bonds (Earl M. Jorgensen Co.),
8 1/2s, 9/1/04 B-/P 909,459
2,200,000 Rockport, Poll. Control Mandatory
Put Bonds (Indiana Michigan Pwr.
Co.), Ser. C, 2 5/8s, 4/1/25 BBB 2,194,500
4,000,000 Rockport, Poll. Control
Rev. Bonds (Indiana-Michigan Pwr.),
Ser. A, 4.9s, 6/1/25 Baa2 4,220,000
--------------
7,323,959
Iowa (1.8%)
- -------------------------------------------------------------------------------
IA Fin. Auth. Hlth. Care Fac.
Rev. Bonds (Care Initiatives)
15,020,000 9 1/4s, 7/1/25 BBB-/P 18,005,225
895,000 9.15s, 7/1/09 BBB-/P 1,043,794
105,000 Marion Hlth. Care Fac. Rev. Bonds
(First Mtg.), Ser. IA, 6 1/2s,
1/1/29 CCC/P 95,681
--------------
19,144,700
Kansas (0.3%)
- -------------------------------------------------------------------------------
Lenexa, Hlth. Care Rev. Bonds
(LakeView Village)
2,250,000 Ser. C, 6 7/8s, 5/15/32 BB+ 2,359,688
1,200,000 Ser. B, 6 1/4s, 5/15/26 BB+ 1,210,500
--------------
3,570,188
Kentucky (1.3%)
- -------------------------------------------------------------------------------
2,935,000 Kenton Cnty., Arpt. Board Rev. Bonds
(Special Fac. - Delta Airlines,
Inc.), 7 1/8s, 2/1/21 B3 2,843,281
610,000 Kentucky Econ. Dev. Fin. Auth.
Rev. Bonds (First Mtg.), Ser. IA,
6 1/2s, 1/1/29 CCC/P 555,863
KY Econ. Dev. Fin. Auth. Hlth. Syst.
Rev. Bonds (Norton Healthcare,
Inc.), Ser. A
6,250,000 6 5/8s, 10/1/28 BBB/P 6,578,125
3,740,000 6 1/8s, 10/1/10 BBB/P 4,034,525
--------------
14,011,794
Louisiana (3.3%)
- -------------------------------------------------------------------------------
3,000,000 LA Hlth. Ed. Auth. Rev. Bonds
(Lambert House), Ser. A, 6.2s,
1/1/28 B+/P 2,973,750
5,335,000 LA Local Govt. Env. Fac. Cmnty. Dev.
Auth. Rev. Bonds (St. James Place),
Ser. A, 8s, 11/1/19 B-/P 4,694,800
7,750,000 LA Pub. Fac. Auth. Hosp. Rev. Bonds
(Lake Charles Memorial Hosp.
Project), 8 5/8s, 12/1/30 CCC/P 6,422,813
7,000,000 Port of New Orleans, Indl. Dev.
Rev. Bonds (Continental Grain Co.),
7 1/2s, 7/1/13 BB- 7,113,470
3,000,000 St. Charles Parish, Poll. Control
Rev. Bonds, Ser. A, 4.9s, 6/1/30 Baa3 3,097,500
Tangipahoa Parish Hosp. Svcs.
Rev. Bonds (North Oaks Med. Ctr.
Project), Ser. A
1,000,000 5s, 2/1/30 A 977,500
1,000,000 5s, 2/1/25 A 992,500
9,000,000 W. Feliciana Parish, Solid Waste
Disp. Rev. Bonds (Kaiser Aluminum),
7.7s, 12/1/14 Ba1 9,301,050
--------------
35,573,383
Maine (0.3%)
- -------------------------------------------------------------------------------
3,500,000 Rumford, Solid Waste Disp.
Rev. Bonds (Boise Cascade Corp.),
6 7/8s, 10/1/26 Ba2 3,530,625
Maryland (0.9%)
- -------------------------------------------------------------------------------
5,000,000 Howard Cnty., Rev. Bonds, Ser. A,
U.S. Govt. Coll., 8s, 5/15/29 AAA 6,562,500
MD State Hlth. & Higher Edl. Fac.
Auth. Rev. Bonds
2,000,000 (Mercy Ridge), Ser. A, 6s, 4/1/35 BB+/P 2,005,000
1,500,000 (Medstar Health), 5 1/2s, 8/15/33 Baa2 1,468,125
--------------
10,035,625
Massachusetts (4.8%)
- -------------------------------------------------------------------------------
Atlas Boston Tax Exempt Rev. Bonds
1,165,000 Ser. 99-1, 7 1/4s, 1/1/35 (In
default) (NON) D/P 5,825
2,220,000 Ser. 1, 6.65s, 1/1/35 (In default)
(NON) D/P 777,000
5,000,000 MA G.O. Bonds, Ser. C, MBIA, 5 1/4s,
8/1/18 Aaa 5,606,250
4,055,000 MA State Dev. Fin. Agcy. Rev. Bonds
(Alden Place), 6 3/4s, 7/1/30 B/P 3,872,525
5,600,000 MA State Hlth. & Edl. Fac. Auth. IFB
(Boston U.), Ser. L, AMBAC, 10.653s,
7/1/25 Aaa 5,745,208
MA State Hlth. & Edl. Fac. Auth.
Rev. Bonds
5,750,000 (Civic Investments), Ser. A, 9s,
12/15/15 BB/P 6,634,063
4,000,000 (Jordan Hosp.), Ser. E, 6 3/4s,
10/1/33 BBB- 4,055,000
4,900,000 (Winchester Hosp.), Ser. E, 6 3/4s,
7/1/30 BBB 5,236,875
5,850,000 (UMass Memorial), Ser. C, 6 5/8s,
7/1/32 Baa2 6,113,250
2,200,000 (Berkshire Hlth. Syst.), Ser. E,
6 1/4s, 10/1/31 BBB+ 2,279,750
4,500,000 (Hlth. Care Syst. Covenant Hlth.),
Ser. E, 6s, 7/1/31 A- 4,696,875
2,630,000 (Caritas Christi Oblig. Group),
Ser. A, 5 1/4s, 7/1/08 BBB 2,679,313
1,855,000 MA State Indl. Fin. Agcy. R (TNG
Marina Bay LLC Project), 7 1/2s,
12/1/27 B/P 1,892,100
MA State Indl. Fin. Agcy. Rev. Bonds
2,378,153 (Evanswood Bethzatha Corp.), 8s,
1/15/27 (In default) (NON) D/P 2,973
1,664,711 (1st. Mtge. Evanswood Bethzatha-A),
7 7/8s, 1/15/20 (In default) (NON) D/P 2,081
1,850,000 (Sr. Living Fac. Forge Hill), 7s,
4/1/17 B/P 1,757,500
--------------
51,356,588
Michigan (4.9%)
- -------------------------------------------------------------------------------
2,251,000 Ann Arbor, Econ. Dev. Corp. Ltd.
Oblig. Rev. Bonds (Glacier Hills,
Inc.), State & Local Govt.
Coll., 8 3/8s, 1/15/19 AAA 3,044,478
2,000,000 Delta Cnty., Econ. Dev. Corp.
Rev. Bonds, Ser. A, 6 1/4s, 4/15/27 Baa2 2,102,500
10,000,000 Dickinson Cnty., Econ. Dev. Corp.
Rev. Bonds, (Intl. Paper Co.
Project), Ser. A, 5 3/4s, 6/1/16 Baa2 10,775,000
1,500,000 Flint, Hosp. Bldg. Auth. Rev. Bonds
(Hurley Med. Ctr.), 6s, 7/1/20 Baa3 1,464,375
Garden City, Hosp. Fin. Auth.
Rev. Bonds (Garden City Hosp. OB
Group), Ser. A
3,000,000 5 3/4s, 9/1/17 Ba2 2,512,500
2,000,000 5 5/8s, 9/1/10 Ba2 1,837,500
4,600,000 Macomb Cnty., Hosp. Fin. Auth.
Rev. Bonds (Mt. Clemens Gen. Hosp.),
Ser. B, 5 7/8s, 11/15/34 BBB- 4,335,500
MI State Strategic Fund Solid Waste
Disp. Rev. Bonds
4,850,000 (Genesee Pwr. Station), 7 1/2s,
1/1/21 B/P 4,092,188
3,500,000 (SD Warren Co.), Ser. C, 7 3/8s,
1/15/22 BB/P 3,521,875
7,500,000 MI State Strategic Fund, Ltd. IFB
(Rites-PA 334), MBIA, 11.308s,
9/1/25 (acquired 3/9/98, cost
$9,018,750) (RES) AAA/P 8,906,250
5,000,000 Midland Cnty., Econ. Dev. Corp.
Rev. Bonds, 6 3/4s, 7/23/09 Ba3 5,243,750
5,495,000 Waterford, Econ. Dev. Corp.
Rev. Bonds (Canterbury Hlth.), 6s,
1/1/39 B-/P 3,915,188
2,000,000 Wayne Charter Cnty., Special Arpt.
Fac. Rev. Bonds (Northwest Airlines,
Inc.), 6s, 12/1/29 CCC/P 1,672,500
--------------
53,423,604
Minnesota (0.8%)
- -------------------------------------------------------------------------------
2,600,000 Chaska, Indl. Dev. Rev. Bonds
(Lifecore Biomedical, Inc. Project),
10 1/4s, 9/1/20 BB/P 2,688,062
3,700,000 Minneapolis & St. Paul, Metropolitan
Arpt. Comm. Special Fac. Rev. Bonds
(Northwest Airlines, Inc.), Ser. A,
7s, 4/1/25 CCC/P 3,658,375
2,075,000 Minneapolis, Rev. Bonds (Walker
Methodist Sr. Svcs.), Ser. A, 6s,
11/15/28 B+/P 1,691,125
800,000 Sauk Rapids Hlth. Care & Hsg. Fac.
Rev. Bonds (Good Shepherd Lutheran
Home), 6s, 1/1/34 B/P 794,000
--------------
8,831,562
Missouri (1.4%)
- -------------------------------------------------------------------------------
3,250,000 Cape Girardeau Cnty., Indl. Dev.
Auth. Hlth. Care Fac. Rev. Bonds
(St. Francis Med. Ctr.),
Ser. A, 5 1/2s, 6/1/27 A 3,327,188
2,000,000 MO State Hlth. & Edl. Fac. Auth.
VRDN (MO Valley College), 0.95s,
10/1/31 A-1+ 2,000,000
St. Louis Arpt. Rev. Bonds (Lambert
St. Louis Intl.), Ser. A, FSA
4,150,000 5 1/4s, 7/1/11 Aaa 4,710,250
4,495,000 5 1/4s, 7/1/10 Aaa 5,107,444
--------------
15,144,882
Montana (0.2%)
- -------------------------------------------------------------------------------
2,000,000 MT State Board Inv. Exempt Fac.
Rev. Bonds (Still Water Mining
Project), 8s, 7/1/20 Ba3 1,975,000
Nebraska (0.2%)
- -------------------------------------------------------------------------------
Kearney, Indl. Dev. Rev. Bonds
142,042 (Great Platte River), 8s, 9/1/12 D/P 142,036
1,582,933 (Cap. Appn. Great Platte River),
zero %, 9/1/12 D/P 7,915
2,000,000 NE Investment Fin. Auth. Hosp. IFB
(Bishop Clarkson Memorial Hosp.),
MBIA, 11.941s, 12/8/16 Aaa 1,990,640
--------------
2,140,591
Nevada (1.3%)
- -------------------------------------------------------------------------------
1,500,000 Clark Cnty., Impt. Dist. (Special
Impt. Dist. No. 142-LOC Impt.),
6.1s, 8/1/18 BB-/P 1,516,875
5,350,000 Clark Cnty., Indl. Dev. Rev. Bonds
(Southwest Gas Corp. Project),
Ser. C, 5.45s, 3/1/38 Baa2 5,811,438
Henderson, Local Impt. Dist. Special
Assmt. Bonds (No. T-14)
3,000,000 5.8s, 3/1/23 BB-/P 3,003,750
2,650,000 5.55s, 3/1/17 BB-/P 2,653,313
810,000 Las Vegas, Special Impt. Dist. No.
809 Rev. Bonds (Summerlin Area),
5.65s, 6/1/23 BB/P 785,700
--------------
13,771,076
New Hampshire (2.7%)
- -------------------------------------------------------------------------------
NH Higher Ed. & Hlth. Fac. Auth.
Rev. Bonds
8,500,000 (1st. Mtge.-Rivermead Peterborough),
8 1/2s, 7/1/24 AAA 8,926,445
5,900,000 (Havenwood-Heritage Heights), 7.35s,
1/1/18 BB/P 6,150,750
3,000,000 (Rivermead at Peterborough), 5 3/4s,
7/1/28 BB/P 2,730,000
2,200,000 NH Hlth. & Ed. Fac. Auth. Rev. Bonds
(Huntington at Nashua), Ser. A,
6 7/8s, 5/1/33 B/P 2,158,750
NH State Bus. Fin. Auth. Rev. Bonds
2,500,000 (Alice Peck Day Hlth. Syst.),
Ser. A, 7s, 10/1/29 BB+/P 2,509,375
3,855,000 (Franklin Regl. Hosp. Assn.),
Ser. A, 6.05s, 9/1/29 BB-/P 3,411,675
3,550,000 (Proctor Academy), Ser. A, 5.6s,
6/1/28 Baa2 3,629,875
8,551,027 NH State Bus. Fin. Auth. Poll.
Control & Solid Waste Rev. Bonds
(Crown Paper Co.), 7 3/4s,
1/1/22 (In default) (NON) D 10,689
--------------
29,527,559
New Jersey (4.7%)
- -------------------------------------------------------------------------------
5,000,000 Camden Cnty., Impt. Auth.
Rev. Bonds, 8.4s, 4/1/24 (acquired
4/12/94, cost $4,991,808) (In
default) (NON)(RES) D/P 4,150,000
NJ Econ. Dev. Auth. Rev. Bonds
7,000,000 (Winchester Gardens), Ser. A,
8 5/8s, 11/1/25 BB-/P 7,463,750
1,500,000 (1st Mtge.-Cranes Mill), Ser. A,
7 1/2s, 2/1/27 BB-/P 1,571,250
900,000 (Cedar Crest Village, Inc.), Ser. A,
7s, 11/15/16 BB-/P 922,500
9,000,000 (Newark Arpt. Marriot Hotel), 7s,
10/1/14 Ba3 8,943,750
500,000 (First Mtge. Presbyterian), Ser. A,
6 3/8s, 11/1/31 BB/P 503,750
3,000,000 (United Methodist Homes), Ser. A-1,
6 1/4s, 7/1/33 BB+ 3,007,500
500,000 (First Mtge. Presbyterian), Ser. A,
6 1/4s, 11/1/20 BB/P 510,000
5,220,000 NJ Econ. Dev. Auth. Assisted Living
Rev. Bonds (Meridian Assisted
Living), 6 3/4s, 8/1/30 B/P 4,267,350
NJ Hlth. Care Fac. Fin. Auth.
Rev. Bonds
4,000,000 (Trinitas Hosp. Oblig. Group),
7 1/2s, 7/1/30 Baa3 4,405,000
2,000,000 (Columbus Regl. Hosp.), Ser. A,
7 1/2s, 7/1/21 B2 1,807,500
3,500,000 (Raritan Bay Med. Ctr.), 7 1/4s,
7/1/27 BB+/P 3,600,380
5,000,000 (South Jersey Hosp.), 6s, 7/1/12 Baa1 5,650,000
1,750,000 NJ State Ed. Fac. Auth. Rev. Bonds
(Stevens Inst. of Tech.), Ser. C,
5 1/4s, 7/1/32 A- 1,767,500
2,000,000 Tobacco Settlement Fin. Corp.
Rev. Bonds, 6 3/4s, 6/1/39 Baa2 1,980,000
--------------
50,550,230
New Mexico (0.7%)
- -------------------------------------------------------------------------------
5,500,000 Farmington, Poll. Control Rev. Bonds
(Tucson Elec. Pwr. Co. San Juan),
Ser. A, 6.95s, 10/1/20 Ba3 5,795,625
2,200,000 Farmington, Poll. Control VRDN (AZ
Pub. Svc. Co.), Ser. B, 1.03s,
9/1/24 VMIG1 2,200,000
--------------
7,995,625
New York (8.6%)
- -------------------------------------------------------------------------------
2,250,000 Colonie, Indl. Dev. Agcy. Rev. Bonds
(Cap. Compost & Waste), Ser. A,
3 3/8s, 6/1/21 D/P 258,750
1,250,000 Huntington, Hsg. Auth. Rev. Bonds
(Gurwin Jewish Sr. Residence),
Ser. A, 6s, 5/1/39 B+/P 1,162,500
2,000,000 Nassau Cnty, Interim Fin. Auth.
Rev. Bonds, Ser. B, MBIA, 5s,
11/15/11 Aaa 2,257,500
1,575,000 Nassau Cnty., Indl. Dev. Agcy.
Rev. Bonds (North Shore Hlth. Syst.
Project D), 5 1/4s, 11/1/07 A3 1,704,938
8,000,000 NY City, G.O. Bonds, Ser. C, 5 1/2s,
8/1/13 A2 8,910,000
6,280,000 NY City, Rev. Bonds, 10.531s, 8/1/06
(acquired 9/12/97, cost $7,384,526)
(RES) AAA/P 7,543,850
NY City, Indl. Dev. Agcy. Rev. Bonds
6,000,000 (Paper Inc.), 7.8s, 1/1/16 B+/P 6,300,000
2,075,000 (British Airways), 7 5/8s, 12/1/32 BB+ 2,100,938
3,250,000 (Brooklyn Navy Yard Cogen.
Partners), 5.65s, 10/1/28 BBB- 2,985,938
500,000 NY City, Indl. Dev. Agcy. Civic Fac.
Rev. Bonds (Brooklyn Polytech. U.
Project J), 6 1/8s, 11/1/30 BB+ 402,500
5,000,000 NY City, Indl. Dev. Agcy. Special
Arpt. Fac. Rev. Bonds (Airis JFK I
LLC), Ser. A, 5 1/2s, 7/1/28 Baa3 4,968,750
3,325,000 NY City, Indl. Dev. Agcy. Special
Fac. Rev. Bonds (British Airways),
5 1/4s, 12/1/32 BB+ 2,556,094
5,500,000 NY City, Transitional Fin. Auth.
Rev. Bonds (Future Tax), Ser. C,
FSA, 5 1/4s, 8/1/10 Aaa 6,263,125
1,785,000 NY State Dorm. Auth. Rev. Bonds
(Lenox Hill Hosp.), 5 3/4s, 7/1/12 A3 2,005,894
8,000,000 NY State Energy Resource & Dev.
Auth. Poll. Control IFB, FGIC,
12.948s, 7/1/29 (acquired 12/19/94,
cost $8,353,120) (RES) Aaa 8,699,840
4,500,000 NY State Env. Fac. Corp. Rev. Bonds,
MBIA, 6s, 6/15/12 Aaa 5,411,250
11,185,000 NY State Env. Fac. Corp. Poll.
Control FRB (PA 198), MBIA, 10.543s,
6/15/10 (acquired 10/22/97, cost
$13,449,963) (RES) AAA 15,421,301
5,000,000 Onondaga Cnty., Indl. Dev. Agcy.
Rev. Bonds (Solvay Paperboard, LLC),
7s, 11/1/30 BB-/P 5,312,500
5,000,000 Suffolk Cnty., Indl. Dev. Agcy.
Rev. Bonds (Peconic Landings),
Ser. A, 8s, 10/1/20 B+/P 5,150,000
3,800,000 Suffolk Cnty., Indl. Dev. Agcy.
Civic Fac. Rev. Bonds (Southampton
Hosp. Assn.), Ser. B, 7 5/8s, 1/1/30 B-/P 3,833,250
--------------
93,248,918
North Carolina (2.7%)
- -------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Syst.
Rev. Bonds, Ser. C
7,500,000 5 3/8s, 1/1/17 BBB 7,950,000
3,400,000 5 3/8s, 1/1/16 BBB 3,633,750
2,000,000 5.3s, 1/1/15 BBB 2,137,500
4,500,000 NC Med. Care Comm. Retirement Fac.
Rev. Bonds (1st Mtge.-Givens
Estates Project), Ser. A, 6 1/2s,
7/1/32 BB-/P 4,618,125
NC State Muni. Pwr. Agcy. Rev. Bonds
4,000,000 (No. 1, Catawba Elec.), Ser. B,
6 1/2s, 1/1/20 Baa1 4,470,000
6,000,000 Ser. A, 5 1/2s, 1/1/13 Baa1 6,615,000
--------------
29,424,375
Ohio (2.2%)
- -------------------------------------------------------------------------------
Marion Cnty., Hlth. Care Fac.
Rev. Bonds (United Church Homes)
900,000 6 3/8s, 11/15/10 BBB- 923,625
750,000 6.3s, 11/15/15 BBB- 763,125
1,000,000 OH State Env. Impt. Rev. Bonds (USX
Corp.), 5 5/8s, 5/1/29 Baa1 1,018,750
OH State Higher Edl. Fac. FRB
(Kenyon College Project)
2,500,000 4.95s, 7/1/37 A2 2,631,250
5,000,000 4.85s, 7/1/37 A2 5,268,750
6,500,000 OH State Solid Waste Mandatory Put
Bonds, 4.85s, 11/1/22 BBB 6,930,625
6,000,000 OH State Wtr. Dev. Auth. Poll.
Control Fac. Rev. Bonds, 6.1s,
8/1/20 Baa2 6,112,500
700,000 OH State Wtr. Dev. Auth. Solid Waste
Disp. Rev. Bonds (Bay Shore Power
Co.), Ser. A, 5 7/8s, 9/1/20 BB+/P 674,625
--------------
24,323,250
Oklahoma (0.6%)
- -------------------------------------------------------------------------------
OK Dev. Fin. Auth. Rev. Bonds
1,600,000 (Continuing Care Retirement),
Ser. A, 8s, 2/1/32 B/P 1,606,000
3,075,000 (Hillcrest Hlth. Care), Ser. A,
5 5/8s, 8/15/29 B1 2,417,719
2,350,000 Ottawa Cnty., Fin. Auth. Indl.
Rev. Bonds (Doane Products Co.),
7 1/4s, 6/1/17 B-/P 1,944,625
--------------
5,968,344
Oregon (0.6%)
- -------------------------------------------------------------------------------
6,700,000 Multnomah Cnty., Hosp. Fac. Auth.
Rev. Bonds (Terwilliger Plaza
Project), 6 1/2s, 12/1/29 BB-/P 6,683,250
Pennsylvania (5.5%)
- -------------------------------------------------------------------------------
6,500,000 Allegheny Cnty., Hosp. Dev. Auth.
Rev. Bonds (Hlth. Syst.), Ser. B,
9 1/4s, 11/15/15 B2 7,068,750
1,150,000 Allentown, Hosp. Auth. Rev. Bonds
(Sacred Heart Hosp.), Ser. A,
6 3/4s, 11/15/14 Baa3 1,154,313
8,605,000 Carbon Cnty., Indl. Dev. Auth.
Rev. Bonds (Panther Creek Partners),
6.65s, 5/1/10 BBB- 9,347,181
1,700,000 Chester Cnty., Hlth. & Ed. Fac.
Auth. Rev. Bonds (Jenners Pond,
Inc.), 7 5/8s, 7/1/34 BB-/P 1,740,375
3,750,000 Dauphin Cnty., Gen. Auth. Rev. Bonds
(Office & Pkg.), Ser. A, 6s, 1/15/25 D/P 1,743,750
1,500,000 Lancaster Cnty., Hosp. Auth.
Rev. Bonds (Gen. Hosp.), 5 1/2s,
3/15/26 A- 1,526,250
Lehigh Cnty., Gen. Purpose Auth.
Rev. Bonds
2,250,000 (St. Luke's Hosp. - Bethlehem),
5 3/8s, 8/15/33 Baa2 2,258,438
2,860,000 (Lehigh Valley Hosp. Hlth. Network),
Ser. A, 5 1/4s, 7/1/32 A2 2,870,725
1,750,000 New Morgan, Indl. Dev. Auth. Solid
Waste Disp. Rev. Bonds (New Morgan
Landfill Co., Inc.), 6 1/2s, 4/1/19 BB- 1,673,438
2,000,000 PA Econ. Dev. Fin. Auth.
Rev. Bonds (Amtrak Project), Ser. A,
6 3/8s, 11/1/41 A3 2,042,500
9,000,000 PA State Econ. Dev. Fin. Auth. Res.
Recvy. Rev. Bonds (Colver), Ser. E,
8.05s, 12/1/15 BBB-/P 9,462,510
PA State Higher Edl. Fac. Auth.
Rev. Bonds
1,500,000 (Widener U.), 5.4s, 7/15/36 BBB+ 1,524,375
1,345,000 (Philadelphia College of Osteopathic
Med.), 5s, 12/1/13 A 1,464,369
Philadelphia, Hosp. & Higher Ed.
Fac. Auth. Rev. Bonds
4,875,853 (Graduate Hlth. Syst. Oblig. Group),
7 1/4s, 7/1/18 (In default) (NON) Ca 6,095
3,000,000 (Jeanses Hosp. Project), 5 7/8s,
7/1/17 Baa2 3,018,750
Scranton, G.O. Bonds, Ser. C
3,060,000 7.1s, 9/1/31 AAA/P 3,890,025
1,000,000 7s, 9/1/22 AAA/P 1,265,000
2,500,000 West Cornwall, Tpk. Muni. Auth.
Rev. Bonds (Elizabethtown College
Project), 6s, 12/15/27 BBB+ 2,615,625
2,600,000 West Shore, Area Hosp. Auth.
Rev. Bonds (Holy Spirit Hosp.),
6 1/4s, 1/1/32 BBB+ 2,681,250
2,000,000 York Cnty., Indl. Dev. Auth.
Rev. Bonds, Ser. A, 5 1/2s, 9/1/20 Baa1 2,022,500
--------------
59,376,219
Puerto Rico (0.7%)
- -------------------------------------------------------------------------------
7,400,000 PR Indl. Tourist Edl. Med. & Env.
Control Fac. Rev. Bonds (Cogen.
Fac.-AES PR), 6 5/8s, 6/1/26 Baa3 7,797,750
Rhode Island (0.1%)
- -------------------------------------------------------------------------------
710,000 Tobacco Settlement Fin. Corp.
Rev. Bonds, Ser. A, 6 1/4s, 6/1/42 Baa2 650,538
South Carolina (3.9%)
- -------------------------------------------------------------------------------
Connector 2000 Assn., Inc. SC Toll
Road Rev. Bonds
5,215,000 (SR-Southern Connector), Ser. A,
5 3/8s, 1/1/38 B- 2,972,550
4,465,000 (Cap. Appn. Sub.), Ser. C, zero %,
1/1/21 B-/P 128,369
5,500,000 (Cap. Appn. Sub.), Ser. C, zero %,
1/1/20 B-/P 158,125
4,200,000 (Cap. Appn. Sub.), Ser. C, zero %,
1/1/14 B-/P 152,250
4,100,000 (Cap. Appn. Sub.), Ser. C, zero %,
1/1/13 B-/P 148,625
1,000,000 (Cap. Appn. Sub.), Ser. C, zero %,
1/1/12 B-/P 37,500
3,175,000 Florence Cnty., Indl. Dev. Auth.
Rev. Bonds (Stone Container Corp.),
7 3/8s, 2/1/07 B/P 3,230,817
2,275,000 Lexington Cnty. Rev. Bonds, 5 1/2s,
11/1/32 A2 2,343,250
4,000,000 SC Hosp. Auth. Rev. Bonds (Med. U.),
Ser. A, 6 1/2s, 8/15/32 BBB+ 4,190,000
SC Jobs Econ. Dev. Auth. Rev. Bonds
10,355,000 (St. Francis Hosp.-Franciscan
Sisters), 7s, 7/1/15 BBB+/P 10,607,351
5,000,000 (Palmetto Hlth. Alliance), Ser. C,
6s, 8/1/20 Baa2 5,168,750
3,800,000 SC Jobs Econ. Dev. Auth. Hosp. Fac.
Rev. Bonds (Palmetto Hlth.
Alliance), Ser. A, 7 3/8s, 12/15/21 Baa2 4,887,750
9,000,000 SC Tobacco Settlement Rev. Mgt.
Rev. Bonds, Ser. B, 6 3/8s, 5/15/30 Baa2 8,448,750
--------------
42,474,087
South Dakota (0.1%)
- -------------------------------------------------------------------------------
1,650,000 SD Edl. Enhancement Funding Corp.
Rev. Bonds, Ser. B, 6 1/2s, 6/1/32 Baa2 1,581,938
Tennessee (1.5%)
- -------------------------------------------------------------------------------
1,000,000 Elizabethton, Hlth. & Edl. Fac.
Board Rev. Bonds (Hosp. Ref. &
Impt.), Ser. B, 8s, 7/1/33 Baa2 1,165,000
7,500,000 Johnson City, Hlth. & Edl. Fac.
Board Hosp. Rev. Bonds (Mountain
States Hlth.), Ser. A, 7 1/2s,
7/1/33 Baa2 8,493,750
Memphis-Shelby Cnty., Arpt. Auth.
Rev. Bonds (Federal Express Corp.)
4,000,000 5.05s, 9/1/12 Baa2 4,325,000
2,500,000 4 1/2s, 7/1/14 Baa2 2,565,625
--------------
16,549,375
Texas (4.4%)
- -------------------------------------------------------------------------------
6,850,000 Abilene, Hlth. Fac. Dev. Corp.
Rev. Bonds (Sears Methodist
Retirement), Ser. A, 5.9s, 11/15/25 BB+/P 6,524,625
3,985,000 Crawford Ed. Fac. Rev. Bonds (U. St.
Thomas), 5 3/8s, 10/1/27 BBB+ 3,980,019
2,500,000 Dallas-Fort Worth, Intl. Arpt. Fac.
Impt. Rev. Bonds (American Airlines,
Inc.), 8 1/4s, 11/1/36 Caa2 1,956,250
3,000,000 Dallas-Fort Worth, Intl. Arpt. Fac.
Impt. Corp. Rev. Bonds (American
Airlines, Inc.), 6 3/8s, 5/1/35 Caa2 2,167,500
500,000 Georgetown, Hlth. Fac. Dev. Corp.
Rev. Bonds, 6 1/4s, 8/15/29 BB+ 482,500
Houston, Arpt. Syst. Rev. Bonds
7,000,000 (Special Fac. - Continental
Airlines, Inc.), Ser. E, 6 3/4s,
7/1/21 B- 6,475,000
3,000,000 (Continental Airlines, Inc.),
Ser. C, 5.7s, 7/15/29 B- 2,362,500
5,500,000 Lufkin, Hlth. Fac. Dev. Corp.
Rev. Bonds (Memorial Hlth. Syst. of
East TX), 5.7s, 2/15/28 BBB- 5,032,500
5,265,000 Round Rock, Hotel Occupancy Tax
Rev. Bonds (Convention Ctr.
Complex), 5.85s, 12/1/24 BBB/P 5,337,394
4,500,000 Sam Rayburn Muni. Pwr. Agcy.
Rev. Bonds, 6s, 10/1/21 Baa2 4,713,750
Tomball, Hosp. Auth. Rev. Bonds
(Tomball Regl. Hosp.)
6,250,000 6 1/8s, 7/1/23 Baa2 6,394,375
2,095,000 6s, 7/1/25 Baa2 2,136,900
--------------
47,563,313
Utah (1.1%)
- -------------------------------------------------------------------------------
1,000,000 Carbon Cnty., Solid Waste Disp.
Rev. Bonds (Laidlaw Env.), Ser. A,
7 1/2s, 2/1/10 BB- 1,028,750
5,500,000 Tooele Cnty., Harbor & Term. Dist.
Port Fac. Rev. Bonds (Union
Pacific), Ser. A, 5.7s, 11/1/26 Baa2 5,582,500
4,480,000 UT Cnty., Env. Impt. Rev. Bonds
(Marathon Oil Project), 5.05s,
11/1/17 Baa1 4,872,000
--------------
11,483,250
Virginia (3.0%)
- -------------------------------------------------------------------------------
6,250,000 Henrico Cnty. Econ. Dev. Auth.
Rev. Bonds (United Methodist),
Ser. A, 6.7s, 6/1/27 BB+/P 6,414,063
2,000,000 Henrico Cnty., Indl. Dev. Auth. IFB
(Bon Secours Hlth. Syst.), FSA,
10.61s, 8/23/27 Aaa 2,757,500
2,500,000 James Cnty., Indl. Dev. Auth.
Rev. Bonds (1st. Mtge.
Williamsburg), Ser. A, 6 1/8s,
3/1/32 BB-/P 2,537,500
4,000,000 Peninsula Ports Auth. Rev. Bonds (VA
Baptist Homes), Ser. A, 7 3/8s,
12/1/32 B+/P 4,175,000
5,250,000 Pocahontas Parkway Assn. Toll Rd.
Rev. Bonds, Ser. A, 5 1/2s, 8/15/28 BB 4,350,938
Roanoke Cnty. Indl. Dev. Auth.
Rev. Bonds (Res. Care Fac.), Ser. A
2,000,000 6.3s, 7/1/35 B+/P 2,015,000
1,000,000 4.4s, 7/1/08 B+/P 1,005,000
1,000,000 Russell Cnty. Indl. Dev. Auth. Poll.
Control Rev. Bonds (Appalachian Pwr.
Co.), Ser. I, 2.7s, 11/1/07 Baa2 1,002,500
9,010,000 Suffolk, Redev. & Hsg. Auth.
Rev. Bonds (Beach-Oxford Apts.),
6 1/4s, 10/1/33 BB-/P 8,041,425
--------------
32,298,926
Washington (0.9%)
- -------------------------------------------------------------------------------
4,970,000 Tobacco Settlement Auth. of WA
Rev. Bonds, 6 1/2s, 6/1/26 Baa2 4,920,300
5,500,000 Washington Cnty., Hsg. & Redev.
Auth. Rev. Bonds (Healtheast),
5 1/2s, 11/15/27 Ba2 4,812,500
--------------
9,732,800
West Virginia (0.6%)
- -------------------------------------------------------------------------------
3,475,000 Mason Cnty., Poll. Control FRB
(Appalachian Pwr. Co. Project),
Ser. L, 5 1/2s, 10/1/22 Baa2 3,527,125
4,495,000 Princeton, Hosp. Rev. Bonds (Cmnty.
Hosp. Assn., Inc.), 6.1s, 5/1/29 B2 3,197,069
--------------
6,724,194
Wisconsin (0.6%)
- -------------------------------------------------------------------------------
Badger Tobacco Settlement
Asset Securitization Corp.
Rev. Bonds
1,000,000 7s, 6/1/28 Baa2 1,022,500
5,500,000 6 3/8s, 6/1/32 Baa2 5,176,875
--------------
6,199,375
Wyoming (0.6%)
- -------------------------------------------------------------------------------
5,350,000 Sweetwater Cnty., Poll. Control
Rev. Bonds (Idaho Power Co.
Project), Ser. A, 6.05s, 7/15/26 A3 5,543,938
1,400,000 Uinta Cnty. Poll. Control VRDN
(Chevron USA, Inc.), 0.88s, 12/1/22 VMIG1 1,400,000
--------------
6,943,938
--------------
Total Municipal bonds and notes
(cost $1,057,722,513) $1,051,438,046
Preferred stocks (1.0%) (a)
Number of shares Value
- -------------------------------------------------------------------------------
2,000,000 Charter Mac. Equity Trust 144A
Ser. A, 6.625% cum. pfd. (acquired
6/11/99, cost $2,000,000) (RES) $2,145,000
8,000,000 MuniMae Tax Exempt Bond Subsidiary,
LLC 144A Ser. B, 7 3/4s cum. pfd. 8,850,000
--------------
Total Preferred stocks
(cost $10,000,000) $10,995,000
Common stocks (0.1%) (a)
Number of shares Value
- -------------------------------------------------------------------------------
184,103 Tembec, Inc. (Canada) (NON) $1,197,092
- -------------------------------------------------------------------------------
Total Investments (cost $1,076,779,798) $1,063,630,138
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,081,833,850.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at January 31, 2004 for the
securities listed. Ratings are generally ascribed to securities at the
time of issuance. While the agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at January 31, 2004. Securities rated by Putnam are indicated
by "/P" and are not publicly rated.
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at January 31, 2004 was
$60,222,241 or 5.6% of net assets.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
The rates shown on VRDN, mandatory put bonds and Floating Rate Bonds
(FRB) are the current interest rates shown at January 31, 2004.
The rates shown on IFB, which are securities paying interest rates that
vary inversely to changes in the market interest rates, are the current
interest rates shown at January 31, 2004.
The fund had the following industry group concentrations greater than
10% at January 31, 2004 (as a percentage of
net assets):
Health care 34.5
Utilities 19.2
The accompanying notes are an integral part of these financial
statements.
Statement of assets and liabilities
January 31, 2004 (Unaudited)
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$1,076,779,798) (Note 1) $1,063,630,138
- -------------------------------------------------------------------------------
Cash 7,594,876
- -------------------------------------------------------------------------------
Interest and other receivables 15,616,839
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 317,954
- -------------------------------------------------------------------------------
Receivable for securities sold 3,269,566
- -------------------------------------------------------------------------------
Total assets 1,090,429,373
Liabilities
- -------------------------------------------------------------------------------
Distributions payable to shareholders 2,368,852
- -------------------------------------------------------------------------------
Payable for securities purchased 3,468,843
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,542,531
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 545,048
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 173,372
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 120,542
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,518
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 303,737
- -------------------------------------------------------------------------------
Other accrued expenses 71,080
- -------------------------------------------------------------------------------
Total liabilities 8,595,523
- -------------------------------------------------------------------------------
Net assets $1,081,833,850
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,267,147,503
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 1,784,303
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (173,948,296)
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments (13,149,660)
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $1,081,833,850
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($864,825,030 divided by 68,355,448 shares) $12.65
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.50 of $12.65)* $13.25
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($198,831,383 divided by 15,690,412 shares)** $12.67
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($10,830,506 divided by 855,711 shares)** $12.66
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($7,346,931 divided by 580,706 shares) $12.65
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $12.65)*** $13.07
- -------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25000 or
more and on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
*** On single retail sales of less than $50,000. On sales of $50,000 or more
and on group sales, the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
Statement of operations
Six months ended January 31, 2004 (Unaudited)
Interest income: $37,153,461
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 3,461,574
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 629,783
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 20,578
- -------------------------------------------------------------------------------
Administrative services (Note 2) 9,199
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 952,245
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 909,472
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 57,538
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 23,070
- -------------------------------------------------------------------------------
Other 97,005
- -------------------------------------------------------------------------------
Non-recurring costs (Note 5) 13,623
- -------------------------------------------------------------------------------
Costs assumed by Manager (Note 5) (13,623)
- -------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2) (565)
- -------------------------------------------------------------------------------
Total expenses 6,159,899
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (17,569)
- -------------------------------------------------------------------------------
Net expenses 6,142,330
- -------------------------------------------------------------------------------
Net investment income 31,011,131
- -------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (43,114,943)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 76,441,625
- -------------------------------------------------------------------------------
Net gain on investments 33,326,682
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $64,337,813
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Six months ended Year ended
January 31 July 31
Decrease in net assets 2004* 2003
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $31,011,131 $76,752,234
- -------------------------------------------------------------------------------
Net realized loss on investments (43,114,943) (46,006,262)
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 76,441,625 (14,729,467)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 64,337,813 16,016,505
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From ordinary income
Class A -- (17,230)
- -------------------------------------------------------------------------------
Class B -- (3,945)
- -------------------------------------------------------------------------------
Class C -- (187)
- -------------------------------------------------------------------------------
Class M -- (171)
- -------------------------------------------------------------------------------
From tax-exempt income
Class A (26,524,763) (62,725,610)
- -------------------------------------------------------------------------------
Class B (5,266,629) (13,041,582)
- -------------------------------------------------------------------------------
Class C (274,404) (610,914)
- -------------------------------------------------------------------------------
Class M (244,396) (601,649)
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (196,389,732) (113,047,446)
- -------------------------------------------------------------------------------
Total decrease in net assets (164,362,111) (174,032,229)
Net assets
- -------------------------------------------------------------------------------
Beginning of period 1,246,195,961 1,420,228,190
- -------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $1,784,303 and
$3,083,364, respectively) $1,081,833,850 $1,246,195,961
- -------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.31 $12.88 $13.39 $13.27 $14.13 $14.61
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .34 (c) .74 .83 .80 .80 .81
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .35 (.57) (.52) .11 (.85) (.48)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .69 .17 .31 .91 (.05) .33
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.35) (.74) (.82) (.79) (.81) (.81)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.35) (.74) (.82) (.79) (.81) (.81)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.65 $12.31 $12.88 $13.39 $13.27 $14.13
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.67* 1.34 2.38 7.10 (.24) 2.25
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $864,825 $1,000,769 $1,115,695 $1,145,710 $1,114,842 $1,157,920
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .46* (c) .91 .90 .88 .86 .87
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.70* (c) 5.83 6.31 6.01 5.95 5.56
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.64* 28.90 19.87 17.95 12.05 12.16
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an expense limitation in effect during the period. As a
result of such limitation the expenses of the fund reflect a reduction
of less than 0.01% of the average net assets (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS B
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.33 $12.90 $13.41 $13.29 $14.15 $14.62
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .30 (c) .67 .76 .73 .73 .74
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .35 (.57) (.52) .12 (.86) (.47)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .65 .10 .24 .85 (.13) .27
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.31) (.67) (.75) (.73) (.73) (.74)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.67) (.75) (.73) (.73) (.74)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.67 $12.33 $12.90 $13.41 $13.29 $14.15
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.32* 0.82 1.88 6.55 (.82) 1.81
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $198,831 $222,970 $281,825 $356,506 $441,174 $743,456
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .78* (c) 1.43 1.40 1.39 1.44 1.37
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.37* (c) 5.32 5.83 5.49 5.36 5.03
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.64* 28.90 19.87 17.95 12.05 12.16
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an expense limitation in effect during the period. As a
result of such limitation the expenses of the fund reflect a reduction
of less than 0.01% of the average net assets (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS C
- ----------------------------------------------------------------------------------------------------------------------------
Six months For the
ended period
January 31 Feb 1, 1999+
Per-share (Unaudited) Year ended July 31 to July 31
operating performance 2004 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.31 $12.89 $13.39 $13.27 $14.13 $14.73
- ----------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income .29 (c) .64 .72 .69 .69 .36
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .36 (.58) (.51) .12 (.85) (.60)
- ----------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .65 .06 .21 .81 (.16) (.24)
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------------
From net
investment income (.30) (.64) (.71) (.69) (.70) (.36)
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (.30) (.64) (.71) (.69) (.70) (.36)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.66 $12.31 $12.89 $13.39 $13.27 $14.13
- ----------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.34* 0.45 1.64 6.25 (1.05) 1.58*
- ----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $10,831 $12,028 $11,002 $6,779 $3,945 $2,738
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .86* (c) 1.71 1.70 1.68 1.66 .83*
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.30* (c) 5.02 5.46 5.20 5.16 2.47*
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.64* 28.90 19.87 17.95 12.05 12.16
- ----------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an expense limitation in effect during the period. As a
result of such limitation the expenses of the fund reflect a reduction
of less than 0.01% of the average net assets (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS M
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2004 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.31 $12.89 $13.39 $13.27 $14.14 $14.61
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .32 (c) .70 .79 .76 .77 .77
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .35 (.58) (.51) .12 (.87) (.47)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .67 .12 .28 .88 (.10) .30
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.33) (.70) (.78) (.76) (.77) (.77)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.33) (.70) (.78) (.76) (.77) (.77)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.65 $12.31 $12.89 $13.39 $13.27 $14.14
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.52* 0.96 2.16 6.79 (.62) 2.01
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $7,347 $10,429 $11,706 $11,474 $13,745 $23,693
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .61* (c) 1.21 1.20 1.18 1.16 1.17
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.54* (c) 5.54 6.00 5.70 5.65 5.27
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.64* 28.90 19.87 17.95 12.05 12.16
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an expense limitation in effect during the period. As a
result of such limitation the expenses of the fund reflect a reduction
of less than 0.01% of the average net assets (Note 2).
The accompanying notes are an integral part of these financial
statements.
Notes to financial statements
January 31, 2004 (unaudited)
Note 1
Significant accounting policies
Putnam Tax-Free High Yield Fund (the "fund") is a series of Putnam
Tax-Free Income Trust (the "trust") which is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund pursues its objective of seeking
high current income exempt from federal income tax by investing
primarily in high-yielding, lower rated tax-exempt securities
constituting a portfolio that Putnam Investment Management, LLC ("Putnam
Management"), the fund's manager, an indirect wholly-owned subsidiary of
Putnam, LLC, believes does not involve undue risk to income or
principal. The fund invests in higher yielding, lower rated bonds that
have a higher rate of default due to the nature of the investments.
The fund offers class A, class B, class C, and class M shares. Class A
shares are sold with a maximum front-end sales charge of 4.50%. Prior to
January 28, 2004, the maximum front-end sales charge for class shares
was 4.75%. Class B shares, which convert to class A shares after
approximately eight years, do not pay a front-end sales charge but pay a
higher ongoing distribution fee than class A and class M shares, and are
subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class C shares have a higher
ongoing distribution fee than class B shares and have a one-year 1.00%
contingent deferred sales charge and do not convert to Class A shares.
Class M shares are sold with a maximum front end sales charge of 3.25%
and pay an ongoing distribution fee that is higher than class A shares
but lower than class B and class C shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
Effective April 19, 2004, a 2.00% redemption fee may apply to any shares
that are redeemed (either by selling or exchanging into another fund)
within 5 days of purchase.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in the financial
statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results could
differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are valued on the basis
of valuations provided by an independent pricing service, approved by
the Trustees. Such services use information with respect to transactions
in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. Investments for which market quotations are readily
available are valued at the last reported sales price on their principal
exchange, or official closing price for certain markets. If no sales are
reported -- as in the case of some securities traded over-the-counter --
a security is valued at its last reported bid price. Restricted
securities are valued at fair value following procedures approved by the
Trustees. Such valuations and procedures are reviewed periodically by
the Trustees. Short-term investments having remaining maturities of 60
days or less are valued at amortized cost, which approximates fair
value.
B) Security transactions and related investment income Security
transactions are recorded on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on
the identified cost basis. Interest income is recorded on the accrual
basis.
Non-cash dividends, if any, are recorded at the fair market value of the
securities received. All premiums/discounts are amortized/accreted on a
yield-to-maturity basis. The premium in excess of the call price, if
any, is amortized to the call date; thereafter, any remaining premium is
amortized to maturity.
C) Line of credit During the period, the fund was entered into a
committed line of credit with certain banks. The line of credit
agreement included restrictions that the fund would maintain an asset
coverage ratio of at least 300% and that borrowings would not exceed
prospectus limitations. For the period ended August 6, 2003, the fund
had no borrowings against the line of credit. Effective August 6, 2003,
the fund no longer participated in a committed line of credit.
D) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986, as amended. Therefore, no
provision has been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on income
and capital gains.
At July 31, 2003, the fund had a capital loss carryover of approximately
$72,899,436 available to the extent allowed by tax law to offset future
capital gains, if any. The amount of the carryover and the expiration
dates are:
Loss Carryover Expiration
- --------------------------------
$12,477,080 July 31, 2004
21,345,454 July 31, 2006
23,390,767 July 31, 2007
7,813,842 July 31, 2008
1,682,906 July 31, 2009
1,466,587 July 31, 2010
4,722,800 July 31, 2011
Pursuant to federal income tax regulations applicable to regulated
investment companies, the fund has elected to defer to its fiscal year
ending July 31, 2004 approximately $51,751,776 of losses recognized
during the period November 1, 2002 to July 31, 2003.
The aggregate identified cost on a tax basis is $1,076,684,105,
resulting in gross unrealized appreciation and depreciation of
$56,460,114 and $69,514,081, respectively, or net unrealized
depreciation of $13,053,967.
E) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid monthly. Distributions from capital gains, if any,
are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. Reclassifications are
made to the fund's capital accounts to reflect income and gains
available for distribution (or available capital loss carryovers) under
income tax regulations.
F) Expenses of the trust Expenses directly charged or attributable to
any fund will be paid from the assets of that fund. Generally, expenses
of the trust will be allocated among and charged to the assets of each
fund on a basis that the Trustees deem fair and equitable, which may be
based on the relative assets of each fund or the nature of the services
performed and relative applicability to each fund.
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on the following annual rates: 0.65% of the first $500 million
of average net assets, 0.55% of the next $500 million, 0.50% of the next
$500 million, 0.45% of the next $5 billion, 0.425% of the next $5
billion, 0.405% of the next $5 billion, and 0.39% of the next $5 billion
and 0.38% thereafter.
Effective January 28, 2004, Putnam Management has agreed to limit its
compensation (and, to the extent necessary bear other expenses) through
December 31, 2004 to the extent that the fund's net expenses as a
percentage of average net assets exceed the average expense ratio for
the fund's Lipper peer group of front-end load funds.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam, LLC. Putnam
Investor Services, a division of PFTC, provides investor servicing agent
functions to the fund. During the six months ended January 31, 2004 the
fund paid PFTC $527,172 for these services.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the six months ended January 31,
2004, the fund's expenses were reduced by $17,569 under these
arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $1,901 has been allocated to the fund, and an additional fee for
each Trustees meeting attended. Trustees receive additional fees for
attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan"),
which allows the Trustees to defer the receipt of all or a portion of
Trustees fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Trustee compensation and expenses in the
Statement of operations. Accrued pension liability is included in
Payable for Trustee compensation and expenses in the Statement of assets
and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B, class C and class M shares pursuant to rule 12b-1
under the Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Retail Management, a wholly-owned subsidiary of
Putnam, LLC and Putnam Retail Management GP, Inc., for services provided
and expenses incurred by it in distributing shares of the fund. The
Plans provide for payments by the fund to Putnam Retail Management at an
annual rate of up to 0.35%, 1.00%, 1.00% and 1.00% of the average net
assets attributable to class A, class B, class C and class M shares,
respectively. The Trustees have approved payment by the fund at the
annual rates of 0.20%, 0.85%, 1.00% and 0.50% of the average net assets
attributable to class A, class B, class C and class M shares,
respectively.
For the six months ended January 31, 2004, Putnam Retail Management,
acting as underwriter, received net commissions of $18,644 and $89 from
the sale of class A and class M shares, respectively, and received
$327,548 and $142 in contingent deferred sales charges from redemptions
of class B and class C shares, respectively. 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 as part of an investment
of $1 million or more. For the six months ended January 31, 2004, Putnam
Retail Management, acting as underwriter, received $4,649 on class A
redemptions.
Note 3
Purchases and sales of securities
During the six months ended January 31, 2004, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $110,212,705 and $319,822,714, respectively.
There were no purchases and sales of U.S. government securities.
Note 4
Capital shares
At January 31, 2004, there were an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 1,761,437 $21,877,038
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 1,283,002 16,031,819
- ----------------------------------------------------------------
3,044,439 37,908,857
Shares repurchased (15,988,322) (199,528,178)
- ----------------------------------------------------------------
Net decrease (12,943,883) $(161,619,321)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 7,302,265 $92,127,348
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 2,953,632 37,186,069
- ----------------------------------------------------------------
10,255,897 129,313,417
Shares repurchased (15,560,514) (195,724,936)
- ----------------------------------------------------------------
Net decrease (5,304,617) $(66,411,519)
- ----------------------------------------------------------------
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 636,126 $7,947,562
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 209,561 2,622,890
- ----------------------------------------------------------------
845,687 10,570,452
Shares repurchased (3,239,662) (40,498,189)
- ----------------------------------------------------------------
Net decrease (2,393,975) $(29,927,737)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 1,854,677 $23,435,847
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 512,488 6,465,446
- ----------------------------------------------------------------
2,367,165 29,901,293
Shares repurchased (6,122,644) (77,328,504)
- ----------------------------------------------------------------
Net decrease (3,755,479) $(47,427,211)
- ----------------------------------------------------------------
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 86,527 $1,075,423
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 11,135 138,884
- ----------------------------------------------------------------
97,662 1,214,307
Shares repurchased (218,682) (2,722,956)
- ----------------------------------------------------------------
Net decrease (121,020) $(1,508,649)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 345,325 $4,381,427
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 25,053 308,458
- ----------------------------------------------------------------
370,378 4,689,885
Shares repurchased (247,328) (3,113,145)
- ----------------------------------------------------------------
Net increase 123,050 $1,576,740
- ----------------------------------------------------------------
Six months ended January 31, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 15,574 $194,373
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 13,412 167,483
- ----------------------------------------------------------------
28,986 361,856
Shares repurchased (295,478) (3,695,881)
- ----------------------------------------------------------------
Net decrease (266,492) $(3,334,025)
- ----------------------------------------------------------------
Year ended July 31, 2003
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 47,097 $565,889
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 31,500 421,804
- ----------------------------------------------------------------
78,597 987,693
Shares repurchased (139,917) (1,773,149)
- ----------------------------------------------------------------
Net decrease (61,320) $(785,456)
- ----------------------------------------------------------------
Note 5
Regulatory matters and litigation
On November 13, 2003, Putnam Management agreed to entry of an order by
the Securities and Exchange Commission in partial resolution of
administrative and cease-and-desist proceedings initiated by the SEC on
October 28, 2003 in connection with alleged excessive short-term trading
by at least six Putnam Management investment professionals. The SEC's
findings reflect that four of those employees engaged in such trading in
funds over which they had investment decision-making responsibility and
had access to non-public information regarding, among other things,
current portfolio holdings and valuations. The six individuals are no
longer employed by Putnam Management. Under the order, Putnam Management
will make restitution for losses attributable to excessive short-term
trading by Putnam employees, institute new employee trading restrictions
and enhanced employee trading compliance, retain an independent
compliance consultant, and take other remedial actions. Putnam
Management neither admitted nor denied the order's findings, which
included findings that Putnam Management willfully violated provisions
of the federal securities laws. A civil monetary penalty and other
monetary relief, if any, will be determined at a later date. If a
hearing is necessary to determine the amounts of such penalty or other
relief, Putnam Management will be precluded from arguing that it did not
violate the federal securities laws in the manner described in the SEC
order, the findings set forth in the SEC order will be accepted as true
by the hearing officer and additional evidence may be presented. Putnam
Management, and not the investors in any Putnam fund, will bear all
costs, including restitution, civil penalties and associated legal fees.
Administrative proceedings instituted by the Commonwealth of
Massachusetts on October 28, 2003 against Putnam Management in
connection with alleged market timing activities by Putnam employees and
by participants in some Putnam-administered 401(k) plans are pending.
Putnam Management has committed to make complete restitution for any
losses suffered by Putnam shareholders as a result of any improper
market-timing activities by Putnam employees or within
Putnam-administered 401(k) plans.
The SEC's and Commonwealth's allegations and related matters also serve
as the general basis for numerous lawsuits, including purported class
action lawsuits filed against Putnam Management and certain related
parties, including certain Putnam funds. Putnam Management has agreed to
bear any costs incurred by Putnam funds in connection with these
lawsuits. Based on currently available information, Putnam Management
believes that the likelihood that the pending private lawsuits and
purported class action lawsuits will have a material adverse financial
impact on the fund is remote, and the pending actions are not likely to
materially affect its ability to provide investment management services
to its clients, including the Putnam funds.
For the period ended January 31, 2004, Putnam Management has assumed
$13,623 of legal, shareholder servicing and communication, audit, and
Trustee fees incurred by the Fund in connection with these matters.
Review of these matters by counsel for Putnam Management and by separate
independent counsel for the Putnam funds and their independent Trustees
is continuing. In addition, Marsh & McLennan Companies, Inc., Putnam
Management's parent company, has engaged counsel to conduct a separate
review of Putnam Management's policies and controls related to
short-term trading. The fund may experience increased redemptions as a
result of these matters, which could result in increased transaction
costs and operating expenses.
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds.
Investors should consider the investment objective, risks, charges, and
expenses of a fund before investing. For a prospectus containing this
and other information for any Putnam fund or product, call your
financial advisor at 1-800-225-1581 and ask for a prospectus. Please
read the prospectus carefully before investing.
Growth Funds
Discovery Growth Fund
Growth Opportunities Fund
Health Sciences Trust
International New Opportunities Fund*
New Opportunities Fund
OTC & Emerging Growth Fund
Small Cap Growth Fund
Vista Fund
Voyager Fund
Blend Funds
Capital Appreciation Fund
Capital Opportunities Fund
Europe Equity Fund*
Global Equity Fund*
Global Natural Resources Fund*
International Capital Opportunities Fund*
International Equity Fund*
Investors Fund
Research Fund
Tax Smart Equity Fund
Utilities Growth and Income Fund
Value Funds
Classic Equity Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
International Growth and Income Fund*
Mid Cap Value Fund
New Value Fund
Small Cap Value Fund+
Income Funds
American Government Income Fund
Diversified Income Trust
Global Income Trust*
High Yield Advantage Fund+*
High Yield Trust*
Income Fund
Intermediate U.S. Government Income Fund
Money Market Fund++
U.S. Government Income Trust
Tax-free Income Funds
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund++
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
Asset Allocation Funds
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* A 1% redemption fee on total assets redeemed or exchanged within 90
days of purchase may be imposed for all share classes of these funds.
+ Closed to new investors.
++ An investment in a money market fund is not insured or guaranteed by
the Federal Deposit Insurance Corporation or any other government
agency. Although the funds seek to preserve your investment at $1.00
per share, it is possible to lose money by investing in the fund.
For shares purchased on or after April 19, 2004, a 2% redemption fee
will be applied to shares exchanged or sold within 5 days of purchase.
Check your account balances and the most recent month-end performance at
www.putnaminvestments.com.
Fund information
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Treasurer and Principal Financial Officer
Patricia C. Flaherty
Senior Vice President
Steven D. Krichmar
Vice President and Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Beth S. Mazor
Vice President
Gordon H. Silver
Vice President
Mark C. Trenchard
Vice President and BSA Compliance Officer
William H. Woolverton
Vice President and
Chief Legal Officer
Judith Cohen
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax-Free
High Yield Fund. It may also be used as sales literature when preceded
or accompanied by the current prospectus, the most recent copy of
Putnam's Quarterly Performance Summary, and Putnam's Quarterly Ranking
Summary. For more recent performance, please visit
www.putnaminvestments.com. Investors should consider the investment
objective, risks, charges, and expenses of a fund, which are described
in its prospectus. For more information or to request a prospectus, call
1-800-225-1581 toll free. Please read the prospectus carefully before
investing. The fund's Statement of Additional Information contains
additional information about the fund's Trustees and is available
without charge upon request by calling 1-800-225-1581.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
Call 1-800-225-1581 or visit our Web site
www.putnaminvestments.com.
SA042-211467 036/679/851 3/04
Not FDIC Insured May Lose Value No Bank Guarantee
Item 2. Code of Ethics:
- -----------------------
Not applicable
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
Not applicable
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
Not applicable
Items 5-6. [Reserved]
- ---------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. [Reserved]
- ------------------
Item 9. Submission of Matters to a Vote of Security Holders:
- ------------------------------------------------------------
Not applicable
Item 10. Controls and Procedures:
- ---------------------------------
(a) The registrant's principal executive officer and principal financial
officer have concluded, based on their evaluation of the
effectiveness of the design and operation of the registrant's
disclosure controls and procedures as of a date within 90 days of
the filing date of this report on Form N-CSR, that the design and
operation of such procedures are generally effective to provide
reasonable assurance that information required to be disclosed by
the investment company in the reports that it files or submits under
the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
Commission's rules and forms.
Although such officers reached the conclusion expressed in the
preceding paragraph, they are aware of matters that raise concerns
with respect to controls, each of which arose in connection with the
administration of 401(k) plans by Putnam Fiduciary Trust Company.
The first matter, which occurred in early 2001, involved the willful
circumvention of controls by certain Putnam employees in connection
with the correction of operational errors with respect to a 401(k)
client's investment in certain Putnam Funds, which led to losses in
five Putnam Funds (not including the registrant). Such officers
became aware of this matter in February 2004. The second matter,
which occurred in 2002, involved the willful circumvention by
certain Putnam employees of policies and procedures in connection
with the payment of Putnam corporate expenses. Such officers did
not learn that this matter involved a Putnam Fund until January
2004. Putnam has made restitution to the affected Funds,
implemented a number of personnel changes, including senior
personnel, begun to implement changes in procedures to address these
items and informed the SEC, the Funds' Trustees and independent
auditors. An internal investigation and review of procedures and
controls are currently ongoing.
In reaching the conclusion expressed herein, the registrant's
principal executive officer and principal financial officer
considered a number of factors, including the nature of the matters
described above, when the matters occurred, the individuals
involved, personnel changes that have occurred since these matters
occurred, the results to date of the current ongoing investigation
and the overall quality of controls at Putnam at this time.
(b) Changes in internal control over financial reporting:
Not applicable
Item 11. Exhibits:
- ------------------
(a) Not applicable
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002
are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: April 1, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Executive Officer
Date: April 1, 2004
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: April 1, 2004