Putnam
Municipal
Income 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
9-30-04
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
During the past several months, Putnam introduced a number of reforms for
the benefit of shareholders, including increasing the amount of disclosure
for our funds. Beginning with this month's reports, we inform you of any
changes during the prior year among the Portfolio Leader and Portfolio
Members of your fund's management team. Additionally, we list the other fund
management responsibilities of your fund's Portfolio Leader and Portfolio
Members. This new information, which you can find following the Outlook for
Your Fund, complements the expense, risk, and portfolio turnover comparisons
we added to the reports earlier this year.
We are also pleased to announce that three new Trustees have joined your
fund's Board of Trustees. Nominated by the independent Trustees, these
individuals have had outstanding careers as leaders in the investment
management industry. Myra R. Drucker is a Vice Chair of the Board of
Trustees of Sarah Lawrence College and serves as Chair of the New York Stock
Exchange (NYSE) Pension Managers Advisory Committee and as a Trustee of
Commonfund, a not-for-profit asset management firm. Richard B. Worley is
Managing Partner of Permit Capital LLC, an investment management firm. Both
Ms. Drucker and Mr. Worley are independent Trustees (i.e., Trustees who are
not "interested persons" of your fund or its investment advisor). Charles E.
Haldeman, Jr., the third new Trustee, is President and Chief Executive
Officer of Putnam Investments.
During the period covered by the following report, Putnam Municipal Income
Fund delivered respectable results. In the following pages, the fund
managers discuss fund performance, strategy, and their outlook for the rest
of the fund's fiscal year.
As always, we thank you for your support of the Putnam Funds.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
November 17, 2004
Report from Fund Management
Fund highlights
* For the six months ended September 30, 2004, Putnam Municipal Income
Fund's class A shares had a total return of 1.53% without sales charges
and -3.02% with maximum sales charge reflected.
* The fund's benchmark, the Lehman Municipal Bond Index, returned 1.42%
for the period.
* The average return for the fund's Lipper category, General Municipal
Debt Funds, was 1.08%.
* See the Performance Summary beginning on page 9 for additional fund
performance, comparative performance, and Lipper data.
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TOTAL RETURN FOR
PERIODS ENDED 9/30/04
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Class A
(inception 5/22/98) NAV POP
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6 months 1.53% -3.02%
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1 year 4.45 -0.24
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5 years 28.20 22.49
Annual average 5.09 4.14
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10 years 74.40 66.65
Annual average 5.72 5.24
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Annual average
(life of fund) 6.48 6.16
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Data is historical. 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. Performance assumes reinvestment of
distributions and does not account for taxes. Returns at NAV do not
reflect a sales charge of 4.50%. For the most recent month-end
performance, visit www.putnaminvestments.com. For a portion of the
period, this fund limited expenses, without which returns would have
been lower. A 2% short-term trading fee may be applied to shares
exchanged or sold within 5 days of purchase.
Performance commentary
High-yielding, lower-rated municipal bonds continued to outperform
lower-yielding, higher-quality municipal bonds during the six months ended
September 30, 2004. This is reflected in the fact that the fund's results at
net asset value (NAV) were slightly ahead of returns for its benchmark. The
fund invests in a mixture of bonds rated investment grade or higher and
lower-quality, higher-yielding bonds, while the index is composed primarily
of higher-quality bonds. Your fund's exposure to higher-yielding municipal
bonds also helped it provide above-average results relative to its Lipper
category. Because we had a relatively large commitment to a variety of
California municipal bonds, the increase in demand that followed the recent
upgrade in that state's credit rating also benefited the fund. However,
performance was negatively affected by a distressed holding, discussed on
page 5 of this report. We are maintaining our policy of broad
diversification in an effort to spread out risks among issues that pay
income exempt from federal income taxes.
FUND PROFILE
Putnam Municipal Income Fund seeks to provide as high a level of income free
from federal income tax as we believe is consistent with preservation of
capital. The fund invests in a nationally diversified portfolio of
investment-grade municipal bonds and higher-yielding, lower-rated municipal
bonds that give the portfolio higher income potential. The fund may be
suitable for investors who are seeking tax-exempt income and are willing to
accept the risks associated with below-investment-grade bonds.
Market overview
Over the past six months, which constitute the first half of your fund's
2005 fiscal year, the yield on the 10-year Treasury bond fell, and bond
prices, which move in the opposite direction of yields, rose. In mid-March,
just before the fiscal year began, the bond market had begun to anticipate a
change in the Federal Reserve Board's monetary policy. Treasury bonds sold
off sharply and pushed yields upward, as strong economic growth and rising
corporate profitability increased the likelihood that the Fed would raise
short-term interest rates at its June 30 meeting. Interestingly, when the
Fed announced what had been a widely anticipated 25-basis-point increase,
the bond market reversed course, and yields have since trended downward,
despite two subsequent rate increases of 25 basis points each. Since July,
long-term bond yields have fallen while, at the same time, short-term rates
have risen. This has resulted in a flattening of the yield curve.
Among uninsured bonds and bonds rated A and below, yield spreads remained
essentially flat for the period. However, these higher-yielding securities
continued to provide attractive income streams that contributed to the
fund's total return during the period. Municipal bonds issued by the State
of California were generally strong performers. The state's economy improved
to such an extent that three bond-rating agencies -- Moody's, Standard &
Poor's, and Fitch -- upgraded the state's credit rating. Yields on tobacco
settlement bonds rose sharply in the past six months, reflecting the
uncertainty of ongoing legal battles. Airline-related industrial development
bonds (IDBs) generally performed poorly as the industry continued to face
financial difficulties that were made worse by record high oil prices.
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MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 9/30/04
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Bonds
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Lehman Municipal Bond Index (tax-exempt bonds) 1.42%
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Lehman Aggregate Bond Index (broad bond market) 0.68%
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Lehman Government Bond Index (U.S Treasury and agency
securities) 0.04%
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Lehman Intermediate Treasury Bond Index
(intermediate-maturity U.S. Treasury bonds) -0.18%
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Equities
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S&P 500 Index (broad stock market) -0.18%
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S&P Utilities Index (utilities stocks) 5.35%
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Russell 2000 Growth Index (small-company growth stocks) -5.92%
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These indexes provide an overview of performance in different market
sectors for the six months ended 9/30/04.
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Strategy overview
Because we believe that the Fed is likely to continue to raise
short-term interest rates through mid-2005, we are positioning the
portfolio more defensively. This involves shortening the fund's
duration, which means reducing its sensitivity to changes in interest
rates. As part of our effort to accomplish this, we have entered into
swap agreements, an active strategy in which we swap a portion of the
fixed interest payments received by the fund for floating-rate interest
payments. The swaps potentially allow the fund to benefit from rising
interest rates without requiring the sale of the fund's intermediate- or
longer-term bonds to buy shorter-term bonds. Meanwhile, we continued to
trim and diversify the fund's positions in uninsured bonds and bonds
rated A and below, which have performed strongly. We maintained a
neutral position in California municipal bonds, which were in high
demand as that state got its fiscal house in order and its debt quality
was upgraded by the major bond-rating agencies. The fund maintained its
overweight position in tobacco settlement bonds. We sold some bonds
while closely monitoring developments in that sector. The fund had less
exposure to airline-related IDBs during the period than did its peers.
In previous fiscal years, the fund emphasized non-callable bonds --
bonds that the issuer is not permitted to redeem (or "call") before the
maturity date. These issues performed well as rates fell through March
2004, but during the spring we began to moderate this position, selling
non-callable bonds and purchasing callable issues scheduled to mature in
the 15- to 20-year range. We believe callable bonds may perform better
than non-callable bonds if interest rates rise and the yield curve
flattens further.
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
3/31/04 9/30/04
Average effective
maturity in years 8.1 8.0
Duration in years 5.8 5.4
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 holdings affected performance
During the reporting period, upgrades to the state of California's
credit rating had a powerful effect on the prices of all bonds issued
within the state. Bonds in many different categories benefited, as
investor perceptions of all California debt improved. California State
Department of Water Resources Power Supply revenue bonds are one insured
California issue that appreciated during the period. Even when bonds are
insured, increased investor demand can influence their price positively.
Similarly, the fund's position in Certificates of Participation issued
by Vallejo, California, for Marine World also rose in value. These bonds
were issued to help build the theme park and have been in the portfolio
for some time. The fundamentals affecting this issue remain unchanged,
but demand is up.
Your fund's holdings in Golden State Tobacco Securitization bonds also
served it well, even though most tobacco settlement bonds performed poorly
during the reporting period. The payments from tobacco settlement bonds are
secured by income promised to various states through settlements from
tobacco companies. The income could suffer as a result of
multibillion-dollar judgments against the companies and the market has been
shifting, as earlier optimism was overshadowed by concern about the
litigation environment. We remain watchful of the situation. However, the
fund's Golden State tobacco settlement bonds are double-backed, once by the
settlement and again by the state, which helped set this issue apart from
similar bonds in other municipalities.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa -- 32.4%
Aa -- 4.3%
A -- 13.6%
Baa -- 29.4%
Ba -- 13.2%
B -- 2.7%
Other -- 4.4%
Footnote reads:
As a percentage of market value as of 9/30/04. A bond rated Baa or
higher is considered investment grade. The chart reflects Moody's
ratings; percentages may include unrated bonds considered by Putnam
Management to be of comparable quality. Ratings will vary over time.
Even one distressed portfolio holding -- Valley Health System, California
Hospital -- contributed positively to performance as a result of the
California upgrade. We purchased revenue bonds issued for this
three-hospital system in 1996, but it experienced stiff competition and
revenue disappointments. We began selling portions of the position last year
as the hospital system's outlook deteriorated. Our outlook for these bonds
has not changed, but the recent increase in demand has enabled us to sell
them at higher prices.
Although high-yield municipal securities performed well across the board
during the past six months, there were a few individual securities that had
a negative impact on the fund's performance. One example is Louisiana Local
Government Environmental Facilities Community Development Authority Revenue
Bonds for St. James Place, a continuing-care retirement community. We
purchased these bonds early in 1996, but over time the system suffered from
overly optimistic projections and marketing difficulties. We had been
hopeful that a turnaround was possible. However, recently the fund joined
the remaining bondholders in a tentative agreement to tender our bonds back
to the issuer in exchange for a position in a newer bond that more closely
reflects the issuer's current income.
This disappointment reinforces the importance we have been placing on
diversification. As we have trimmed down large, older positions, we have
been establishing smaller positions in a variety of holdings in different
sectors. Real estate is one of the sectors we have favored, and we have been
purchasing bonds associated with projects in a variety of geographic areas.
These include real estate projects in Chula Vista, California and Las Vegas,
Nevada. The projects have been performing well and our overall projections
are for continued economic growth with low inflation, so we expect continued
positive results, especially from projects in these rapidly growing areas.
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.
OF SPECIAL INTEREST
Merger with Putnam Tax-Free High Yield Fund proposed
The fund's Trustees have approved the merger of your fund into Putnam
Tax-Free High Yield Fund, an open-end fund that, like your fund, invests
mainly in bonds that pay interest exempt from federal income tax. Putnam
Tax-Free High Yield Fund invests in a nationally diversified portfolio
of lower-rated, higher-yielding municipal bonds and investment-grade
municipal bonds. The proposed merger is expected to result in lower
expenses for shareholders of your fund due to the larger asset base of
the combined fund.
A prospectus/proxy statement containing more information about the
proposed merger is expected to be sent to shareholders of your fund in
the coming months. Completion of the merger is subject to a number of
conditions, including approval by shareholders of your fund at a
shareholder meeting.
This report is not an offer to sell, nor a solicitation of an offer to
buy, shares of any fund, nor is it a solicitation of a proxy. To receive
a free copy of the prospectus/proxy statement relating to the proposed
merger (which contains important information about fees, expenses, and
risk considerations) after a registration statement has been filed with
the SEC and becomes effective, please call 1-800-225-1581. The
prospectus/proxy statement will also be available without charge on the
SEC's Web site (www.sec.gov). Read the prospectus/proxy statement
carefully before making any investment decisions.
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 an environment of rising short-term interest rates, yields on
long-term bonds have fallen, and judging from the flattening yield
curve, the bond market appears to have largely shrugged off the recent
Fed rate hikes. However, we believe that interest rates all along the
yield curve are more likely to rise than fall. We anticipate greater
increases for bonds with shorter maturities because we believe the Fed
will continue to raise short-term rates incrementally through mid-2005.
This also suggests further flattening of the yield curve. We plan to
monitor the fund's duration and position the fund defensively. We
believe inflation will remain low, despite the threat posed by high oil
prices. We also anticipate the GDP growth rate will slow during the next
two quarters, as the effects of the Fed's tightening policy are felt.
In general, these signs indicate that we are headed into a more
challenging environment for bond investing. Our task will be to continue
to search for the most attractive opportunities among tax-exempt
securities, and to balance the pursuit of attractive current income with
prudent risk management.
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. 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. Mutual funds that invest in bonds are subject to
certain risks, including interest-rate risk, credit risk, and inflation
risk. As interest rates rise, the prices of bonds fall. Long-term bonds
are more exposed to interest-rate risk than short-term bonds. Unlike
bonds, bond funds have ongoing fees and expenses. Tax-free funds may not
be suitable for IRAs and other non-taxable accounts.
Your fund's management
Your fund is managed by the members of the Putnam Tax Exempt
Fixed-Income Team. David Hamlin is the Portfolio Leader, and Paul Drury,
Susan McCormack, and James St. John are Portfolio Members of your fund.
The Portfolio Leader and Portfolio Members coordinate the team's
management of the fund.
For a complete listing of the members of the Putnam Tax Exempt
Fixed-Income Team, including those who are not Portfolio Leaders or
Portfolio Members of your fund, visit Putnam's Individual Investor Web
site at www.putnaminvestments.com.
Other funds managed by the Portfolio Leader and Portfolio Members
David Hamlin is the Portfolio Leader and Paul Drury, Susan McCormack,
and James St. John are Portfolio Members for Putnam's tax-exempt funds
for the following states: Arizona, California, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, New York, Ohio, and Pennsylvania.
Additionally, the same group manages Putnam California Investment Grade
Municipal Trust, Putnam High Yield Municipal Trust, Putnam Investment
Grade Municipal Trust, Putnam Managed Municipal Income Trust, Putnam
Municipal Bond Fund, Putnam Municipal Opportunities Trust, Putnam New
York Investment Grade Municipal Trust, Putnam Tax Exempt Income Fund,
Putnam Tax-Free Health Care Fund, Putnam Tax-Free High Yield Fund, and
Putnam Tax-Free Insured Fund.
David Hamlin, Paul Drury, Susan McCormack, and James St. John may also
manage other accounts advised by Putnam Management or an affiliate.
Changes in your fund's Portfolio Leader and Portfolio Members
During the year ended September 30, 2004, Portfolio Member Richard Wyke
left your fund's management team, and Portfolio Member James St. John
joined your fund's management team.
Performance summary
This section shows your fund's performance during the first half of its
fiscal year, which ended September 30, 2004. Performance should always
be considered in light of a fund's investment strategy. Data represents
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 9/30/04
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Class A Class B Class C Class M
(inception dates) (5/22/89) (1/4/93) (2/1/99) (12/1/94)
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NAV POP NAV CDSC NAV CDSC NAV POP
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6 months 1.53% -3.02% 1.22% -3.74% 1.14% 0.15% 1.40% -1.84%
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1 year 4.45 -0.24 3.83 -1.15 3.78 2.78 4.19 0.82
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5 years 28.20 22.49 24.54 22.56 23.62 23.62 26.61 22.44
Annual average 5.09 4.14 4.49 4.15 4.33 4.33 4.83 4.13
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10 years 74.40 66.65 64.51 64.51 61.29 61.29 69.90 64.37
Annual average 5.72 5.24 5.10 5.10 4.90 4.90 5.44 5.10
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Annual average
(life of fund) 6.48 6.16 5.77 5.77 5.66 5.66 6.15 5.92
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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 4.50% and 3.25%, respectively. 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 B, C, and M shares before
their inception is derived from the historical performance of class A
shares, adjusted for the applicable sales charge (or CDSC) and higher
operating expenses for such shares. For a portion of the period, this fund
limited expenses, without which returns would have been lower.
A 2% short-term trading fee may be applied to shares exchanged or sold
within 5 days of purchase.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/04
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Lipper General
Lehman Municipal Debt
Municipal Funds category
Bond Index average*
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6 months 1.42% 1.08%
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1 year 4.59 3.95
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5 years 38.75 31.97
Annual average 6.77 5.69
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10 years 92.53 75.40
Annual average 6.77 5.76
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Annual average
(life of fund) 7.11 6.39
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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 9/30/04, there
were 299, 299, 230, and 128 funds, respectively, in this Lipper
category.
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PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 9/30/04
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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 $0.198670 $0.172824 $0.166642 $0.187896
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Capital gains 1 -- -- -- --
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Total $0.198670 $0.172824 $0.166642 $0.187896
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Share value: NAV POP NAV NAV NAV POP
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3/31/04 $8.74 $9.15 $8.74 $8.75 $8.74 $9.03
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9/30/04 8.67 9.08 8.67 8.68 8.67 8.96
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Current return (end of period)
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Current dividend rate 2 4.33% 4.14% 3.73% 3.58% 4.08% 3.95%
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Taxable equivalent 3 6.66 6.37 5.74 5.51 6.28 6.08
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Current 30-day SEC yield
(with expense limitation) 4 3.86 3.69 3.27 3.11 3.61 3.50
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Taxable equivalent 3,4 5.94 5.68 5.03 4.78 5.55 5.38
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Current 30-day SEC yield
(without expense limitation) 3.80 3.62 3.20 3.05 3.55 3.44
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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% federal tax rate for 2004. Results for investors
subject to lower tax rates would not be advantageous.
4 For a portion of the period, this fund limited expenses, without which
yields would have been lower. Based only on investment income, calculated
using SEC guidelines.
Understanding your
fund's expenses
As a mutual fund investor, you pay ongoing expenses, such as management
fees, distribution fees (12b-1 fees), and other expenses. In the most recent
six-month period, your fund limited these expenses; had it not done so,
expenses may have been higher. Using the information below, you can estimate
how these expenses affect your investment and compare them with the expenses
of other funds. You may also pay one-time transaction expenses, including
sales charges (loads) and redemption fees, which are not shown in this
section and would have resulted in higher total expenses. For more
information, see your fund's prospectus or talk to your financial advisor.
Review your fund's expenses
The table below shows the expenses you would have paid on a $1,000
investment in Putnam Municipal Income Fund from April 1, 2004, to September
30, 2004. It also shows how much a $1,000 investment would be worth at the
close of the period, assuming actual returns and expenses.
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EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming actual returns for the 6 months ended 9/30/04
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Class A Class B Class C Class M
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Expenses paid per $1,000* $4.55 $7.57 $8.32 $5.81
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Ending value (after expenses) $1,015.30 $1,012.20 $1,011.40 $1,014.00
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* Expenses for each share class are calculated using the fund's annualized
expense ratio for each class, which represents the ongoing expenses as a
percentage of net assets for the six months ended 9/30/04. The expense ratio
may differ for each share class (see the table at the bottom of the next
page). Expenses are calculated by multiplying the expense ratio by the
average account value for the period; then multiplying the result by the
number of days in the period; and then dividing that result by the number of
days in the year.
Estimate the expenses you paid
To estimate the ongoing expenses you paid for the six months ended September
30, 2004, use the calculation method below. To find the value of your
investment on April 1, 2004, go to www.putnaminvestments.com and log on to
your account. Click on the "Transaction History" tab in your Daily Statement
and enter 04/01/2004 in both the "from" and "to" fields. Alternatively, call
Putnam at 1-800-225-1581.
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HOW TO CALCULATE THE EXPENSES YOU PAID
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Total
Value of your Expenses paid expenses
investment on 4/1/04 [DIV] $1,000 X per $1,000 = paid
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Example Based on a $10,000 investment in class A shares of your fund.
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$10,000 [DIV] $1,000 X $4.55 (see table above) = $45.50
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Comparing your fund's expenses with those of other funds
Using the SEC's method to compare expenses
The Securities and Exchange Commission (SEC) has established guidelines to
help investors assess fund expenses. Per these guidelines, the table below
shows your fund's expenses based on a $1,000 investment, assuming a
hypothetical 5% annualized return. You can use this information to compare
the ongoing expenses (but not transaction expenses or total costs) of
investing in the fund with those of other funds. All mutual fund shareholder
reports will provide this information to help you make this comparison.
Please note that you cannot use this information to estimate your actual
ending account balance and expenses paid during the period.
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EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming a hypothetical 5% annualized return for the 6 months ended 9/30/04
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Class A Class B Class C Class M
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Expenses paid per $1,000* $4.56 $7.59 $8.34 $5.82
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Ending value (after expenses) $1,020.56 $1,017.55 $1,016.80 $1,019.30
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* Expenses for each share class are calculated using the fund's annualized
expense ratio for each class, which represents the ongoing expenses as a
percentage of net assets for the six months ended 9/30/04. The expense ratio
may differ for each share class (see the table at the bottom of this page).
Expenses are calculated by multiplying the expense ratio by the average
account value for the period; then multiplying the result by the number of
days in the period; and then dividing that result by the number of days in
the year.
Using industry averages to compare expenses
You can also compare your fund's expenses with industry averages, as
determined by Lipper, an independent fund-rating agency that ranks funds
relative to others that Lipper considers to have similar investment styles
or objectives. The expense ratio for each share class shown below indicates
how much of your fund's net assets have been used to pay ongoing expenses
during the period.
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EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA
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Class A Class B Class C Class M
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Your fund's annualized
expense ratio 0.90% 1.50% 1.65% 1.15%
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Average annualized expense
ratio for Lipper peer group+ 0.90% 1.50% 1.65% 1.15%
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+ For class A shares, expenses shown represent the average of the expenses
of front-end load funds viewed by Lipper as having the same investment
classification or objective as the fund, calculated in accordance with
Lipper's standard reporting methodology for comparing expenses within a
given universe. All Lipper data is for the most recent fiscal periods
available as of 9/30/04. For class B, C, and M shares, Putnam has adjusted
the Lipper total expense average to reflect higher 12b-1 fees incurred by
these classes of shares. The peer group may include funds that are
significantly larger or smaller than the fund, which may limit the
comparability of the fund's expenses to the Lipper average.
Understanding your fund's
portfolio turnover
Putnam funds are actively managed by teams of experts who buy and sell
securities based on intensive analysis of companies, industries, economies,
and markets. Portfolio turnover is a measure of how often a fund's managers
buy and sell securities for your fund. A portfolio turnover of 100%, for
example, means that the managers sold and replaced securities valued at 100%
of a fund's assets within a one-year period. Funds with high turnover may be
more likely to generate capital gains and dividends that must be distributed
to shareholders as taxable income. High turnover may also cause a fund to
pay more brokerage commissions and other transaction costs, which may
detract from performance.
Funds that invest in bonds may have higher turnover than funds that invest
only in stocks. Short-term bond funds tend to have higher turnover than
longer-term bond funds, because shorter-term bonds will mature or be sold
more frequently than longer-term bonds. You can use the table below to
compare your fund's turnover with the average turnover for funds in its
Lipper category.
- -----------------------------------------------------------------------------
TURNOVER COMPARISONS
percentage of holdings that change every year
- -----------------------------------------------------------------------------
2004 2003 2002 2001 2000
- -----------------------------------------------------------------------------
Putnam Municipal
Income Fund 19% 32% 16% 13% 14%
- -----------------------------------------------------------------------------
Lipper General Municipal
Debt Funds category average 54% 45% 47% 49% 98%
- -----------------------------------------------------------------------------
Turnover data for the fund is calculated based on the fund's fiscal-year
period, which ends on March 31. Turnover data for the fund's Lipper category
is calculated based on the average of the turnover of each fund in the
category for its fiscal year ended during the indicated year. Fiscal years
vary across funds in the Lipper category, which may limit the comparability
of the fund's portfolio turnover rate to the Lipper average. Comparative
data for 2004 is based on information available as of 9/30/04.
Risk comparison
As part of new initiatives to enhance disclosure, we are including a risk
comparison to help you understand how your fund compares with other funds.
The comparison utilizes a risk measure developed by Morningstar, an
independent fund-rating agency. This risk measure is referred to as the
fund's Overall Morningstar Risk.
[GRAPHIC OMITTED: chart MORNINGSTAR [REGISTRATION MARK] RISK]
MORNINGSTAR [REGISTRATION MARK] RISK
Fund's Overall
Morningstar Risk 0.18
Municipal bond
fund average 0.22
0% INCREASING RISK 100%
Your fund's Overall Morningstar Risk is shown alongside that of the average
fund in its broad asset class, as determined by Morningstar. The risk bar
broadens the comparison by translating the fund's Overall Morningstar Risk
into a percentile, which is based on the fund's ranking among all funds
rated by Morningstar as of September 30, 2004. A higher Overall Morningstar
Risk generally indicates that a fund's monthly returns have varied more
widely.
Morningstar determines a fund's Overall Morningstar Risk by assessing
variations in the fund's monthly returns -- with an emphasis on downside
variations -- over 3-, 5-, and 10-year periods, if available. Those measures
are weighted and averaged to produce the fund's Overall Morningstar Risk.
The information shown is provided for the fund's class A shares only;
information for other classes may vary. Overall Morningstar Risk is based on
historical data and does not indicate future results. Morningstar does not
purport to measure the risk associated with a current investment in a fund,
either on an absolute basis or on a relative basis. Low Overall Morningstar
Risk does not mean that you cannot lose money on an investment in a fund.
Copyright 2004 Morningstar, Inc. All Rights Reserved. The information
contained herein (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted to
be accurate, complete, or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information.
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. NAV
is calculated by dividing the net assets of each class of shares by the
number of outstanding shares in the class.
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 4.50% 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 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 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.
Proxy voting
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. The Putnam funds' proxy voting guidelines and
procedures, as well as information regarding how your fund voted proxies
relating to portfolio securities during the 12-month period ended June
30, 2004, are available on the Putnam Individual Investor Web site,
www.putnaminvestments.com/individual, and on the SEC's Web site,
www.sec.gov. If you have questions about finding forms on the SEC's Web
site, you may call the SEC at 1-800-SEC-0330. You may also obtain the
Putnam funds' proxy voting guidelines and procedures at no charge by
calling Putnam's Shareholder Services at 1-800-225-1581.
Fund portfolio holdings
For periods ending on or after July 9, 2004, the fund will file a
complete schedule of its portfolio holdings with the SEC for the first
and third quarters of each fiscal year on Form N-Q. Shareholders may
obtain the fund's Forms N-Q on the SEC's Web site at www.sec.gov. In
addition, the fund's Forms N-Q may be reviewed and copied at the SEC's
public reference room in Washington, D.C. You may call the SEC at
1-800-SEC-0330 for information about the SEC's Web site or the operation
of the public reference room.
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 the fund's net investment gain or loss, 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
September 30, 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
VRDN Variable Rate Demand Notes
Municipal bonds and notes (96.5%) (a)
Principal amount Rating (RAT) Value
Alabama (0.6%)
- -------------------------------------------------------------------------------
$4,640,000 Jackson Cnty., Hlth. Care Auth.
Rev. Bonds, 5.7s, 5/1/19 BB+ $4,297,800
Arizona (1.4%)
- -------------------------------------------------------------------------------
3,300,000 Casa Grande, Indl. Dev. Auth.
Rev. Bonds (Casa Grande Regl. Med.
Ctr.), Ser. A, 7 5/8s, 12/1/29 B-/P 3,473,250
2,800,000 Cochise Cnty., Indl. Dev. Auth.
Rev. Bonds (Sierra Vista Cmnty.
Hosp.), 6.45s, 12/1/17 BB+/P 2,957,500
2,000,000 Maricopa Cnty., Poll. Control
Rev. Bonds (Pub. Service - Palo
Verde), Ser. A, 4s, 1/1/38 Baa2 2,012,500
2,500,000 Navajo Cnty., Indl. Dev. Rev. Bonds
(Stone Container Corp.), 7.2s,
6/1/27 B/P 2,600,000
--------------
11,043,250
Arkansas (1.0%)
- -------------------------------------------------------------------------------
3,900,000 AR State Hosp. Dev. Fin. Auth.
Rev. Bonds (Washington Regl. Med.
Ctr.), 7 3/8s, 2/1/29 Baa3 4,304,625
3,415,000 Northwest Regl. Arpt. Auth.
Rev. Bonds, 7 5/8s, 2/1/27 BB/P 3,688,200
--------------
7,992,825
California (14.3%)
- -------------------------------------------------------------------------------
5,000,000 Anaheim, Pub. Fin. Auth. Lease 144A
Rev. Bonds (Pub. Impts.), Ser. A,
FSA, 6s, 9/1/24 Aaa 5,950,000
425,000 Association of Bay Area Governments
(ABAG) Fin. Auth. for Nonprofit
Corps. Rev. Bonds (San Diego Hosp.
Assn.), Ser. C, 5 3/8s, 3/1/21 Baa1 432,438
CA Rev. Bonds
1,250,000 (Adventist Hlth. Syst.), Ser. A, 5s,
3/1/33 A 1,229,688
2,500,000 (Stanford Hosp. & Clinics), Ser. A,
5s, 11/15/23 A3 2,531,250
2,000,000 CA State G.O. Bonds, 5.1s, 2/1/34 A 2,027,500
CA State Dept. of Wtr. Resources
Pwr. Supply Rev. Bonds, Ser. A
18,000,000 AMBAC, 5 1/2s, 5/1/13 Aaa 20,542,500
7,000,000 5 1/2s, 5/1/11 A2 7,892,500
2,000,000 5 1/8s, 5/1/18 A2 2,147,500
3,650,000 CA State Econ. Recvy. G.O. Bonds,
Ser. A, 5s, 7/1/17 Aa3 3,891,813
4,240,000 CA State Pub. Wks. Board Lease
Rev. Bonds (Dept. of
Corrections-State Prisons), Ser. A,
AMBAC, 5s, 12/1/19 Aaa 4,679,900
900,000 Chula Vista, Cmnty. Fac. Dist.
Special Tax (No. 07-I Otay Ranch
Village Eleven), 5.8s, 9/1/28 BB-/P 921,375
13,900,000 Corona, COP (Vista Hosp. Syst.),
zero %, 7/1/29 (In default) (NON) D/P 278,000
2,960,000 Gilroy, Rev. Bonds (Bonfante Gardens
Park), 8s, 11/1/25 D/P 2,090,500
5,000,000 Golden State Tobacco Securitization
Corp. Rev. Bonds, Ser. B, 5 5/8s,
6/1/38 A- 5,218,750
1,400,000 LA Tax Alloc. Rev. Bonds (No. 5 &
6), MBIA, 5 1/4s, 2/1/19 Aaa 1,580,250
1,215,000 Lancaster, Fin. Auth. Tax Alloc.
Rev. Bonds (No. 5 & 6), MBIA, 5s,
2/1/16 Aaa 1,345,613
Orange Cnty., Cmnty. Fac. Dist.
Special Tax
1,240,000 (No. 03-1 Ladera Ranch), Ser. A,
5.4s, 8/15/21 BB/P 1,260,150
1,250,000 (No. 02-1 Ladera Ranch), Ser. A,
5.55s, 8/15/33 BB+/P 1,256,250
5,600,000 Orange Cnty., Local Trans. Auth.
Sales Tax IFB, 10.544s, 2/14/11 AA+ 7,273,000
4,000,000 Orange Cnty., Local Trans. Auth.
Sales Tax Rev. Bonds, AMBAC, 6.2s,
2/14/11 Aaa 4,615,000
1,700,000 Rancho Mirage, JT Powers Fin. Auth.
Rev. Bonds (Eisenhower Med. Ctr.),
5 7/8s, 7/1/26 A3 1,785,000
10,000,000 San Joaquin Hills, Trans. Corridor
Agcy. Toll Rd. Rev. Bonds, 7.55s,
1/1/10 Aaa 11,862,500
1,980,000 Santaluz Cmnty., Facs. Dist. No. 2
Special Tax Rev. Bonds (Impt. Area
No. 1), Ser. B, 6 3/8s, 9/1/30 BB+/P 2,029,500
2,220,000 Sunnyvale, Special Tax Rev. Bonds
(Cmnty. Fac. Dist. No. 1), 7 3/4s,
8/1/32 BB-/P 2,258,850
4,815,000 Thousand Oaks, Cmnty. Fac. Dist.
Special Tax Rev. Bonds (Marketplace
94-1), zero %, 9/1/14 B/P 2,371,388
11,840,000 Vallejo, COP (Marine World
Foundation), 7s, 2/1/17 BBB-/P 11,943,600
750,000 Valley Hlth. Syst. Hosp. Rev. Bonds,
Ser. A, 6 1/2s, 5/15/25 B+ 692,813
--------------
110,107,628
Colorado (0.9%)
- -------------------------------------------------------------------------------
3,310,000 Denver, City & Cnty. Arpt.
Rev. Bonds, Ser. A, 7 1/2s, 11/15/23 A 3,395,564
3,000,000 Larimer Cnty., G.O. Bonds (Poudre
Impt. - School Dist. No. 1), 7s,
12/15/16 Aa3 3,885,000
--------------
7,280,564
Connecticut (1.1%)
- -------------------------------------------------------------------------------
CT State Dev. Auth. Rev. Bonds
1,302,223 (East Hills Woods), Ser. A, 7 3/4s,
11/1/17 B-/P 1,035,279
1,000,000 (Elm Park Baptist), 5s, 12/1/13 BBB+ 1,037,500
147,496 (East Hills Woods), Ser. B, zero %,
3/1/21 B-/P 4,425
6,000,000 CT State Dev. Auth. Poll. Control
Rev. Bonds (Western MA), Ser. A,
5.85s, 9/1/28 A3 6,322,500
--------------
8,399,704
District of Columbia (5.8%)
- -------------------------------------------------------------------------------
31,750,000 DC G.O. Bonds, Ser. A, 6 3/8s,
6/1/26 AAA 34,766,250
DC Rev. Bonds (American Geophysical
Union)
4,200,000 5 7/8s, 9/1/23 BBB 4,221,714
3,095,000 5 3/4s, 9/1/13 BBB 3,112,703
3,000,000 DC Tobacco Settlement Fin. Corp.
Rev. Bonds, 6 1/2s, 5/15/33 BBB 2,763,750
--------------
44,864,417
Florida (3.2%)
- -------------------------------------------------------------------------------
2,500,000 Cap. Trust Agcy. Rev. Bonds
(Seminole Tribe Convention), Ser. A,
10s, 10/1/33 B/P 2,996,875
CFM Cmnty. Dev. Dist. Rev. Bonds
1,000,000 Ser. A, 6 1/4s, 5/1/35 BB-/P 1,021,250
500,000 (Cap. Impt.), Ser. B, 5 7/8s, 5/1/14 BB-/P 508,750
1,650,000 Escambia Cnty., Hlth. Fac. Auth.
Rev. Bonds (Baptist Hosp. & Baptist
Manor), 5 1/8s, 10/1/19 A3 1,656,188
3,000,000 Highlands Cnty., Hlth. Fac. Auth.
Rev. Bonds (Adventist Sunbelt),
Ser. A, 6s, 11/15/31 A 3,213,750
1,050,000 Lee Cnty., Indl. Dev. Auth. Hlth.
Care Fac. Rev. Bonds (Shell Point
Village), Ser. A, 5 1/2s, 11/15/29 BBB- 1,009,313
2,000,000 Miami Beach, Hlth. Fac. Auth. Hosp.
Rev. Bonds (Mount Sinai Med. Ctr.),
Ser. A, 6.7s, 11/15/19 BB 2,072,500
4,750,000 Orange Cnty., Hlth. Fac. Auth. IFB,
9.69s, 10/1/14 (acquired 4/19/95,
cost $6,129,272) (RES) AAA/P 7,469,375
1,300,000 Orange Cnty., Hlth. Fac. Auth.
Rev. Bonds (Orlando Regl. Hlth.
Care), 5 3/4s, 12/1/32 A2 1,366,625
1,500,000 Reunion West, Cmnty. Dev. Dist.
Special Assmt., 6 1/4s, 5/1/36 BB-/P 1,520,625
500,000 Sterling Hill, Cmnty. Dev. Dist.
Rev. Bonds, Ser. B, 5 1/2s, 11/1/10 BB- 507,500
920,000 Verandah, West Cmnty. Dev. Dist.
Rev. Bonds (Cap. Impt.), Ser. B,
5 1/4s, 5/1/08 BB-/P 930,350
--------------
24,273,101
Georgia (1.0%)
- -------------------------------------------------------------------------------
4,000,000 Burke Cnty., Poll. Control Dev.
Auth. Mandatory Put Bonds (GA Power
Co.), 4.45s, 11/30/08 A2 4,205,000
Rockdale Cnty., Dev. Auth. Solid
Waste Disp. Rev. Bonds (Visay Paper,
Inc.)
1,600,000 7 1/2s, 1/1/26 BB+/P 1,655,664
1,800,000 7.4s, 1/1/16 BB+/P 1,864,044
--------------
7,724,708
Illinois (1.4%)
- -------------------------------------------------------------------------------
1,745,000 Chicago, O'Hare Intl. Arpt. Special
Fac. Rev. Bonds (American Airlines,
Inc.), 8.2s, 12/1/24 Caa2 1,286,938
IL Hlth. Fac. Auth. Rev. Bonds
575,000 (Cmnty. Rehab. Providers Fac.),
8 1/4s, 8/1/12 D/P 552,719
2,470,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, 7 7/8s, 7/1/20 (Prerefunded) AAA/P 2,631,736
415,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, 7 7/8s, 7/1/20 D/P 334,075
4,790,000 (Hindsdale Hosp.), Ser. A, 6.95s,
11/15/13 Baa1 5,604,300
--------------
10,409,768
Indiana (1.7%)
- -------------------------------------------------------------------------------
1,595,000 Anderson Indpt. School Bldg. Corp.
Rev. Bonds (First Mtge.), FSA,
5 1/2s, 7/15/25 AAA 1,738,550
2,605,000 IN State Office Bldg. Communication
Facs. Rev. Bonds (Southeast Regl.
Treatment Ctr.), Ser. E, AMBAC, 5s,
7/1/26 Aaa 2,663,613
5,500,000 Indianapolis, Arpt. Auth. Rev. Bonds
(Federal Express Corp.), 5.1s,
1/15/17 Baa2 5,726,875
3,000,000 Rockport, Poll. Control
Rev. Bonds (Indiana-Michigan Pwr.),
Ser. A, 4.9s, 6/1/25 Baa2 3,131,250
--------------
13,260,288
Iowa (1.0%)
- -------------------------------------------------------------------------------
6,355,000 IA Fin. Auth. Hlth. Care Fac.
Rev. Bonds (Care Initiatives),
9 1/4s, 7/1/25 BBB-/P 7,697,494
Kentucky (0.4%)
- -------------------------------------------------------------------------------
3,000,000 KY Econ. Dev. Fin. Auth. Hlth. Syst.
Rev. Bonds (Norton Healthcare,
Inc.), Ser. A, 6 5/8s, 10/1/28 BBB/P 3,195,000
Louisiana (2.9%)
- -------------------------------------------------------------------------------
5,700,000 LA Local Govt. Env. Fac. Cmnty. Dev.
Auth. Rev. Bonds (St. James Place),
Ser. A, 8s, 11/1/19 B-/P 3,833,250
LA Pub. Fac. Auth. Hosp. Rev. Bonds
2,850,000 (Lake Charles Memorial Hosp.),
8 5/8s, 12/1/30 CCC/P 2,283,563
5,000,000 (Franciscan Missionaries), FSA,
5 3/4s, 7/1/18 Aaa 5,912,500
2,000,000 Port of New Orleans, Indl. Dev.
Rev. Bonds (Continental Grain Co.),
7 1/2s, 7/1/13 BB- 2,035,520
3,000,000 St. Charles Parish, Poll. Control
Rev. Bonds, Ser. A, 4.9s, 6/1/30 Baa2 3,048,390
900,000 Tangipahoa Parish Hosp. Svcs.
Rev. Bonds (North Oaks Med. Ctr.),
Ser. A, 5s, 2/1/25 A 894,375
4,000,000 W. Feliciana Parish, Poll. Control
Rev. Bonds (Entergy Gulf States),
Ser. B, 6.6s, 9/1/28 Ba1 4,090,000
--------------
22,097,598
Maine (0.3%)
- -------------------------------------------------------------------------------
2,000,000 Rumford, Solid Waste Disp.
Rev. Bonds (Boise Cascade Corp.),
6 7/8s, 10/1/26 Ba2 2,072,500
Maryland (1.0%)
- -------------------------------------------------------------------------------
2,000,000 MD State Hlth. & Higher Edl. Fac.
Auth. Rev. Bonds (Medstar Hlth.),
5 3/8s, 8/15/24 Baa2 2,027,500
4,000,000 MD State Trans. Auth. VRDN
(Baltimore/ Washington Arpt.), Class
A, 1.7s, 7/1/13 VMIG1 4,000,000
2,000,000 Westminster, Econ. Dev. Rev. Bonds
(Carroll Lutheran Village), Ser. A,
6s, 5/1/24 BB/P 2,032,500
--------------
8,060,000
Massachusetts (5.0%)
- -------------------------------------------------------------------------------
1,975,000 MA Dev. Fin. Agcy. Rev. Bonds
(Semass Syst.), Ser. A, MBIA,
5 5/8s, 1/1/12 Aaa 2,236,688
MA State G.O. Bonds
5,285,000 Ser. C, 5 3/4s, 8/1/11 Aaa 6,117,388
7,850,000 Ser. A, 5 3/4s, 8/1/09 Aaa 8,919,563
3,380,000 MA State Dev. Fin. Agcy.
Rev. Bonds (Lasell College), 6 3/4s,
7/1/31 B+ 3,409,575
MA State Hlth. & Edl. Fac. Auth.
Rev. Bonds
2,500,000 (Civic Investments), Ser. A, 9s,
12/15/15 BB/P 2,868,750
2,000,000 (Jordan Hosp.), Ser. E, 6 3/4s,
10/1/33 BBB- 2,087,500
3,900,000 (UMass Memorial), Ser. C, 6 5/8s,
7/1/32 Baa2 4,124,250
2,200,000 (Berkshire Hlth. Syst.), Ser. E,
6 1/4s, 10/1/31 BBB+ 2,293,500
2,700,000 (Hlth. Care Syst. Covenant Hlth.),
Ser. E, 6s, 7/1/31 A- 2,818,125
3,700,000 MA State Wtr. Resource Auth. VRDN
(Multi-Modal), Ser. C, 1.8s, 8/1/20 VMIG1 3,700,000
--------------
38,575,339
Michigan (1.6%)
- -------------------------------------------------------------------------------
297,000 Ann Arbor, Econ. Dev. Corp. Ltd.
Oblig. Rev. Bonds (Glacier Hills,
Inc.), State & Local Govt.
Coll., 8 3/8s, 1/15/19 AAA 396,866
5,000,000 Dickinson Cnty., Econ. Dev. Corp.
Rev. Bonds, 5 3/4s, 6/1/16 Baa2 5,400,000
1,000,000 Flint, Hosp. Bldg. Auth. Rev. Bonds
(Hurley Med. Ctr.), 6s, 7/1/20 Baa3 1,010,000
2,500,000 MI State Hosp. Fin. Auth. Rev. Bonds
(Oakwood Hosp.), Ser. A, 5 3/4s,
4/1/32 A2 2,593,750
MI State Strategic Fund Solid Waste
Disp. Rev. Bonds
1,000,000 (Genesee Pwr. Station), 7 1/2s,
1/1/21 B/P 883,750
2,000,000 (SD Warren Co.), Ser. C, 7 3/8s,
1/15/22 BB/P 2,077,500
--------------
12,361,866
Minnesota (0.5%)
- -------------------------------------------------------------------------------
4,100,000 St. Paul, Hsg. & Hosp. Redev. Auth.
Rev. Bonds (Healtheast), Ser. A,
6 5/8s, 11/1/17 Ba2 4,131,898
Mississippi (0.5%)
- -------------------------------------------------------------------------------
4,000,000 MS Bus. Fin. Corp. Poll. Control
Rev. Bonds (Syst. Energy Resources,
Inc.), 5 7/8s, 4/1/22 Ba1 4,024,920
Missouri (1.3%)
- -------------------------------------------------------------------------------
3,000,000 Cape Girardeau Cnty., Indl. Dev.
Auth. Hlth. Care Fac. Rev. Bonds
(St. Francis Med. Ctr.),
Ser. A, 5 1/2s, 6/1/32 A 3,071,250
2,500,000 MO State Hlth. & Edl. Fac. Auth.
Rev. Bonds (BJC Hlth. Syst.),
5 1/4s, 5/15/32 Aa2 2,562,500
4,295,000 MO State Hlth. & Edl. Fac. Auth.
VRDN (Cox Hlth. Syst.), AMBAC, 1.8s,
6/1/22 VMIG1 4,295,000
--------------
9,928,750
Montana (0.5%)
- -------------------------------------------------------------------------------
3,325,000 Forsyth, Poll. Control Mandatory Put
Bonds (Avista Corp.), AMBAC, 5s,
12/30/08 Aaa 3,578,531
Nevada (1.5%)
- -------------------------------------------------------------------------------
2,000,000 Clark Cnty., Rev. Bonds, Ser. B,
FGIC, 5 1/4s, 7/1/20 Aaa 2,142,500
3,745,000 Clark Cnty., Arpt. Rev. Bonds,
Ser. B, FGIC, 5 1/4s, 7/1/19 Aaa 4,053,963
1,000,000 Clark Cnty., Impt. Dist. Special
Assmt. (Dist. No. 142), 6 3/8s,
8/1/23 BB- 1,013,750
Henderson, Local Impt. Dist. Special
Assmt. Bonds (No. T-14)
700,000 5.8s, 3/1/23 BB-/P 716,625
2,250,000 4s, 3/1/08 BB-/P 2,264,063
Las Vegas, Local Impt. Board Special
Assmt.
200,000 (Dist. No. 607), 5.9s, 6/1/18 BB-/P 205,500
1,000,000 (Special Impt. Dist. No. 607), 6s,
6/1/19 BB-/P 1,030,110
--------------
11,426,511
New Hampshire (2.1%)
- -------------------------------------------------------------------------------
NH Higher Ed. & Hlth. Fac. Auth.
Rev. Bonds
880,000 (Havenwood-Heritage Heights), 7.1s,
1/1/06 BB-/P 896,500
3,000,000 (Rivermead at Peterborough), 5 3/4s,
7/1/28 BB/P 2,801,250
NH State Bus. Fin. Auth. Rev. Bonds
500,000 (Alice Peck Day Hlth. Syst.),
Ser. A, 7s, 10/1/29 BBB-/P 503,125
1,810,000 (Franklin Regl. Hosp. Assn.),
Ser. A, 6.05s, 9/1/29 BB-/P 1,708,188
NH State Bus. Fin. Auth. Poll.
Control Rev. Bonds
7,000,000 (Pub. Svc. Co.), Ser. D, 6s, 5/1/21 A3 7,332,500
2,600,000 3 1/2s, 7/1/27 Baa2 2,609,750
--------------
15,851,313
New Jersey (3.3%)
- -------------------------------------------------------------------------------
NJ Econ. Dev. Auth. Rev. Bonds
4,400,000 (Newark Arpt. Marriot Hotel), 7s,
10/1/14 Ba3 4,532,000
2,405,000 (1st Mtge.-Cranes Hill), Ser. A, 7s,
2/1/10 BB-/P 2,492,181
5,000,000 (Motor Vehicle), Ser. A, MBIA, 5s,
7/1/27 Aaa 5,181,250
900,000 NJ Econ. Dev. Auth. Special Fac.
Rev. Bonds (Continental Airlines,
Inc.), 6 1/4s, 9/15/29 B 664,875
6,000,000 NJ Hlth. Care Fac. Fin. Auth.
Rev. Bonds (Gen. Hosp. Ctr.-Passaic
Inc.), FSA, 6 3/4s, 7/1/19 Aaa 7,597,500
1,250,000 NJ State Ed. Fac. Auth. Rev. Bonds
(Stevens Inst. of Tech.), Ser. C,
5 1/8s, 7/1/22 Baa1 1,296,875
1,970,000 NJ State Tpk. Auth. Rev. Bonds,
Ser. C, MBIA, 6 1/2s, 1/1/16 Aaa 2,413,250
1,535,000 Tobacco Settlement Fin. Corp.
Rev. Bonds, 6 1/4s, 6/1/43 BBB 1,364,231
--------------
25,542,162
New Mexico (0.2%)
- -------------------------------------------------------------------------------
1,740,000 Farmington, Poll. Control Mandatory
Put Bonds (Pub. Svc. San Juan),
Class B, 2.1s, 4/1/06 Baa2 1,731,300
New York (10.9%)
- -------------------------------------------------------------------------------
2,000,000 Albany, Indl. Dev. Agcy.
Rev. Bonds (Charitable Leadership),
Ser. A, 5 3/4s, 7/1/26 Baa3 2,065,000
10,000,000 Long Island, Pwr. Auth. NY Elec.
Syst. IFB, Ser. 66, MBIA, 8.51s,
4/1/10 (acquired 11/3/98, cost
$11,298,800) (RES) AAA 11,937,500
7,000,000 Long Island, Pwr. Auth. NY Elec.
Syst. Rev. Bonds, Ser. A, 5 3/4s,
12/1/24 A- 7,507,500
9,580,000 Metro. Trans. Auth. Rev. Bonds,
FGIC, 5 1/2s, 7/1/15 Aaa 11,172,675
7,500,000 NY City, G.O. Bonds, Ser. C, 5 1/2s,
8/1/12 A2 8,465,625
2,800,000 NY City, State Dorm. Auth. Lease
Rev. Bonds (Court Fac.), 6s, 5/15/39 A 3,031,000
NY State Dorm. Auth. Rev. Bonds
10,785,000 (Personal Income Tax), FGIC, 5 1/2s,
3/15/12 Aaa 12,389,269
4,350,000 (NY U.), Ser. B, MBIA, 5s, 7/1/11 Aaa 4,855,688
5,000,000 NY State Energy Research & Dev.
Auth. Poll. Control Rev. Bonds
(Lilco), Ser. B, 5.15s, 3/1/16 A1 5,121,250
10,000,000 NY State Env. Fac. Corp. Poll.
Control Rev. Bonds (State Wtr.
Sub-Revolving Fund), Ser. E, MBIA,
6s, 6/15/10 Aaa 11,650,000
1,500,000 Oneida Cnty., Indl. Dev. Agcy.
Rev. Bonds (St. Elizabeth Med.),
Ser. A, 5 7/8s, 12/1/29 BB-/P 1,342,500
3,900,000 Onondaga Cnty., Indl. Dev. Agcy.
Rev. Bonds (Solvay Paperboard, LLC),
7s, 11/1/30 BB-/P 4,114,500
--------------
83,652,507
North Carolina (4.1%)
- -------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Syst.
Rev. Bonds
2,200,000 Ser. B, FGIC, 6.42s, 1/1/25 Aaa 2,648,250
3,800,000 Ser. B, FGIC, 6s, 1/1/22 Aaa 4,626,500
10,000,000 Ser. B, MBIA, 6s, 1/1/22 Aaa 12,175,000
5,250,000 AMBAC, 6s, 1/1/18 Aaa 6,372,188
5,000,000 NC State Muni. Pwr. Agcy. Rev. Bonds
(No. 1, Catawba Elec.), Ser. B,
6 1/2s, 1/1/20 Baa1 5,618,750
--------------
31,440,688
Ohio (3.6%)
- -------------------------------------------------------------------------------
1,500,000 Cleveland-Cuyahoga Cnty., Port.
Auth. Rev. Bonds (Rock & Roll Hall
of Fame), FSA, 3.6s, 12/1/14 Aaa 1,500,855
4,500,000 Cuyahoga Cnty., Rev. Bonds, Ser. A,
6s, 1/1/15 A1 5,146,875
2,010,000 Marion Cnty., Hlth. Care Fac.
Rev. Bonds (United Church Homes),
6 3/8s, 11/15/10 BBB- 2,042,663
3,910,000 OH State Bldg. Auth. Rev. Bonds
(Administration Bldg.), Ser. A, 5s,
10/1/18 Aa2 4,139,713
5,000,000 OH State Higher Edl. Fac. FRB
(Kenyon College), 4.7s, 7/1/37 A2 5,243,750
OH State Higher Edl. Fac.
Rev. Bonds (Case Western Reserve U.)
3,000,000 5 1/2s, 10/1/22 AA- 3,307,500
2,000,000 5 1/2s, 10/1/21 AA- 2,217,500
750,000 OH State Wtr. Dev. Auth. Poll.
Control Fac. Mandatory Put Bonds
(Cleveland Elec.), Class A, 3.75s,
10/1/08 Baa2 752,813
3,000,000 OH State Wtr. Dev. Auth. Solid Waste
Disp. Rev. Bonds (North Star Broken
Hill Steel), 6.45s, 9/1/20 A+ 3,157,890
--------------
27,509,559
Oregon (0.5%)
- -------------------------------------------------------------------------------
3,950,000 Multnomah Cnty., Hosp. Fac. Auth.
Rev. Bonds (Terwilliger Plaza),
6 1/2s, 12/1/29 BB-/P 4,033,938
Pennsylvania (7.0%)
- -------------------------------------------------------------------------------
5,000,000 Allegheny Cnty., Indl. Dev. Auth.
Rev. Bonds (Env. Imports), 4 3/4s,
12/1/32 Baa1 5,387,500
Allentown, Hosp. Auth. Rev. Bonds
(Sacred Heart Hosp.), Ser. A
500,000 6 3/4s, 11/15/14 Baa3 502,500
1,000,000 6 1/2s, 11/15/08 Baa3 1,011,080
2,850,000 Beaver Cnty., Indl. Dev. Auth. Poll.
Control Mandatory Put Bonds
(Cleveland Elec.), 3.75s, 10/1/08 Baa2 2,846,438
1,695,000 Carbon Cnty., Indl. Dev. Auth.
Rev. Bonds (Panther Creek
Partners), 6.65s, 5/1/10 BBB- 1,834,838
1,725,000 Chester Cnty., Hlth. & Ed. Fac.
Auth. Rev. Bonds (Jenners Pond,
Inc.), 7 1/4s, 7/1/24 BB-/P 1,759,500
2,500,000 Dauphin Cnty., Gen. Auth. Rev. Bonds
(Office & Pkg.), Ser. A, 6s,
1/15/25 D/P 1,162,500
2,940,000 Dauphin Cnty., Hosp. Rev. Bonds
(Northwestern Med. Ctr.), 8 5/8s,
10/15/13 AAA 3,166,968
650,000 Lebanon Cnty., Hlth. Fac. Auth.
Rev. Bonds (Good Samaritan Hosp.),
6s, 11/15/35 Baa1 664,625
Lehigh Cnty., Gen. Purpose Auth.
Rev. Bonds
3,000,000 (St. Luke's Hosp. - Bethlehem),
5 3/8s, 8/15/33 Baa2 2,977,500
1,000,000 (Lehigh Valley Hosp. Hlth. Network),
Ser. A, 5 1/4s, 7/1/32 A2 1,011,250
3,000,000 Lehigh Cnty., Indl. Dev. Auth. Poll.
Control Rev. Bonds (PA Pwr. & Lt.
Co.), Ser. B, MBIA, 6.4s, 9/1/29 Aaa 3,076,290
750,000 PA Convention Ctr. Auth. Rev. Bonds,
Ser. A, 6 3/4s, 9/1/19 Baa2 769,425
PA State Econ. Dev. Fin. Auth.
Resource Recvy. Rev. Bonds
2,000,000 (Colver), Ser. D, 7.15s, 12/1/18 BBB- 2,054,880
4,000,000 (Colver), Ser. E, 8.05s, 12/1/15 BBB-/P 4,103,920
3,590,000 (Northhampton), Ser. B, 6 3/4s,
1/1/07 BBB- 3,747,063
3,000,000 (Northampton Generating), Ser. A,
6 1/2s, 1/1/13 BBB- 3,045,000
945,000 PA State Higher Edl. Fac. Auth.
Rev. Bonds (Philadelphia College of
Osteopathic Medicine), 5s, 12/1/06 A 995,794
6,000,000 Philadelphia, Gas Wks. FRB, FSA,
2.38s, 8/1/21 Aaa 6,000,000
6,000,000 Philadelphia, Gas Wks. IFB, FSA,
8.6s, 8/1/21 (acquired 1/24/94, cost
$5,621,520) (RES) Aaa 6,270,000
1,245,000 Washington Cnty., Indl. Dev. Auth.
Hlth. Care Fac. Rev. Bonds (1st
Mtge. AHF/Central), 6 1/2s, 1/1/29 CCC 1,181,194
--------------
53,568,265
Puerto Rico (1.2%)
- -------------------------------------------------------------------------------
8,500,000 Cmnwlth. of PR, G.O. Bonds, MBIA,
9.68s, 1/1/18 (acquired 6/12/95,
cost $8,912,590) (RES) AAA/P 9,284,550
Rhode Island (0.1%)
- -------------------------------------------------------------------------------
600,000 Tobacco Settlement Fin. Corp.
Rev. Bonds, Ser. A, 6 1/4s, 6/1/42 BBB 529,500
South Carolina (3.4%)
- -------------------------------------------------------------------------------
3,910,000 Charleston Cnty., Indl. Dev.
Rev. Bonds (Hoover Group, Inc.),
8 1/2s, 11/1/02 D/P 2,150,500
970,000 Florence Cnty., Indl. Dev. Auth.
Rev. Bonds (Stone Container Corp.),
7 3/8s, 2/1/07 B/P 983,997
1,350,000 Lexington Cnty. Rev. Bonds, 5 1/2s,
11/1/32 A2 1,385,438
Piedmont, Muni. Elec. Pwr. Agcy.
Rev. Bonds, Ser. A, FGIC
5,490,000 6 1/2s, 1/1/16 Aaa 6,828,188
630,000 6 1/2s, 1/1/16 (Escrow) Aaa 774,900
3,000,000 Richland Cnty. Rev. Bonds (Intl.
Paper Co.), Ser. A, 4 1/4s, 10/1/07 Baa2 3,112,500
1,750,000 SC Hosp. Auth. Rev. Bonds (Med. U.),
Ser. A, 6 1/2s, 8/15/32 BBB+ 1,872,500
3,000,000 SC Jobs Econ. Dev. Auth.
Rev. Bonds (Palmetto Hlth.), Ser. C,
6 3/8s, 8/1/34 Baa2 3,153,750
6,000,000 SC Tobacco Settlement Rev. Mgt.
Rev. Bonds, Ser. B, 6 3/8s, 5/15/28 BBB 5,572,500
--------------
25,834,273
South Dakota (0.4%)
- -------------------------------------------------------------------------------
1,900,000 SD Edl. Enhancement Funding Corp.
Rev. Bonds, Ser. B, 6 1/2s, 6/1/32 BBB 1,778,875
1,230,000 SD State Hlth & Edl. Fac. Auth.
Rev. Bonds (Sioux Valley Hosp. &
Hlth. Syst.), Ser. A, 5 1/2s,
11/1/31 A1 1,271,513
--------------
3,050,388
Tennessee (0.9%)
- -------------------------------------------------------------------------------
3,000,000 Elizabethton, Hlth. & Edl. Fac.
Board Rev. Bonds (Hosp. Ref. &
Impt.), Ser. B, 8s, 7/1/33 Baa2 3,566,250
3,000,000 Johnson City, Hlth. & Edl. Fac.
Hosp. Board Rev. Bonds (Mountain
States Hlth.), Ser. A,
7 1/2s, 7/1/25 BBB+ 3,506,250
--------------
7,072,500
Texas (5.0%)
- -------------------------------------------------------------------------------
2,500,000 Abilene, Hlth. Fac. Dev. Corp.
Rev. Bonds (Sears Methodist
Retirement), Ser. A, 7s, 11/15/33 BB/P 2,593,750
1,500,000 Alliance, Arpt. Auth. Rev. Bonds
(Federal Express Corp.), 6 3/8s,
4/1/21 Baa2 1,576,875
5,000,000 Bexar Cnty., Hsg. Fin. Auth. Corp.
Rev. Bonds (American
Opty-Waterford), Ser. A1, 7s,
12/1/36 A3 5,056,250
2,000,000 Dallas-Fort Worth, Intl. Arpt. Fac.
Impt. Corp. Rev. Bonds (American
Airlines, Inc.), 7 1/4s, 11/1/30 Caa2 1,270,000
3,600,000 Georgetown, Hlth. Fac. Dev. Corp.
Rev. Bonds, 6 1/4s, 8/15/29 BB 3,496,500
1,500,000 Harris Cnty., Hlth. Fac. Dev. Corp.
Hosp. Rev. Bonds (Memorial Hermann
Hlth. Care Syst.), Class A, 5 1/4s,
12/1/17 A2 1,606,875
5,000,000 Houston, Arpt. Syst. Rev. Bonds
(Continental Airlines, Inc.),
Ser. E, 6 3/4s, 7/1/29 B- 3,950,000
1,500,000 Matagorda Cnty., Navigation Dist. TX
Poll. Control Mandatory Put Bonds
(American Elec. Power), 2.15s,
11/1/04 Baa2 1,499,490
3,500,000 Sam Rayburn Muni. Pwr. Agcy.
Rev. Bonds, 6s, 10/1/21 Baa2 3,749,375
4,000,000 Tarrant Cnty., Hlth. Fac. Dev. (TX
Hlth. Resource Sys.), Ser. A, MBIA,
5 3/4s, 2/15/12 Aaa 4,600,000
Tomball, Hosp. Auth. Rev. Bonds
(Tomball Regl. Hosp.)
2,500,000 6 1/8s, 7/1/23 Baa3 2,500,150
1,650,000 6s, 7/1/25 Baa3 1,621,125
3,500,000 TX State IFB, Ser. B, 11.051s,
9/30/11 Aa1 4,720,625
--------------
38,241,015
Utah (0.3%)
- -------------------------------------------------------------------------------
1,950,000 UT Cnty., Env. Impt. Rev. Bonds
(Marathon Oil), 5.05s, 11/1/17 Baa1 2,137,671
Virginia (1.0%)
- -------------------------------------------------------------------------------
3,000,000 Henrico Cnty. Econ. Dev. Auth.
Rev. Bonds (United Methodist),
Ser. A, 6 1/2s, 6/1/22 BB+/P 3,052,500
5,000,000 Suffolk, Redev. & Hsg. Auth.
Rev. Bonds (Beach-Oxford Apts.),
6.1s, 4/1/26 BB-/P 4,581,250
--------------
7,633,750
Washington (0.8%)
- -------------------------------------------------------------------------------
5,000,000 WA State Pub. Pwr. Supply Syst.
Rev. Bonds (Nuclear No. 3), Ser. B,
MBIA, 7 1/8s, 7/1/16 Aaa 6,475,000
West Virginia (0.6%)
- -------------------------------------------------------------------------------
3,600,000 WV State G.O. Bonds, Ser. D, FGIC,
6 1/2s, 11/1/26 Aaa 4,333,500
Wisconsin (1.4%)
- -------------------------------------------------------------------------------
Badger Tobacco Settlement
Asset Securitization Corp.
Rev. Bonds
1,000,000 7s, 6/1/28 BBB 993,750
7,750,000 6 3/8s, 6/1/32 BBB 7,120,313
2,500,000 WI State Hlth. & Edl. Fac. Auth.
Rev. Bonds (Wheaton Franciscan
Svcs.), 5 1/8s, 8/15/33 A2 2,468,750
--------------
10,582,813
Wyoming (0.8%)
- -------------------------------------------------------------------------------
2,000,000 Sweetwater Cnty., Poll. Control
Rev. Bonds (Idaho Power Co.),
Ser. A, 6.05s, 7/15/26 A3 2,115,000
4,400,000 Sweetwater Cnty., Poll. Control
VRDN (Pacificorp.), Ser. B, 1.8s,
1/1/14 VMIG1 4,400,000
--------------
6,515,000
--------------
Total Municipal bonds and notes
(cost $715,270,108) $741,824,152
Preferred stocks (0.9%) (a) (cost $6,000,000)
Number of shares Value
- -------------------------------------------------------------------------------
6,000,000 MuniMae Tax Exempt Bond Subsidiary,
LLC 144A 6.875% cum. pfd. A3 $6,630,000
Common stocks (--%) (a) (cost $--)
Number of shares Value
- -------------------------------------------------------------------------------
47,911 Hoover Group, Inc. (AFF) $5
- -------------------------------------------------------------------------------
Total Investments
(cost $721,270,108) $748,454,157
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $768,532,799.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at September 30, 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 September 30, 2004. Securities rated by Putnam are
indicated by "/P".
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at September 30, 2004
was $34,961,425 or 4.5% of net assets.
(AFF) Affiliated Companies (Note 5).
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 at September 30, 2004.
The rates shown on IFB's, which are securities paying interest rates
that vary inversely to changes in the market interest rates, are the
current interest rates at September 30, 2004.
The fund had the following industry group concentrations greater than
10% at September 30, 2004 (as a percentage of net assets):
Utilities 24.0%
Health care 23.3
The fund had the following insurance concentration greater than 10% at
September 30, 2004 (as a percentage of net assets):
MBIA 10.0%
The dates shown on Mandatory Put Bonds are the next mandatory put dates.
Interest rate swap contracts outstanding at September 30, 2004
(Unaudited)
Notional Termination Unrealized
Amount date appreciation
-------------------------------------------------------------------------
Agreement with JP Morgan Chase
Bank dated September 24, 2004
to pay quarterly the notional
multiplied by 3.513% and receive
quarterly the notional multiplied
by the Bond Market Association
Municipal Swap Index. $9,000,000 12/29/14 $40,500
-------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of assets and liabilities
September 30, 2004 (Unaudited)
Assets
- -------------------------------------------------------------------------------
Investment in securities, at value (Note 1)
- -------------------------------------------------------------------------------
Unaffiliated issuers (identified cost $721,270,108) $748,454,152
- -------------------------------------------------------------------------------
Affiliated issuers (identified cost $--) (Note 5) 5
- -------------------------------------------------------------------------------
Cash 452,543
- -------------------------------------------------------------------------------
Interest and other receivables 12,512,096
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 196,409
- -------------------------------------------------------------------------------
Receivable for securities sold 12,171,923
- -------------------------------------------------------------------------------
Receivable for open swap contracts (Note 1) 40,500
- -------------------------------------------------------------------------------
Total assets 773,827,628
Liabilities
- -------------------------------------------------------------------------------
Distributions payable to shareholders 528,235
- -------------------------------------------------------------------------------
Payable for securities purchased 1,737,848
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,124,641
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 951,627
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 220,868
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 117,233
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,491
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 495,536
- -------------------------------------------------------------------------------
Other accrued expenses 116,350
- -------------------------------------------------------------------------------
Total liabilities 5,294,829
- -------------------------------------------------------------------------------
Net assets $768,532,799
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $798,876,412
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 2,506,817
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (60,074,979)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 27,224,549
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $768,532,799
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($629,595,752 divided by 72,588,290 shares) $8.67
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.50 of $8.67)* $9.08
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($118,170,193 divided by 13,631,250 shares)** $8.67
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($13,220,533 divided by 1,523,260 shares)** $8.68
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($7,546,321 divided by 870,436 shares) $8.67
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.67)*** $8.96
- -------------------------------------------------------------------------------
* 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 September 30, 2004 (Unaudited)
Interest income: $23,493,262
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,969,474
- -------------------------------------------------------------------------------
Investor servicing fees (Note 2) 362,651
- -------------------------------------------------------------------------------
Custodian fees (Note 2) 72,732
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 13,857
- -------------------------------------------------------------------------------
Administrative services (Note 2) 8,433
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 796,835
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 545,439
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 64,861
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 19,475
- -------------------------------------------------------------------------------
Other 140,423
- -------------------------------------------------------------------------------
Non-recurring costs (Notes 2 and 6) 14,990
- -------------------------------------------------------------------------------
Costs assumed by Manager (Notes 2 and 6) (14,990)
- -------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2) (24,339)
- -------------------------------------------------------------------------------
Total expenses 3,969,841
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (33,641)
- -------------------------------------------------------------------------------
Net expenses 3,936,200
- -------------------------------------------------------------------------------
Net investment income 19,557,062
- -------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (1,681,253)
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments and swap
contracts during the period (7,331,918)
- -------------------------------------------------------------------------------
Net loss on investments (9,013,171)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $10,543,891
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Six months ended Year ended
September 30 March 31
Decrease in net assets 2004* 2004
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $19,557,062 $45,332,872
- -------------------------------------------------------------------------------
Net realized loss on investments (1,681,253) (29,164,223)
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments (7,331,918) 43,774,741
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 10,543,891 59,943,390
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From ordinary income
- -------------------------------------------------------------------------------
Class A (14,898,590) (529,766)
- -------------------------------------------------------------------------------
Class B (2,624,110) (123,318)
- -------------------------------------------------------------------------------
Class C (254,257) (11,434)
- -------------------------------------------------------------------------------
Class M (172,827) (6,917)
- -------------------------------------------------------------------------------
From tax-exempt income
- -------------------------------------------------------------------------------
Class A -- (36,111,300)
- -------------------------------------------------------------------------------
Class B -- (7,416,424)
- -------------------------------------------------------------------------------
Class C -- (668,906)
- -------------------------------------------------------------------------------
Class M -- (500,906)
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (62,637,935) (243,010,343)
- -------------------------------------------------------------------------------
Total decrease in net assets (70,043,828) (228,435,924)
Net assets
- -------------------------------------------------------------------------------
Beginning of period 838,576,627 1,067,012,551
- -------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $2,506,817 and
$899,539, respectively) $768,532,799 $838,576,627
- -------------------------------------------------------------------------------
* 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
Sept. 30
Per-share (Unaudited) Year ended March 31
operating performance 2004 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $8.74 $8.60 $8.62 $8.85 $8.61 $9.25
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .22 (c) .41 (c) .45 .49 .48 .49
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.09) .14 (.01) (.24) .24 (.64)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities .13 .55 .44 .25 .72 (.15)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.20) (.41) (.46) (.48) (.48) (.49)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.20) (.41) (.46) (.48) (.48) (.49)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.67 $8.74 $8.60 $8.62 $8.85 $8.61
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.53* 6.59 5.15 2.83 8.67 (1.53)
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $629,596 $671,931 $823,708 $841,445 $752,169 $715,475
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .45*(c) .89 (c) .94 .95 .95 .94
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.54*(c) 4.77 (c) 5.18 5.51 5.57 5.62
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 18.25* 19.45 32.03 16.46 12.76 14.32
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) The ratio of expenses to average net assets 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, expenses of the fund for the period ended September 30,
2004 and March 31, 2004 reflect a reduction of less than 0.01% based on
average net assets for class A shares (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
Sept. 30
Per-share (Unaudited) Year ended March 31
operating performance 2004 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $8.74 $8.60 $8.62 $8.84 $8.61 $9.24
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .19 (c) .36 (c) .40 .43 .43 .44
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.09) .14 (.02) (.23) .23 (.63)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities .10 .50 .38 .20 .66 (.19)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.17) (.36) (.40) (.42) (.43) (.44)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.17) (.36) (.40) (.42) (.43) (.44)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.67 $8.74 $8.60 $8.62 $8.84 $8.61
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.22* 5.95 4.53 2.33 7.90 (2.02)
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $118,170 $144,352 $211,399 $255,540 $372,129 $420,310
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .75*(c) 1.49 (c) 1.54 1.55 1.55 1.54
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.26*(c) 4.17 (c) 4.59 4.90 4.98 5.02
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 18.25* 19.45 32.03 16.46 12.76 14.32
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) The ratio of expenses to average net assets 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, expenses of the fund for the period ended September 30,
2004 and March 31, 2004 reflect a reduction of less than 0.01% based on
average net assets for class B shares (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
ended
Sept. 30
Per-share (Unaudited) Year ended March 31
operating performance 2004 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $8.75 $8.61 $8.62 $8.85 $8.61 $9.25
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .19 (c) .35 (c) .39 .42 .42 .43
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.09) .14 (.01) (.24) .24 (.64)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities .10 .49 .38 .18 .66 (.21)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.17) (.35) (.39) (.41) (.42) (.43)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.17) (.35) (.39) (.41) (.42) (.43)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.68 $8.75 $8.61 $8.62 $8.85 $8.61
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.14* 5.80 4.49 2.06 7.86 (2.26)
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $13,221 $13,907 $18,881 $16,865 $12,330 $8,467
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .82*(c) 1.64 (c) 1.69 1.70 1.70 1.69
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.17*(c) 4.02 (c) 4.42 4.77 4.81 4.89
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 18.25* 19.45 32.03 16.46 12.76 14.32
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) The ratio of expenses to average net assets 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, expenses of the fund for the period ended
September 30, 2004 and March 31, 2004 reflect a reduction of less than
0.01% based on average net assets for class C shares (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
Sept. 30
Per-share (Unaudited) Year ended March 31
operating performance 2004 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $8.74 $8.60 $8.62 $8.85 $8.61 $9.25
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .21 (c) .39 (c) .43 .47 .46 .47
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.09) .14 (.02) (.24) .24 (.64)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities .12 .53 .41 .23 .70 (.17)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.19) (.39) (.43) (.46) (.46) (.47)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.19) (.39) (.43) (.46) (.46) (.47)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.67 $8.74 $8.60 $8.62 $8.85 $8.61
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.40* 6.32 4.89 2.57 8.40 (1.77)
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $7,546 $8,387 $13,025 $12,828 $14,775 $13,286
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .57*(c) 1.14 (c) 1.19 1.20 1.20 1.19
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.42*(c) 4.52 (c) 4.93 5.26 5.32 5.37
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 18.25* 19.45 32.03 16.46 12.76 14.32
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) The ratio of expenses to average net assets 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, expenses of the fund for the period ended
September 30, 2004 and March 31, 2004 reflect a reduction of less than
0.01% based on average net assets for class M shares (Note 2).
The accompanying notes are an integral part of these financial
statements.
Notes to financial statements
September 30, 2004 (Unaudited)
Note 1
Significant accounting policies
Putnam Municipal Income Fund (the "fund"), a Massachusetts business
trust, is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The
fund seeks as high a level of current income exempt from federal income
tax as Putnam Investment Management, LLC ("Putnam Management"), the
fund's manager, an indirect wholly-owned subsidiary of Putnam, LLC,
believes is consistent with the preservation of capital.
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%. 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 but lower than class C
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 A, class B, and class M
shares, do not pay front-end sales charge but 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.
Effective April 19, 2004 (May 3, 2004 for defined contribution plans
administered by Putnam), a 2.00% redemption fee may apply to any shares
that are redeemed (either by selling or exchang ing into another fund)
within 5 days of purchase. The redemption fee is accounted for as an
addition to paid-in-capital.
Investment income, realized and unrealized gains and losses and expenses
of the fund are borne pro-rata based on the relative net assets of each
class to the total net assets of the fund, except that each class bears
expenses unique to that class (including the distribution fees
applicable to such classes). 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.
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 at fair
value 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. Other investments 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. 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) Interest rate swap contracts The fund may enter into interest rate
swap contracts, which are arrangements between two parties to exchange
cash flows based on a notional principal amount, to manage the fund's
exposure to interest rates. Interest rate swap contracts are marked to
market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss. Payments received or made
are recorded as realized gains or loss. The fund could be exposed to
credit or market risk due to unfavorable changes in the fluctuation of
interest rates or if the counterparty defaults on its obligation to
perform. Risks may exceed amounts recognized on the statement of assets
and liabilities. Interest rate swap contracts outstanding at period end,
if any, are listed after the fund's portfolio.
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 (the "Code"), 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 March 31, 2004, the fund had a capital loss carryover of $42,335,225
available to the extent allowed by the Code to offset future net capital
gain, if any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------------------------------
$8,493,975 March 31, 2006
1,799,903 March 31, 2007
11,300,594 March 31, 2008
765,567 March 31, 2009
19,975,186 March 31, 2012
Pursuant to federal income tax regulations applicable to regulated
investment companies, the fund has elected to defer to its fiscal year
ending March 31, 2005 $9,505,452 of losses recognized during the period
November 1, 2003 to March 31, 2004.
The aggregate identified cost on a tax basis is $721,359,309, resulting
in gross unrealized appreciation and depreciation of $40,038,570 and
$12,943,722, respectively, or net unrealized appreciation of
$27,094,848.
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.
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
March 31, 2005, 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. For the period
ended September 30, 2004, Putnam Management waived $24,339 of its
management fee to the fund.
For the period ended September 30, 2004, Putnam Management has assumed
$14,990 of legal, shareholder servicing and communication, audit and Trustee
fees incurred by the fund in connection with certain legal and regulatory
matters (including those described in Note 6).
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 September 30, 2004,
the fund paid PFTC $419,241 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 September 30,
2004, the fund's expenses were reduced by $33,641 under these
arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $1,175, as a quarterly retainer, 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 Trustees have terminated the Pension Plan with
respect to any Trustee first elected after 2003.
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 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 0.25%, 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 September 30, 2004, Putnam Retail Management,
acting as underwriter, received net commissions of $1,072 and $80 from
the sale of class A and class M shares, respectively, and received
$85,086 and $246 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 September 30, 2004,
Putnam Retail Management, acting as underwriter, received $1,234 on
class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended September 30, 2004, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $138,691,746 and $192,276,565, respectively.
There were no purchases or sales of U.S. government securities.
Note 4
Capital shares
At September 30, 2004, there were an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended September 30, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 2,236,078 $19,145,867
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 1,121,357 9,593,687
- ----------------------------------------------------------------
3,357,435 28,739,554
Shares repurchased (7,646,509) (65,364,717)
- ----------------------------------------------------------------
Net decrease (4,289,074) $(36,625,163)
- ----------------------------------------------------------------
Year ended March 31, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 9,002,639 $78,008,319
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 2,725,707 23,658,553
- ----------------------------------------------------------------
11,728,346 101,666,872
Shares repurchased (30,592,593) (264,806,393)
- ----------------------------------------------------------------
Net decrease (18,864,247) $(163,139,521)
- ----------------------------------------------------------------
Six months ended September 30, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 206,291 $1,765,275
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 188,812 1,614,184
- ----------------------------------------------------------------
395,103 3,379,459
Shares repurchased (3,288,271) (28,064,280)
- ----------------------------------------------------------------
Net decrease (2,893,168) $(24,684,821)
- ----------------------------------------------------------------
Year ended March 31, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 956,567 $8,271,245
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 542,731 4,731,629
- ----------------------------------------------------------------
1,499,298 13,002,874
Shares repurchased (9,560,294) (82,867,549)
- ----------------------------------------------------------------
Net decrease (8,060,996) $(69,864,675)
- ----------------------------------------------------------------
Six months ended September 30, 2004
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 157,905 $1,357,001
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 16,720 143,334
- ----------------------------------------------------------------
174,625 1,500,335
Shares repurchased (241,541) (2,060,972)
- ----------------------------------------------------------------
Net decrease (66,916) $(560,637)
- ----------------------------------------------------------------
Year ended March 31, 2004
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 293,231 $2,563,316
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 50,106 434,996
- ----------------------------------------------------------------
343,337 2,998,312
Shares repurchased (947,035) (8,215,531)
- ----------------------------------------------------------------
Net decrease (603,698) $(5,217,219)
- ----------------------------------------------------------------
Six months ended September 30, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 13,261 $112,940
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 14,032 120,005
- ----------------------------------------------------------------
27,293 232,945
Shares repurchased (116,852) (1,000,259)
- ----------------------------------------------------------------
Net decrease (89,559) $(767,314)
- ----------------------------------------------------------------
Year ended March 31, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 89,605 $783,931
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 38,338 332,528
- ----------------------------------------------------------------
127,943 1,116,459
Shares repurchased (682,268) (5,905,387)
- ----------------------------------------------------------------
Net decrease (554,325) $(4,788,928)
- ----------------------------------------------------------------
Note 5
Transactions with affiliated issuers
Transactions during the period with companies in which the fund
owned at least 5% of the voting securities were as follows:
Purchase Sales Dividend Market
Affiliates Cost Cost Income Value
- ----------------------------------------------------------------
Hoover Group, Inc. $-- $-- $-- $5
- ----------------------------------------------------------------
Market values are shown for those securities affiliated at period end.
Note 6
Regulatory matters and litigation
On April 8, 2004, Putnam Management entered into agreements with the
Securities and Exchange Commission ("SEC") and the Massachusetts
Securities Division representing a final settlement of all charges
brought against Putnam Management by those agencies on October 28, 2003
in connection with excessive short-term trading by Putnam employees and,
in the case of the charges brought by the Massachusetts Securities
Division, by participants in some Putnam-administered 401(k) plans. The
settlement with the SEC requires Putnam Management to pay $5 million in
disgorgement plus a civil monetary penalty of $50 million, and the
settlement with the Massachusetts Securities Division requires Putnam
Management to pay $5 million in restitution and an administrative fine
of $50 million. The settlements also leave intact the process
established under an earlier partial settlement with the SEC under which
Putnam Management agreed to pay the amount of restitution determined by
an independent consultant, which may exceed the disgorgement and
restitution amounts specified above, pursuant to a plan to be developed
by the independent consultant.
Putnam Management, and not the investors in any Putnam fund, will bear all
costs, including restitution, civil penalties and associated legal fees
stemming from both of these proceedings. The SEC's and Massachusetts
Securities Division'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.
Review of these matters by counsel for Putnam Management and by separate
independent counsel for the Putnam funds and their independent Trustees
is continuing. The fund may experience increased redemptions as a result
of these matters, which could result in increased transaction costs and
operating expenses.
Note 7
Actions by Trustees
On October 15, 2004 the Trustees approved the merger of Putnam Municipal
Income Fund into Putnam Tax Free High Yield Fund. It is subject to a
number of conditions and there is no guarantee it will occur.
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds.
Investors should carefully 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
Floating Rate Income Fund
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 Portfolios
Putnam Asset Allocation Portfolios--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 between 6
and 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 fund seeks to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
With the exception of money market funds, 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
Myra R. Drucker
Charles E. Haldeman, Jr.
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
Richard B. Worley
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Associate Treasurer and
Principal Executive Officer
Jonathan S. Horwitz
Senior Vice President
and Treasurer
Steven D. Krichmar
Vice President and
Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Daniel T. Gallagher
Vice President and Legal and
Compliance Liaison Officer
Beth S. Mazor
Vice President
James P. Pappas
Vice President
Richard S. Robie, III
Vice President
Mark C. Trenchard
Vice President and
BSA Compliance Officer
Francis J. McNamara, III
Vice President and
Chief Legal Officer
Charles A. Ruys de Perez
Vice President and
Chief Compliance Officer
Judith Cohen
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Municipal
Income 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 carefully consider the investment objective, risks, charges, and
expenses of a fund, which are described in its prospectus. For this and
other 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.
Not FDIC Insured May Lose Value No Bank Guarantee
SA040-216518 11/04
Item 2. Code of Ethics:
- -----------------------
Not applicable
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
Not applicable
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
Not applicable
Item 5. Audit Committee: Not applicable
- -------------------------
Item 6. Schedule of Investments: Not applicable
- --------------------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. Purchases of Equity Securities by Closed-End Management Investment
- --------------------------------------------------------------------------
Companies and Affiliated Purchasers: Not applicable
------------------------------------
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.
(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: November 30, 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: November 30, 2004
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: November 30, 2004