Richard A. Monaghan
President
Putnam Retail Management LP
One Post Office Square
Boston, Massachusetts 02109
November 2004
Dear Investment Colleague:
At Putnam, we are committed to offering a range of fund choices in every
investment style to help investors build diversified portfolios. At the
same time, we continually review our product line to ensure the best
alignment of our investment talent and resources with those products
that are most important to you and your clients. In a recent review, we
identified an opportunity to merge two funds with similar investment
objectives, which will further clarify our product line and advance the
interests of long-term shareholders. We have proposed, and the Trustees
of the Putnam Funds have approved in principle, merging Putnam Municipal
Income Fund into Putnam Tax-Free High Yield Fund.
The two funds are managed by the same portfolio team, and combining them
will allow the team to concentrate its efforts and resources more
efficiently. The surviving fund - Putnam Tax-Free High Yield Fund -
will continue to seek high current income that is exempt from federal
income taxes.
The combined fund will maintain Putnam Tax-Free High Yield Fund's current
strategy of investing in a combination of lower-rated, higher-yielding
bonds and investment-grade bonds issued in many states. Its strategy
involves greater credit risk than that of Putnam Municipal Income Fund,
which invests with a greater emphasis on higher-quality bonds. However,
we believe the combined fund can meet the investment goals of
shareholders of Putnam Municipal Income Fund.
In addition to providing your clients with more focused management
resources, the merger is expected to result in lower expenses because
the surviving fund will have a larger asset base. To prepare for the
process of merging the funds, Putnam Municipal Income fund will be
closed to new investors on November 15, 2004.
Your clients who are your shareholders in Putnam Municipal Income Fund
will be asked to vote on the proposed merger. A prospectus/proxy
statement containing more information about the merger will be mailed to
shareholders in the coming months. The completion of the merger is
subject to certain conditions, including shareholder approval, final
Trustee approval, and SEC review. If approved, the merger would occur
in early 2005. The merger is not expected to result in a taxable event
for clients who remain invested throughout the merger process. However,
any redemptions or exchanges made before the completion of the merger
will be a taxable event for your client, and this will be reflected on
the client's Form 1099.
When the proposed merger is completed, Putnam will offer a choice of
three national municipal bond funds for clients who are looking to add a
tax-exempt income component to their portfolios. Putnam Tax-Free High
Yield Fund invests in a combination of lower-rated, higher-yielding
bonds and investment-grade bonds. Putnam Tax Exempt Income Fund invests
primarily in high-quality municipal bonds. Putnam Tax-Free Insured Fund
invests only in AAA-rated or insured bonds for investors who seek the
lowest level of credit risk.
If you have questions about the merger, please call Putnam
Dealer Marketing Services at 1-800-354-4000. Thank you for your
continued support of Putnam Investments.
Sincerely,
/s/ Rich Monaghan
Note: The foregoing 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 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.
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 have
more exposure to interest rate risk than short-term bonds. Lower-rated
bonds may offer higher yields in return for more risk. Unlike bonds,
bond funds have ongoing fees and expenses.
Your clients should carefully consider the investment objectives, risks,
charges, and expenses of a fund before investing. For a prospectus
containing this and other information for any Putnam fund or product,
call Putnam Dealer Marketing Services at 1-800-354-4000. Read the
prospectus carefully before investing.
Q&A on proposed merger of Putnam Municipal Income Fund into
Putnam Tax-Free High Yield Fund
The Putnam fund Trustees have approved in principle the merger of Putnam
Municipal Income Fund into Putnam Tax-Free High Yield Fund. The
completion of the merger is subject to certain conditions including
approval by shareholders of Putnam Municipal Income Fund, final Trustee
approval, and SEC review. This Q&A provides information about the
proposed merger.
Why is Putnam consolidating these funds?
At Putnam, we are committed to offering a range of fund choices in every
investment style to help investors build diversified portfolios. We
continually review our product line to ensure the best alignment of our
investment talent and resources with those products that are most
important to advisors and shareholders. Putnam looks for opportunities
to distinguish products more clearly and to align management resources
most efficiently for delivering investment performance.
Putnam Municipal Income Fund and Putnam Tax-Free High Yield Fund are
managed by the same portfolio team, and combining them will allow the
team to concentrate its efforts and resources more efficiently. The
surviving fund, Putnam Tax-Free High Yield Fund, will continue to seek
high current income that is exempt from federal income taxes.
Is this a way for Putnam to increase management fees?
No. Over time, shareholders of both funds are expected to benefit from
lower expenses resulting from the larger asset base of the combined
fund. At the time of the merger, it is expected that Putnam Tax-Free
High Yield Fund will adopt the lower management fee of Putnam Municipal
Income Fund.
Was the merger prompted by sub-par performance?
No. The merger is being undertaken to clarify our product line and align
management resources, not to close an underperforming fund. Of course,
one outcome of closing funds is the ability to focus investment talent
on a more select number of funds and to potentially reduce expenses with
the goal of delivering strong performance over time.
Below are tables with performance data for both funds.
Putnam Municipal Income Fund
Annualized total return as of 9/30/04
Lehman Lipper General
Municipal Municipal Debt
Inception 5/22/89 NAV POP Bond Index Fund Category
- -------------------------------------------------------------------
10 years 5.72% 5.24% 6.77% 56% (71/128)
5 years 5.09 4.14 6.77 80% (184/230)
1 year 4.45 -0.24 4.59 28% (84/299)
- -------------------------------------------------------------------
Putnam Tax-Free High Yield Fund
Annualized total return as of 9/30/04
Lehman Lipper High Yield
Municipal Municipal Debt
Inception 9/20/93 NAV POP Bond Index Funds Category
- -------------------------------------------------------------------
10 years 5.08% 4.60% 6.77% 60% (18/29)
5 years 4.15 3.20 6.77 69% (41/59)
1 year 6.40 1.61 4.59 31% (25/80)
- -------------------------------------------------------------------
Data represents past performance, and 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.
For the most recent month-end performance, please visit
www.putnaminvestments.com.
For a portion of the period, these funds limited expenses, without which
returns would have been lower.
A short-term trading fee up to 2% may apply.
The Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds. You cannot invest directly
in an index.
Lipper ranks funds (without sales charges) with similar current
investment styles or objectives as determined by Lipper.
Will the objective of the surviving fund change?
No. The objective of the surviving fund, Putnam Tax-Free High Yield
Fund, will remain the same -- the fund seeks high current income exempt
from federal income taxes. The combined fund will maintain Putnam
Tax-Free High Yield Fund's current strategy of investing in a
combination of lower-rated, higher-yielding bonds and investment-grade
bonds issued in many states. Its strategy involves greater credit risk
than that of Putnam Municipal Income Fund, which invests with a greater
emphasis on higher-quality bonds. However, we believe the combined fund
can meet the investment goals of shareholders of Putnam Municipal Income
Fund.
Who manages the fund?
Both funds are managed by the Tax Exempt Fixed-Income Team. David Hamlin
is the Portfolio Leader and Paul Drury, Susan McCormack, and James St.
John are the Portfolio Members of both funds.
When will the funds be merged?
We currently expect that a meeting of the shareholders of Putnam
Municipal Income Fund to approve the merger transaction will occur in
the next six months. Assuming favorable shareholder action, the actual
fund merger is expected to occur in early 2005.
Will the merging fund close to all investments prior to the merger?
Putnam Municipal Income Fund will be closed to new investors on November
15, 2004. Also, just before the date of the merger the merging fund (in
this case Putnam Municipal Income Fund) typically closes to all
placement trades (existing and new investors) with a T+3 settlement
period as of end-of-day on the Monday prior to the merger. This would
only affect trades placed through the NSCC with a T+3 settlement date.
How will the merger work?
* Shareholders of Putnam Municipal Income Fund will receive proxy materials
soliciting their votes on whether to approve the merger. These materials
also serve as a prospectus of the surviving fund.
* A merger normally involves no change in the surviving fund's performance
reporting, investment objectives or strategies, management team, or other
attributes. This is generally expected to be the case for this merger. As
noted below, if the merger is completed, ongoing 12b-1 fees and commission
rates for class A shares of Putnam Tax-Free High Yield Fund, as well as
management fees, are expected to change.
* Mutual fund shareholders own shares of the overall fund. Shareholders
receive the number of shares in the surviving fund that is equivalent in
value to the shares they owned in the merged fund. Current shareholders of
the surviving fund will not have their interests diluted as a result of the
merger.
TAXES/DISTRIBUTIONS
Does the merger of funds result in a taxable event?
For shareholders who remain invested in the fund throughout the merger
process, this is not expected to be a taxable event, and a 1099 will not
be generated. However, any redemptions or exchanges made prior to the
merger will be a taxable event and will be reflected on form 1099.
How will the merger affect the tax basis of a shareholder in Putnam
Municipal Income Fund?
The merger will not affect a shareholder's overall tax basis in fund
shares they own. If you are a shareholder of Putnam Municipal Income
Fund, you will, however, hold a different number of shares as a result
of the merger because your shares will be exchanged for a proportionate
number of shares in the combined fund. As a result, your overall tax
basis will be spread over a different number of shares, which will
affect the amount of tax basis allocated to each share. For example, if
you purchased $1,000 worth of shares in the acquired fund, your tax
basis would be the cost of the shares, and your total tax basis will
remain $1,000 -- even after the merger. However, your tax basis per share
will change because of the different number of shares you will hold in
the fund after the merger.
To calculate the new tax basis per share:
Total dollar cost basis of shares when purchased/number of shares owned
in the new fund on the day of the merger.
What will happen to dividends/capital gains of the acquired fund?
Putnam is required to distribute all remaining income and/or capital
gains of Putnam Municipal Income Fund prior to the merger. Shareholders
of Putnam Municipal Income Fund will receive detailed information about
the specific tax implications of the merger.
Will the tax losses within Putnam Municipal Income Fund be transferred
to the surviving fund?
Generally speaking, the surviving fund will inherit the acquired fund's
tax loss carry-forwards. Under IRS rules, it is possible that the tax
loss carry-forwards could be limited in the surviving fund. If the tax
loss carry-forwards are limited, even though the surviving fund may not
be able to use those losses to offset current capital gain
distributions, shareholders may still be able to derive a tax benefit
from the losses when they ultimately sell their shares.
Why will Putnam include tax information with merger confirmation
statements sent to shareholders of Putnam Municipal Income Fund?
Per IRS regulations, Putnam is required to provide shareholders of
Putnam Municipal Income Fund with tax information within 60 days of the
merger. Shareholders do not need to take any immediate action, but we
recommend that they keep this information with their records.
Shareholders will also receive complete tax information at the end of
2005 to help them prepare their 2005 tax returns. If they have
additional questions, we suggest that they contact their financial or
tax advisor.
Does the wash sale rule apply if a shareholder chooses to exchange out
of Putnam Municipal Income Fund prior to the merger to take advantage of
a loss, and then exchange back into the surviving fund within a 30-day
period?
We request that you speak with a tax advisor about this.
SERVICE OPTIONS/CERTIFICATES
Will service options (Systematic Exchange, Systematic Investment Plan,
Dividend Disbursement Plan) carry over to the surviving fund?
* If your client does not own the surviving fund, a new account will be
established and service options will move to that new account.
* If your client owns the surviving fund --
* Networked accounts: If the accounts in the acquired and surviving funds
have the same distribution options (cash or reinvest and regardless of
service options) the account in the acquired fund will be merged into the
existing account in the surviving fund. Service options will not carry
over. If the accounts in the acquired and surviving funds have different
distribution options, a new account will be established and the service
options carried over.
* Non-networked accounts: If the account in the acquired fund has a service
option, then a new account will be established and the service options will
be cloned. If the acquired fund account does not have a service option,
then as long as the distribution options (cash or reinvest) are the same on
both accounts, the accounts will be merged.
What if a shareholder has certificates for shares of the Putnam
Municipal Income Fund?
If a shareholder has share certificates of Putnam Municipal Income Fund,
a separate, restricted account will be set up to represent those shares
until the certificates have been returned to Putnam. While these shares
will automatically be converted to shares of Putnam Tax-Free High Yield
Fund, they cannot be transferred, redeemed, or exchanged until Putnam
receives the share certificates. These restricted accounts will be
established with a stop status. Distribution options on the new account
will be set up to reinvest regardless of the options on the former
account. No new certificates will be issued to the shareholder.
INVESTMENT MANAGEMENT LOGISTICS
Will all the securities of the acquired fund be moved over to the
surviving fund upon the merger?
After the shareholder vote, but prior to the merger, it is expected that
Putnam Municipal Income Fund will sell any portfolio holdings that are
not consistent with the investment policies of the surviving fund. These
sales are expected to be limited because the fund to be acquired has an
objective and a portfolio similar to the fund into which it is proposed
to merge. On the date of the merger, all remaining securities and cash
will transfer to the surviving fund.
Will the surviving fund have to make a lot of initial trades that will
be costly to the fund?
Once the merger occurs, the surviving fund will acquire the acquired
fund's substantial assets directly, without the need to pay commissions
to buy additional investments.
ADVISOR-RELATED LOGISTICS
Will the merger affect my commission?
Generally, no. For all share classes except class A, the initial and
ongoing payouts for the merging funds are the same and there will be no
difference in Putnam's calculation of commissions.
The payout rates for assets attributable to class A shares of each fund
outstanding immediately prior to the merger's completion will also
remain the same.
If the merger is completed, the payout rate for advisors with clients
investing in class A shares of Putnam Tax-Free High Yield Fund after the
merger is expected to change. For assets attributable to class A shares
of Putnam Tax-Free High Yield Fund issued after the merger, the payout
rate will be 0.25% of average net assets of the fund attributable to
such shares. This rate is the same as the current commission rate on
shares of Putnam Municipal Income Fund, and is higher than the current
rate on shares of Putnam Tax-Free High Yield Fund. Initial commissions
on sales of class A shares of Putnam Tax-Free High Yield will not be
affected by the merger.
PROSPECTUSES
How does this affect the delivery of prospectuses and other literature?
Prospectus delivery for a merging fund continues as long as the fund
continues to sell shares. Confirmations will contain a message
disclosing the proposed merger. Prospectuses distributed by Putnam will
also be stickered. Marketing literature alluding to a fund with a
pending merger must be accompanied by the fund's own sticker or a
prospectus with a sticker.
Will the prospectus of the surviving fund be updated? When will they be
available?
The prospectus of Putnam Tax-Free High Yield Fund is expected to be
stickered in the coming months to reflect proposed changes in that
fund's management fee and class A 12b-1 fee that will take effect if the
proposed merger is completed. These changes, taken together, are
expected to reduce the overall annual operating expenses of Putnam
Tax-Free High Yield Fund if the merger is completed.
Will investors in the merging fund receive prospectuses?
The proxy statement that shareholders will receive regarding the merger
will be accompanied by a prospectus for the surviving fund.
Will we stop providing prospectuses on the closed fund?
We will continue to provide naked prospectuses to accommodate financial
advisors who have transactions in process.
LOGISTICS/MERGER CALCULATIONS
When the funds are merged, how is my new value calculated?
Your interest in the fund is represented by the number of shares you
own. When funds are merged, we use a precise calculation of a
six-decimal net asset value (NAV). This method of calculation is
standard industry practice and has been approved by the funds' auditors.
Your confirmation statement will also include the merger ratio, an
11-decimal figure that shows how your shares were converted into the
surviving fund.
Example of NAV calculation:
Total net assets: $12,000.000 Total number of shares: 1,800 2-decimal
NAV $6.67 6-decimal NAV $6.666667
When I try to calculate the net asset value of my account after the
merger, it is different from the value before the merger. Why?
Putnam calculates the merger ratio based on a 6-digit net asset value
(NAV) as opposed to the 2-digit NAV or market value for those funds that
is listed on the Internet or in the newspaper, and which is rounded.
This merger ratio based on 6digits is used to calculate your share
balance. If you used the 2-digit NAV to calculate your net asset value,
the value would be slightly different from Putnam's calculation.
How do you calculate the merger ratio?
The merger ratio is calculated in two steps:
1. 1. Calculation of the merger shares:
Total Net Assets at Market of Acquired Fund / Six-digit NAV of surviving
fund
2. 2. Calculation of merger ratio (11 decimal places):
Merger Shares / Total Shares Outstanding of Acquired Fund
This is an industry and audit standard for calculating the merger ratio.
Where will the merger transaction appear on shareholder statements?
Quarterly statements:
The Summary of Account Information includes pre- and post-merger values.
However, it is important to note that the account value in this section
includes all year-to-date transactions, not just the fund merger.
The Account Activity Detail section of the statement, which shows a
year-to-date transaction history, will include a line item on the merger
transaction and the number of shares acquired.
Daily statements on the Web:
The Account Summary includes pre- and post-merger values. However, it is
important to note that the account value in this section includes all
year-to-date transactions, not just the fund merger.
The Transactions Detail section shows a year-to-date transaction history
and will include a line item on the merger transaction and the number of
shares acquired.
Note: The foregoing 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.
Tax-free funds may not be suitable for IRAs and other non-taxable
accounts.
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.
Your clients 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 Putnam Dealer Marketing Services at 1-800-354-4000. Read the
prospectus carefully before investing.
For Dealer Use Only
Putnam Retail Management 219657 11/04