Putnam
AMT-Free
Insured Municipal
Fund*
Item 1. Report to Stockholders:
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The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
1-31-05
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* Formerly Putnam Tax-Free Insured Fund
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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 has introduced a number of
reforms for the benefit of shareholders, including increasing the amount
of disclosure for our funds. We are now including additional disclosure
about your fund's management team. Following the Outlook for Your Fund,
we provide manager compensation information that pertains to your fund
and list any changes in your fund's Portfolio Leader and Portfolio
Members during the prior year period, as well as these individuals'
other fund management responsibilities at Putnam. We also show how much
these individuals have invested in the fund (in dollar ranges), and fund
ownership (in dollar ranges) is also shown for the members of Putnam's
Executive Board. Finally, on page 18, we provide certain information
about the most recent approval of your fund's management contract with
Putnam by the Trustees.
We are also pleased to announce that three new Trustees have joined your
fund's Board of Trustees. Nominated by your fund's 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 ex-officio
member and past 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. We also announce the departure
of one of your fund's Trustees, A.J.C. Smith, formerly Chairman of
Putnam Investments and Consultant to Marsh & McLennan Companies, Inc.
In the following pages, your fund's management team discusses
performance, strategy, and its outlook for the remainder of fiscal 2005.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
March 16, 2005
Report from Fund Management
Fund highlights
* For the six months ended January 31, 2005, Putnam AMT-Free Insured
Municipal Fund's class A shares had a total return of 4.52% without
sales charges and -0.17% with maximum sales charges reflected.
* The fund's primary benchmark, the Lehman Municipal Bond Index,
returned 4.80% for the same period.
* The average return for the fund's Lipper category, Insured Municipal
Debt Funds, was 4.43%.
* The fund's name has changed. Please see page 5 for details.
* See the Performance Summary beginning on page 10 for additional fund
performance, comparative performance, and Lipper data.
Performance commentary
During the past six months, shorter-maturity bonds have seen yields
rise, following a series of deliberate, well-publicized moves by the
Federal Reserve Board to raise the federal funds rate -- a key
short-term U.S. interest-rate benchmark. However, yields on longer-term
bonds actually declined, responding to virtually no signs of increasing
inflation, despite record-high energy prices, a weak dollar, and solid
economic growth. In this environment, your fund's results (NAV, net
asset value without sales charges) were slightly behind those of its
more broadly diversified benchmark, the Lehman Municipal Bond Index, but
in line with the average for its Lipper peer group. We believe the
fund's focus on higher-quality bonds accounts for its underperformance
of the benchmark, as lower-quality, higher-yielding bonds continued to
rally throughout the period. However, effective strategies and strong
returns from a top holding helped the fund to perform in line with its
Lipper peer group average.
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TOTAL RETURN FOR
PERIODS ENDED 1/31/05
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Class A
(inception 9/20/93) NAV POP
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6 months 4.52% -0.17%
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1 year 4.19 -0.50
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5 years 40.81 34.42
Annual average 7.08 6.09
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10 years 79.65 71.58
Annual average 6.03 5.55
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Annual average
(life of fund) 7.04 6.78
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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 short-term trading fee of up to 2% may apply. Performance
prior to inception is derived from historical performance of class B
shares, adjusted for the applicable sales charge and lower operating
expenses.
FUND PROFILE
Putnam AMT-Free Insured Municipal Fund invests in bonds that are insured
as to timely payment of principal and interest, escrowed by securities
guaranteed by the U.S. government, and/or bonds that are rated AAA (or
the equivalent), which is the highest credit rating available. The fund
is intended and may be appropriate for investors seeking high current
income free from federal income tax.
Market overview
The U.S. economy continued to show solid, healthy growth during the past
six months, finishing calendar 2004 with the fastest growth rate since
1999. Consumers continued to drive the economy, as tax cuts, low
mortgage-refinancing rates, and an employment increase of more than two
million jobs fueled spending. Most importantly for the bond market, the
core inflation rate, which excludes volatile food and energy prices,
remained moderate.
The Federal Reserve Board continued to raise short-term interest rates
during the period in a deliberate, well-publicized manner. Just after
the period ended, on February 2, 2005, the benchmark federal funds rate
rose to 2.50%. As a result of this series of interest-rate increases,
which began in June 2004, short-term rates in the municipal market have
increased during the period. However, longer-term rates have declined
due to continued low inflation and a more moderate outlook for global
economic growth. As a result, the yield curve -- a graphical
representation of bond yields of all maturities -- has flattened.
With bond yields at historically low levels and confidence buoyed by the
growing economy, municipal investors sought out lower-quality bonds,
which typically carry higher yields because of their greater credit
risk. Hospital, utilities, and tobacco bonds offered particularly
attractive yields and rallied during the period. Another driver of
improved performance for tobacco bonds was the market's improved outlook
about ongoing litigation, which was brought on by a decline in the
number of tobacco lawsuits in recent years. Higher-quality bonds
offering lower yields generally underperformed lower-quality bonds.
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MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 1/31/05
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Bonds
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Lehman Municipal Bond Index (tax-exempt bonds) 4.80%
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Lehman Aggregate Bond Index (broad bond market) 3.81%
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Lehman GNMA Index (Government National Mortgage Association
bonds) 3.42%
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Lehman Global Aggregate Bond Index (international bonds) 9.18%
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Equities
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S&P 500 Index (broad stock market) 8.16%
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Russell 2000 Index (small-company stocks) 13.88%
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MSCI EAFE Index (international stocks) 16.68%
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These indexes provide an overview of performance in different market
sectors for the six months ended 1/31/05.
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Strategy overview
Prior to the beginning of the period, we believed interest rates would
rise across the board but felt that shorter-maturity bonds would see
greater increases than those on the long end. We expected, as a result,
to see a "flattening" of the municipal bond yield curve, which depicts
bond yields (or rates) of all maturities. (This flattening occurs when
short-term rates rise, long-term rates fall, or both.) Our feeling that
rates would generally rise was based on the maturing of the economic
recovery, increasing employment, rising energy prices, and a weak dollar
- -- factors which historically have contributed to rising interest rates.
Because rising rates erode the value of all bonds, we reduced the fund's
duration, or sensitivity to interest-rate changes, which would better
protect against the erosion of principal if rates were to rise.
However, the economic reports during the period showed continued
productivity and only moderate job gains. Furthermore, comments from the
Federal Reserve Board indicated that it felt inflation was not an
imminent threat. As it turned out, inflation proved to be
inconsequential, long-term bond yields declined, and, as a result, the
fund's shorter duration detracted from its relative performance.
On the positive side, our belief that the yield curve would flatten --
and our positioning of the fund to benefit -- helped the fund's relative
performance because the yield curve flattened even more than expected
(with the rise in short-term rates and decline in long-term rates).
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
7/31/04 1/31/05
Average effective
maturity in years 7.3% 6.4%
Duration in years 5.4% 5.1%
Footnotes read:
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
We positioned the fund for a flattening of the yield curve by employing
an interest-rate swap transaction. Without such a strategy, one way to
position the fund would have been to sell many of the shorter-maturity
bonds in the portfolio and buy longer-maturity bonds -- a more
cumbersome, labor-intensive process that could have incurred significant
transaction costs. Our swap strategy enabled us to create such a
position artificially by entering into short-term (for example,
three-month) contracts with another institution, such as a large bank or
brokerage firm. In such a contract, one party pays a fixed rate and the
other pays a "floating" rate that moves with short-term interest rates.
The net effect of our transaction was to create a synthetic security
that would benefit the fund if the yield curve were to flatten, as we
believed it would. Since the curve flattened more than we had
anticipated, the swap strategy made a strong contribution to
performance.
The fund also benefited when one of its largest holdings, a bond issued
by the New Jersey Economic Development Authority, was prerefunded.
Prerefunding occurs when an issuer raises the money to refinance an
older, higher-coupon bond by issuing new bonds at current lower interest
rates. This money is then invested in a secure investment, usually U.S.
Treasury securities, that mature at the older bond's first call date,
when it is used to pay off the old bonds. This added security is often
perceived as a credit upgrade by the market, and can boost the price of
the older bonds, resulting in capital appreciation for bondholders,
which occurred in this case.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa (89.7%)
A (2.6%)
Bbb (2.1%)
VMIG1 and other (5.6%)
Footnote reads:
As a percentage of market value as of 1/31/05. 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.
In a market in which lower-quality, higher-yielding municipal bonds
outperformed high-quality bonds, the fund's emphasis on AAA-rated,
AMT-free bonds detracted from its relative performance -- particularly
in comparison to its benchmark, the Lehman Municipal Bond Index, which
contains higher-yielding municipals.
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
Your fund's name has been changed
On November 12, 2004, the Trustees of the Putnam Funds approved a name
change for your fund from Putnam Tax-Free Insured Fund to Putnam
AMT-Free Insured Municipal Fund. The name change took effect on November
30, 2004. This change is part of Putnam's continuing efforts to ensure
clarity and consistency in fund names across our entire product line.
The investment objective and strategy of your fund remain the same. We
believe the new name brings the fund's strategy and competitive
advantage to the forefront.
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.
We expect the Fed to continue gradually raising rates in quarter-point
(0.25%) increments as long as the economy continues its current pattern
of growth. However, we expect growth to begin to slow during the second
half of the year, which may prompt the Fed to pause in its rate-hike
program.
While short-term interest rates have been on the rise for more than six
months now, they are still near historically low levels. Meanwhile,
long-term rates have declined, flattening the yield curve. Currently,
our outlook is for the yield curve to flatten even more, as short-term
rates rise with the Fed's adjustments, but we expect the prolonged
decline in long-term rates to reverse, sending bond prices down as rates
rise.
Over the rest of fiscal 2005, we expect to maintain a relatively short
portfolio duration and to keep the fund's interest-rate swap agreements
in place -- both as defensive measures. Given the historically low
levels of interest rates, we expect demand for higher-yielding bonds to
remain strong, although it may soften if economic growth slows. This
could make returns on higher-yielding instruments less robust than they
have been during the past 18 months, although the taxable market is
likely to experience any decrease in demand before the municipal
markets. Especially in terms of after-tax returns, we believe
high-yielding municipal bonds are likely to remain attractive to
investors even as rates reach a plateau in coming months.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. 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.
Shares of this fund are not insured, and their prices will fluctuate
with market conditions.
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.
Fund ownership
The table below shows how much the fund's current Portfolio Leader and
Portfolio Members have invested in the fund (in dollar ranges).
Information shown is for the current and prior year ended January 31.
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FUND PORTFOLIO LEADER AND PORTFOLIO MEMBERS
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$1 - $10,001 - $50,001- $100,001 - $500,001 - $1,000,001
Year $0 $10,000 $50,000 $100,000 $500,000 $1,000,000 and over
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David Hamlin 2005 *
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Portfolio Leader 2004 *
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Paul Drury 2005 *
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Portfolio Member 2004 *
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Susan McCormack 2005 *
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Portfolio Member 2004 *
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James St. John 2005 *
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Portfolio Member 2004 *
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Fund manager compensation
The total 2004 fund manager compensation that is attributable to your
fund is approximately $100,000. This amount includes a portion of 2004
compensation paid by Putnam Management to the fund managers listed in
this section for their portfolio management responsibilities, calculated
based on the fund assets they manage as a percentage of the total assets
they manage. The compensation amount also includes a portion of the 2004
compensation paid to the Chief Investment Officer of the team and the
Group Chief Investment Officer responsible for the fund's broader
investment category for their oversight responsibilities, calculated
based on the fund assets they oversee taken as a percentage of the total
assets they oversee. These percentages are determined as of the fund's
fiscal period-end. For personnel who joined Putnam Management during or
after 2004, the calculation reflects annualized 2004 compensation or an
estimate of 2005 compensation, as applicable.
Other Putnam 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. The
same group also 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 Income Fund, Putnam Municipal Opportunities
Trust, Putnam New York Investment Grade Municipal Trust, Putnam Tax
Exempt Income Fund, Putnam Tax-Free Health Care Fund, and Putnam
Tax-Free High Yield Fund.
David Hamlin, Paul Drury, Susan McCormack, and James St. John may also
manage other accounts and variable trust funds advised by Putnam
Management or an affiliate.
Changes in your fund's Portfolio Leader and Portfolio Members
During the year ended January 31, 2005, Portfolio Member Richard Wyke
left your fund's management team.
Fund ownership
The table below shows how much the members of Putnam's Executive Board
have invested in the fund (in dollar ranges). Information shown is for
the current and prior year ended January 31.
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PUTNAM EXECUTIVE BOARD
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$1 - $10,001 - $50,001- $100,001
Year $0 $10,000 $50,000 $100,000 and over
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Philippe Bibi 2005 *
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Chief Technology Officer 2004 *
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John Boneparth 2005 *
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Head of Global Institutional Mgmt 2004 *
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Joshua Brooks N/A
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Deputy Head of Investments N/A
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Kevin Cronin 2005 *
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Head of Investments N/A
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Charles Haldeman, Jr. 2005 *
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President and CEO 2004 *
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Amrit Kanwal 2005 *
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Chief Financial Officer N/A
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Steven Krichmar 2005 *
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Chief of Operations N/A
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Francis McNamara, III 2005 *
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General Counsel N/A
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Richard Monaghan 2005 *
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Head of Retail Management 2004 *
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Richard Robie, III 2005 *
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Chief Administrative Officer N/A
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Edward Shadek N/A
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Deputy Head of Investments N/A
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N/A indicates the individual joined Putnam's Executive Board after the
reporting date.
Performance summary
This section shows your fund's performance during the first half of its
fiscal year, which ended January 31, 2005. In accordance with regulatory
requirements, we also include performance for the most current calendar
quarter-end. Performance should always be considered in light of a
fund's investment strategy. Data 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 1/31/05
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Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (7/26/99) (6/1/95)
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NAV POP NAV CDSC NAV CDSC NAV POP
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6 months 4.52% -0.17% 4.16% -0.84% 4.11% 3.11% 4.38% 0.99%
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1 year 4.19 -0.50 3.45 -1.54 3.31 2.31 3.83 0.45
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5 years 40.81 34.42 37.04 35.04 35.44 35.44 38.78 34.25
Annual average 7.08 6.09 6.50 6.19 6.26 6.26 6.77 6.07
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10 years 79.65 71.58 72.76 72.76 65.76 65.76 74.30 68.69
Annual average 6.03 5.55 5.62 5.62 5.18 5.18 5.71 5.37
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Annual average (life
of fund) 7.04 6.78 6.77 6.77 6.47 6.47 6.82 6.64
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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 A, C,
and M shares before their inception is derived from the historical
performance of class B shares, adjusted for the applicable sales charge
(or CDSC) and higher or lower operating expenses for such shares.
A 2% short-term trading fee may be applied to shares exchanged or sold
within 5 days of purchase.
For a portion of the period, this fund limited expenses, without which
returns would have been lower.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/05
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Lehman Lipper Insured
Municipal Municipal Debt
Bond Funds category
Index average*
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6 months 4.80% 4.43%
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1 year 4.85 3.90
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5 years 43.54 38.73
Annual average 7.50 6.76
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10 years 94.08 76.79
Annual average 6.86 5.85
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Annual average
(life of fund) 7.93 7.28
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Index and Lipper results should be compared to fund performance at net
asset value.
* Over the 6-month and 1-, 5-, and 10-year periods ended 1/31/05, there
were 53, 53, 45, and 34 funds, respectively, in this Lipper category.
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PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 1/31/05
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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 $0.263244 $0.213873 $0.202666 $0.240973
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Capital gains 1
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Long-term $0.080000 $0.080000 $0.080000 $0.080000
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Short-term $0.026000 $0.026000 $0.026000 $0.026000
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Total $0.369244 $0.319873 $0.308666 $0.346973
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Share value: NAV POP NAV NAV NAV POP
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7/31/04 $14.92 $15.62 $14.94 $14.94 $14.96 $15.46
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1/31/05 15.22 15.94 15.24 15.24 15.26 15.77
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Current return (end of period)
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Current dividend rate 2 3.53% 3.37% 2.88% 2.73% 3.23% 3.13%
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Taxable equivalent 3 5.43 5.18 4.43 4.20 4.97 4.82
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Current 30-day SEC yield 4 2.67 2.55 2.03 1.88 2.38 2.30
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Taxable equivalent 3 4.11 3.92 3.12 2.89 3.66 3.54
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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 35.00% federal tax rate for 2005. Results for
investors subject to lower tax rates would not be advantageous.
4 Based only on investment income, calculated using SEC guidelines.
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TOTAL RETURN FOR PERIODS ENDED 12/31/04 (MOST RECENT CALENDAR QUARTER)
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Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (7/26/99) (6/1/95)
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NAV POP NAV CDSC NAV CDSC NAV POP
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6 months 4.93% 0.18% 4.57% -0.43% 4.52% 3.52% 4.78% 1.37%
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1 year 3.62 -1.04 2.96 -2.01 2.81 1.82 3.34 -0.03
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5 years 38.60 32.37 34.94 32.94 33.30 33.30 36.61 32.21
Annual average 6.75 5.77 6.18 5.86 5.92 5.92 6.44 5.74
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10 years 83.55 75.30 76.46 76.46 69.36 69.36 77.99 72.23
Annual average 6.26 5.77 5.84 5.84 5.41 5.41 5.94 5.59
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Annual average (life
of fund) 7.01 6.76 6.75 6.75 6.45 6.45 6.80 6.62
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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 would 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 AMT-Free Insured Municipal Fund from August 1,
2004, to January 31, 2005. 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 1/31/05
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Class A Class B Class C Class M
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Expenses paid per
$1,000* $4.38 $7.72 $8.49 $5.92
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Ending value (after
expenses) $1,045.20 $1,041.60 $1,041.10 $1,043.80
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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 1/31/05. 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
January 31, 2005, use the calculation method below. To find the value of
your investment on August 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 08/01/2004 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 8/1/04 [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 $4.38 (see table above) = $43.80
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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.
- --------------------------------------------------------------------------
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming a hypothetical 5% annualized return for the 6 months ended
1/31/05
- --------------------------------------------------------------------------
Class A Class B Class C Class M
- --------------------------------------------------------------------------
Expenses paid per
$1,000* $4.33 $7.63 $8.39 $5.85
- --------------------------------------------------------------------------
Ending value (after
expenses) $1,020.92 $1,017.64 $1,016.89 $1,019.41
- --------------------------------------------------------------------------
* 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 12/31/04. 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.
- --------------------------------------------------------------------------
EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA
- --------------------------------------------------------------------------
Class A Class B Class C Class M
- --------------------------------------------------------------------------
Your fund's annualized
expense ratio 0.85% 1.50% 1.65% 1.15%
- --------------------------------------------------------------------------
Average annualized expense
ratio for Lipper peer
group+ 0.88% 1.53% 1.68% 1.18%
- --------------------------------------------------------------------------
+ Average of the expenses of front-end load funds viewed by Lipper as
having the same investment classification or objective as the fund,
as of 12/31/04, calculated in accordance with Lipper's standard
reporting methodology for comparing expenses within a given universe
(excluding 12b-1 fees and without giving effect to any expense offset
and brokerage service arrangements that may reduce fund expenses). To
facilitate comparison, Putnam has adjusted this average to reflect the
12b-1 fees carried by each class 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.
Risk comparison
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 AMT-Free Insured
Municipal Fund 27% 43% 55% 37% 22%
- ------------------------------------------------------------------------------
Lipper Insured Municipal
Debt Funds category average 51% 61% 54% 49% 69%
- ------------------------------------------------------------------------------
Turnover data for the fund is calculated based on the fund's
fiscal-year period, which ends on July 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 12/31/04.
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 0.24
Municipal bond
fund average 0.21
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 December 31, 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 of U.S.
investment-grade fixed-income securities.
Lehman Global Aggregate Bond Index is an unmanaged index of global
investment-grade fixed-income securities.
Lehman GNMA Index is an unmanaged index of Government National Mortgage
Association bonds.
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged
index of equity securities from developed countries in Western Europe,
the Far East, and Australasia.
Russell 2000 Index is an unmanaged index of the 2,000 smallest companies
in the Russell 3000 Index.
S&P 500 Index is an unmanaged index of common stock performance.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper 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.
Trustee approval of management contract
General conclusions
The Board of Trustees of the Putnam funds oversees the management of
each fund and, as required by law, determines annually whether to
approve the continuance of each fund's management contract with Putnam
Management. In this regard the Board of Trustees, with the assistance of
its Contract Committee consisting solely of Independent Trustees,
requests and evaluates all information it deems reasonably necessary in
the circumstances. Over the course of several months beginning in March
and ending in June of 2004, the Contract Committee reviewed the
information provided by Putnam Management and other information
developed with the assistance of the Board's independent counsel and
independent staff. The Contract Committee reviewed and discussed key
aspects of this information with all of the Independent Trustees. Upon
completion of this review, the Contract Committee recommended and the
Independent Trustees approved the continuance of your fund's contract,
effective July 1, 2004.
This approval was based on the following conclusions:
* That the fee schedule currently in effect for your fund represents
reasonable compensation in light of the nature and quality of the
services being provided to the fund, the fees paid by competitive funds
and the costs incurred by Putnam Management in providing such service,
and
* That such fee schedule represents an appropriate sharing between fund
shareholders and Putnam Management of such economies of scale as may
exist in the management of the fund at current asset levels.
These conclusions were based on a comprehensive consideration of all
information provided to the Trustees and were not the result of any
single factor. Some of the factors that figured particularly in the
Trustees' deliberations are described below.
Model fee schedules and categories; total expenses
The Trustees, working in cooperation with Putnam Management, have
developed and implemented a series of model fee schedules for the Putnam
funds designed to ensure that each fund's management fee is consistent
with the fees for similar funds in the Putnam complex and compares
favorably with fees paid by competitive funds sponsored by other
advisors. The Trustees reviewed the model fee schedule currently in
effect for the fund, including fee levels and breakpoints, and the
assignment of the fund to a particular fee category under this
structure. The Trustees also reviewed comparative fee and expense
information for competitive funds. The Trustees concluded that no
changes should be made in the fund's current fee schedule at this time.
The Trustees noted that expense ratios for a number of Putnam funds had
been increasing recently as a result of declining net assets and the
natural operation of fee breakpoints. They noted that such expense ratio
increases were currently being controlled by expense limitations
implemented in January 2004. They also noted that the competitive
landscape regarding mutual fund fees may be changing as a result of fee
reductions accepted by various other fund groups in connection with
recent regulatory settlements and greater focus on fees and expenses in
the mutual fund industry generally. The Trustees indicated an intention
to monitor these developments closely.
Economies of scale
As noted above, the Trustees concluded that the fee schedule currently
in effect for your fund represents an appropriate sharing of economies
of scale at current asset levels. The Trustees indicated their intention
to continue their ongoing consideration of economies of scale and in
particular to consider further the possible operation of such economies
in the event that a significant recovery in the equity markets or net
fund sales were to raise asset levels substantially above current
levels. In this regard, the Trustees noted that they had reviewed data
relating to the substantial increase in asset levels of the Putnam funds
that occurred during the years leading up to the market peak in 2000,
the subsequent decline in assets and the resulting impact on revenues
and expenses of Putnam Management. The Trustees also noted that recent
declines in net assets in many Putnam funds, together with significant
changes in the cost structure of Putnam Management have altered the
economics of Putnam Management's business in significant ways. The
Trustees concluded that they would monitor these changes carefully and
evaluate the resulting impact on Putnam Management's economics and the
sharing of economies of scale between the parties.
Investment performance
The quality of the investment process provided by Putnam Management
represented a major factor in the Trustees' evaluation of the quality of
services provided by Putnam Management under the Management Contracts.
The Trustees recognized that a high quality investment process -- as
measured by the experience and skills of the individuals assigned to the
management of fund portfolios, the resources made available to such
personnel, and in general the ability of Putnam Management to attract
and retain high-quality personnel -- does not guarantee favorable
investment results for every fund in every time period. The Trustees
considered the investment performance of each fund over multiple time
periods and considered information comparing the fund's performance with
various benchmarks and with the performance of competitive funds. The
Trustees noted the satisfactory investment performance of many Putnam
funds.
They also noted the disappointing investment performance of certain
funds in recent years and continued to discuss with senior management of
Putnam Management the factors contributing to such under-performance and
actions being taken to improve performance. The Trustees recognized
that, in recent years, Putnam Management has made significant changes in
its investment personnel and processes and in the fund product line in
an effort to address areas of underperformance. The Trustees indicated
their intention to continue to monitor performance trends to assess the
effectiveness of these changes and to evaluate whether additional
remedial changes are warranted. As a general matter, the Trustees
concluded that consultation between the Trustees and Putnam Management
represents the most effective way to address investment performance
problems. The Trustees believe that investors in the Putnam funds and
their financial advisors have, as a general matter, effectively placed
their trust in the Putnam organization, under the supervision of the
funds' Trustees, to make appropriate decisions regarding the management
of the funds. The Trustees believe that the termination of the
Management Contract and engagement of a new investment adviser for
under-performing funds, with all the attendant disruptions, would not
serve the interests of fund shareholders at this time and would not
necessarily provide any greater assurance of improved investment
performance.
Brokerage and soft-dollar allocations; other benefits
The Trustees considered various potential benefits that Putnam
Management may receive in connection with the services it provides under
the Management Contract with your fund. These include principally
benefits related to brokerage and soft-dollar allocations, which pertain
mainly to funds investing in equity securities. The Trustees believe
that soft-dollar credits and other potential benefits associated with
the allocation of fund brokerage represent assets of the funds that
should be used for the benefit of fund shareholders. The Trustees noted
recent trends in the allocation of fund brokerage, including commission
costs, the allocation of brokerage to firms that provide research
services to Putnam Management, and the sources and application of
available soft-dollar credits. Effective December 31, 2003, reflecting a
decision made by the Trustees earlier that year, Putnam Management
ceased allocating brokerage in connection with the sale of fund shares.
In addition, in preparing its budget for commission allocations in 2004,
Putnam Management voluntarily reduced substantially the allocation of
brokerage commissions to acquire research services from third-party
service providers. In light of evolving best practices in the mutual
fund industry, the Trustees concluded that this practice should be
further curtailed and possibly eliminated in the near future. The
Trustees indicated that they would continue to monitor the allocation of
the funds' brokerage to ensure that the principle of "best price and
execution" remains paramount in the portfolio trading process.
Comparison of retail and institutional fee schedules
The information examined by the Trustees as part of the annual contract
reviews included information regarding fees charged by Putnam Management
and its affiliates to institutional clients such as defined benefit
pension plans and college endowments. This information included
comparison of such fees with fees charged to the Putnam funds, as well
as a detailed assessment of the differences in the services provided to
these two types of clients. The Trustees devoted special attention to
these issues and reviewed recent articles by critics of mutual fund
fees, articles by the ICI defending such fee differences, and relevant
guidance provided by decisions of the courts. The Trustees observed, in
this regard, that the differences in fee rates between institutional
clients and mutual funds are by no means uniform when examined by
individual asset sectors, suggesting that differences in the pricing of
investment management services to these types of clients reflects to a
substantial degree historical competitive forces operating in separate
market places. In reaching their conclusions, the Trustees considered
the fact that fee rates across all asset sectors are higher on average
for mutual funds than for institutional clients, and also considered the
differences between the services that Putnam provides to the Putnam
funds and those that it provides to institutional clients of the firm.
Settlement of regulatory charges related to market timing
Finally, in reaching their conclusions, the Trustees considered all
matters pertinent to the administrative charges filed against Putnam
Management by the SEC and the Commonwealth of Massachusetts in October
2003 relating to market timing, the firm's settlement of those charges,
and the conclusions and recommendations of the Trustees' Audit and
Pricing Committee based on its review of these matters. The Trustees
considered the actions taken by the owner of Putnam Management and its
new senior management to terminate or discipline the individuals
involved, to implement new compliance systems, to indemnify the funds
against all costs and liabilities related to these matters, and
otherwise to ensure that the interests of the funds and their
shareholders are fully protected. The Trustees noted that, in addition
to the settlements of the regulatory charges which will provide
comprehensive restitution for any losses suffered by shareholders, the
new senior management of Putnam Management has moved aggressively to
control expense ratios of funds affected by market timing, to reduce
charges to new investors, to improve disclosure of fees and expenses,
and to emphasize the paramount role of investment performance in
achieving shareholders' investment goals.
Other information for shareholders
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.
The fund's portfolio
January 31, 2005 (Unaudited)
Key to Abbreviations
- -------------------------------------------------------------------------------
AMBAC AMBAC Indemnity Corporation
COP Certificate of Participation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
GNMA Coll. Government National Mortgage Association Collateralized
G.O. Bonds General Obligation Bonds
MBIA MBIA Insurance Company
PSFG Permanent School Fund Guaranteed
RAN Revenue Anticipation Notes
VRDN Variable Rate Demand Notes
XLCA XL Capital Assurance
Municipal bonds and notes (98.6%) (a)
Principal amount Rating (RAT) Value
Alabama (0.8%)
- -------------------------------------------------------------------------------
$3,000,000 Alabama A&M U. Rev. Bonds, MBIA,
6 1/2s, 11/1/25 Aaa $3,158,250
Alaska (2.7%)
- -------------------------------------------------------------------------------
AK State Hsg. Fin. Corp. Rev. Bonds,
Ser. A
6,000,000 MBIA, 5.9s, 12/1/19 Aaa 6,221,520
4,560,000 4.4s, 12/1/31 Aaa 4,675,094
--------------
10,896,614
Arkansas (0.5%)
- -------------------------------------------------------------------------------
2,000,000 Little Rock G.O. Bonds (Cap. Impt.),
FSA, 3.95s, 4/1/19 Aaa 2,065,040
California (9.4%)
- -------------------------------------------------------------------------------
12,000,000 CA State Dept. of Wtr. Resources
Rev. Bonds, Ser. A, AMBAC, 5 1/2s,
5/1/13 Aaa 13,757,760
3,000,000 CA Statewide Cmnty. Dev. Auth. COP
(Motion Picture & TV Fund), AMBAC,
5.35s, 1/1/24 Aaa 3,048,150
2,475,000 Golden State Tobacco Securitization
Corp. Rev. Bonds (Tobacco
Settlement), Ser. B, AMBAC, 5s,
6/1/38 Aaa 2,563,481
2,745,000 Los Angeles, Unified School Dist.
G.O. Bonds (Election of 2004),
Ser. C, FGIC, 5s, 7/1/26 Aaa 2,914,174
7,000,000 San Diego Cnty., Wtr. Auth. COP,
FGIC, 5.681s, 4/23/08 Aaa 7,715,260
2,000,000 San Diego, Unified School Dist. G.O.
Bonds (Election of 1998), Ser. E,
FSA, 5 1/4s, 7/1/19 Aaa 2,263,300
3,680,000 Santa Ana, Fin. Auth. Lease
Rev. Bonds (Police Admin. & Hldg.
Fac.), Ser. A, MBIA, 6 1/4s, 7/1/17 Aaa 4,590,285
--------------
36,852,410
Colorado (2.8%)
- -------------------------------------------------------------------------------
1,000,000 CO Dept. of Trans. RAN, AMBAC, 6s,
6/15/06 Aaa 1,049,330
361,000 CO Hlth. Fac. Auth. Rev. Bonds
(Cmnty. Provider Pooled Loan
Program), Ser. A, FSA, 7 1/4s,
7/15/17 Aaa 362,141
5,000,000 Denver, City & Cnty. Arpt.
Rev. Bonds, MBIA, 5 1/2s, 11/15/25 Aaa 5,272,500
4,000,000 Weld Cnty. School Dist. G.O. Bonds,
FSA, 5 1/2s, 12/1/19 Aaa 4,489,680
--------------
11,173,651
District of Columbia (0.7%)
- -------------------------------------------------------------------------------
3,000,000 DC G.O. Bonds, Ser. A, FSA, 5 7/8s,
6/1/05 Aaa 3,037,170
Florida (7.7%)
- -------------------------------------------------------------------------------
13,675,000 Hernando Cnty., Rev. Bonds (Criminal
Justice Complex Fin.), FGIC, 7.65s,
7/1/16 Aaa 18,742,271
5,000,000 Orlando & Orange Cnty., Expressway
Auth. Rev. Bonds, FGIC, 8 1/4s,
7/1/14 Aaa 6,875,600
3,935,000 Sumter Cnty., School Dist.
Rev. Bonds (Multi Dist. Loan
Program), FSA, 7.15s, 11/1/15 Aaa 5,174,446
--------------
30,792,317
Georgia (1.7%)
- -------------------------------------------------------------------------------
3,360,000 Fulton Cnty., Dev. Auth. Rev. Bonds
(Klaus Pkg. & Fam. Hsg. Project),
MBIA, 5 1/4s, 11/1/20 Aaa 3,740,554
415,000 GA Muni. Elec. Pwr. Auth.
Rev. Bonds, Ser. Y, AMBAC, 6.4s,
1/1/13 Aaa 493,821
2,500,000 Muni. Elec. Auth. Rev. Bonds, AMBAC,
5s, 1/1/26 Aaa 2,685,075
--------------
6,919,450
Illinois (6.5%)
- -------------------------------------------------------------------------------
5,500,000 Chicago, G.O. Bonds, Ser. A, AMBAC,
5 5/8s, 1/1/39 Aaa 6,127,825
1,500,000 Chicago, Board of Ed. G.O. Bonds,
Ser. A, MBIA, 5 1/4s, 12/1/19 Aaa 1,645,995
4,385,000 Cook Cnty., G.O. Bonds, Ser. D,
AMBAC, 5 1/4s, 11/15/21 Aaa 4,785,000
1,000,000 Du Page Cnty., Cmnty. High School
Dist. G.O. Bonds (Dist. No. 108 -
Lake Park), FSA, 5.6s, 1/1/20 Aaa 1,128,520
5,000,000 IL G.O. Bonds, Ser. 1, MBIA, 5 1/4s,
10/1/19 Aaa 5,523,200
5,000,000 Regl. Trans. Auth. Rev. Bonds,
Ser. A, AMBAC, 8s, 6/1/17 Aaa 6,923,950
--------------
26,134,490
Indiana (5.2%)
- -------------------------------------------------------------------------------
1,655,000 Anderson, Indpt. School Bldg. Corp.
G.O. Bonds (First Mtg.), FSA,
5 1/2s, 1/15/28 AAA 1,830,877
Brownsburg Ind. 1999 School Bldg.
Corp. Rev. Bonds (1st Mtge.),
Ser. A, FSA
3,465,000 5 1/4s, 9/15/19 Aaa 3,825,741
3,295,000 5 1/4s, 9/15/18 Aaa 3,653,364
6,605,000 Center Grove, Bldg. Rev. Bonds,
AMBAC, 5 1/2s, 1/15/26 Aaa 7,237,891
1,000,000 Evansville Vanderburgh Pub. Leasing
Corp. Rev. Bonds (1st Mtge.), MBIA,
5 3/4s, 7/15/18 Aaa 1,131,140
3,135,000 IN Bond Bk. Rev. Bonds, AMBAC, 5s,
2/1/06 Aaa 3,218,673
--------------
20,897,686
Kansas (0.5%)
- -------------------------------------------------------------------------------
2,145,000 Olathe, Hlth. Fac. VRDN (Olathe Med.
Ctr.), Ser. A, AMBAC, 1.9s, 9/1/32 A-1+ 2,145,000
Louisiana (3.5%)
- -------------------------------------------------------------------------------
18,022 East Baton Rouge, Mtge. Fin. Auth.
Rev. Bonds (Single Fam.), Ser. B,
GNMA Coll., 8 1/4s, 2/25/11 AAA 18,092
5,730,000 Ernest N. Morial-New Orleans Exhibit
Hall Auth. Special Tax, AMBAC, 5s,
7/15/20 AAA 6,240,142
3,000,000 LA Rev. Bonds, Ser. A, AMBAC,
5 3/8s, 6/1/19 Aaa 3,311,700
4,000,000 LA State U. & Agriculture &
Mechanical College Rev. Bonds, MBIA,
5 1/2s, 7/1/26 Aaa 4,240,200
--------------
13,810,134
Massachusetts (4.3%)
- -------------------------------------------------------------------------------
2,680,000 MA State Hlth. & Edl. Fac. Auth.
VRDN, Ser. D, MBIA, 1.9s, 1/1/35 VMIG1 2,680,000
MA State Special Oblig. Dedicated
Tax Rev. Bonds, FGIC
1,000,000 5 1/4s, 1/1/24 Aaa 1,092,110
1,000,000 5 1/4s, 1/1/23 Aaa 1,095,250
11,000,000 5 1/4s, 1/1/22 Aaa 12,143,230
--------------
17,010,590
Michigan (7.4%)
- -------------------------------------------------------------------------------
720,000 Detroit, Rev. Bonds, Ser. B, FGIC,
5 1/4s, 7/1/20 Aaa 784,872
7,990,000 Detroit, City School Dist. G.O.
Bonds (School Bldg. & Site Impt.),
Ser. B, FGIC, 5s, 5/1/25 Aaa 8,436,721
5,030,000 Detroit, Swr. Disp. VRDN, Ser. B,
FSA, 1.9s, 7/1/33 VMIG1 5,030,000
500,000 Kent, Hosp. Fin. Auth. Rev. Bonds
(Spectrum Hlth. Care), Ser. A, MBIA,
5 1/2s, 1/15/17 AAA 557,600
5,000,000 MI State Hosp. Fin. Auth. Rev. Bonds
(Mercy Hlth. Svcs.), Ser. A, AMBAC,
6s, 8/15/34 Aaa 5,631,900
MI State Strategic Fund, Ltd.
Rev. Bonds (Detroit Edison Co.),
AMBAC
4,000,000 7s, 5/1/21 Aaa 5,371,280
3,500,000 4.85s, 9/1/30 Aaa 3,760,470
--------------
29,572,843
Mississippi (1.0%)
- -------------------------------------------------------------------------------
MS Dev. Bk. Special Obligation
Rev. Bonds (Waste Wtr. & Solid Waste
Mgt.), Ser. A, FSA
$1,855,000 5 3/8s, 2/1/19 Aaa 2,064,263
1,755,000 5 3/8s, 2/1/18 Aaa 1,944,031
--------------
4,008,294
Missouri (3.1%)
- -------------------------------------------------------------------------------
12,525,000 MO State Hlth. & Edl. Fac. Auth.
VRDN (Cox Hlth. Syst.), AMBAC,
1.97s, 6/1/22 VMIG1 12,525,000
Montana (0.5%)
- -------------------------------------------------------------------------------
1,725,000 Forsyth, Poll. Control Mandatory Put
Bonds (Avista Corp.), AMBAC, 5s,
12/30/08 Aaa 1,834,917
Nevada (2.2%)
- -------------------------------------------------------------------------------
8,295,000 Clark Cnty., Rev. Bonds, Ser. B,
FGIC, 5 1/4s, 7/1/20 Aaa 8,958,683
New Hampshire (1.4%)
- -------------------------------------------------------------------------------
5,000,000 NH State Tpk. Syst. Rev. Bonds,
FGIC, 6.806s, 11/1/17 Aaa 5,462,400
New Jersey (4.2%)
- -------------------------------------------------------------------------------
NJ Econ. Dev. Auth. Rev. Bonds
10,000,000 (School Fac. Construction), Ser. F,
FGIC, 5 1/4s, 6/15/21 Aaa 11,415,100
5,000,000 (Motor Vehicle), Ser. A, MBIA, 5s,
7/1/27 Aaa 5,284,250
--------------
16,699,350
New York (4.8%)
- -------------------------------------------------------------------------------
Nassau Cnty., Hlth. Care Syst.
Rev. Bonds (Nassau Hlth. Care
Corp.), FSA
4,610,000 6s, 8/1/13 Aaa 5,323,029
2,285,000 6s, 8/1/12 Aaa 2,638,421
3,000,000 NY City, Muni. Wtr. & Swr. Fin.
Auth. Rev. Bonds, Ser. B, AMBAC, 5s,
6/15/28 Aaa 3,179,640
NY State Dorm. Auth. Rev. Bonds
(Brooklyn Law School), Ser. B, XLCA
2,270,000 5 3/8s, 7/1/22 Aaa 2,535,658
2,215,000 5 3/8s, 7/1/20 Aaa 2,496,349
3,000,000 Sales Tax Asset Receivable Corp.
Rev. Bonds, Ser. A, AMBAC, 5s,
10/15/29 Aaa 3,177,150
--------------
19,350,247
North Carolina (3.7%)
- -------------------------------------------------------------------------------
6,000,000 Metropolitan Pier & Exposition Auth.
Rev. Bonds (McCormack Place
Expansion Project), FGIC, 5 1/2s,
12/15/24 Aaa 6,577,440
7,500,000 NC State Muni. Pwr. Agcy. Rev. Bonds
(No. 1, Catawba Elec.), Ser. A,
MBIA, 5 1/4s, 1/1/19 Aaa 8,296,200
--------------
14,873,640
Ohio (2.4%)
- -------------------------------------------------------------------------------
6,765,000 Cleveland, Wtr. Wks. Rev. Bonds,
Ser. J, FSA, 5s, 1/1/06 Aaa 6,934,802
1,000,000 Cleveland-Cuyahoga Cnty., Port.
Auth. Rev. Bonds (Rock & Roll Hall
of Fame), FSA, 3.6s, 12/1/14 Aaa 1,001,430
1,535,000 Morley Library Dist. G.O. Bonds
(Lake Cnty. Dist. Library), AMBAC,
5 1/4s, 12/1/19 Aaa 1,705,247
45,000 OH Hsg. Fin. Agcy. Single Fam. Mtge.
Rev. Bonds, Ser. 85-A, FGIC, zero %,
1/15/15 Aaa 16,866
--------------
9,658,345
Oklahoma (0.8%)
- -------------------------------------------------------------------------------
3,000,000 OK City Arpt. Trust Rev. Bonds,
Ser. A, FSA, 5 1/4s, 7/1/21 Aaa 3,201,780
Oregon (0.5%)
- -------------------------------------------------------------------------------
1,880,000 Salem-Keizer, School Dist. G.O.
Bonds (No. 24J), FSA, 4s, 6/15/06 Aaa 1,921,943
Pennsylvania (0.8%)
- -------------------------------------------------------------------------------
3,000,000 PA State Pub. School Bldg. Auth.
Rev. Bonds (Philadelphia School
Dist.), FSA, 5 1/4s, 6/1/25 Aaa 3,276,540
Texas (8.8%)
- -------------------------------------------------------------------------------
2,500,000 Dallas, Indpt. School Dist. G.O.
Bonds, PSFG, 5 1/4s, 2/15/19 Aaa 2,728,300
1,250,000 Harris Cnty., Mandatory Put Bonds
(Toll Road), FGIC, 5s, 8/15/09 Aaa 1,350,813
1,190,000 Hays Cnty., G.O. Bonds, FSA, 5s,
8/15/24 Aaa 1,269,920
5,280,000 Houston, Arpt. Syst. Rev. Bonds,
FSA, 5s, 7/1/21 Aaa 5,587,771
1,000,000 Houston, Cmnty. College Syst.
Rev. Bonds (Student Fee), MBIA,
5.1s, 4/15/06 Aaa 1,032,440
1,000,000 Laredo, I S D Pub. Fac. Corp.
Rev. Bonds, Ser. C, AMBAC, 5s,
8/1/29 AAA 1,029,020
4,000,000 San Antonio Wtr. Rev. Bonds, FSA,
5 1/2s, 5/15/20 Aaa 4,474,720
8,000,000 San Antonio, Hotel Occupancy
Mandatory Put Bonds, Ser. B, AMBAC,
5s, 8/15/08 Aaa 8,546,400
5,000,000 Tarrant Cnty., Hlth. Fac. Dev.
Rev. Bonds (TX Hlth. Res. Sys.),
Ser. A, MBIA, 5 3/4s, 2/15/15 Aaa 5,784,400
3,150,000 Victoria G.O. Bonds, FGIC, 5 1/2s,
8/15/20 Aaa 3,484,404
--------------
35,288,188
Utah (3.4%)
- -------------------------------------------------------------------------------
UT State Pwr. Supply Rev. Bonds
(Intermountain Pwr. Agcy.), Ser. A,
MBIA
7,900,000 6.15s, 7/1/14 (prerefunded) Aaa 8,629,407
4,495,000 6.15s, 7/1/14 Aaa 4,805,155
--------------
13,434,562
Washington (6.0%)
- -------------------------------------------------------------------------------
10,000,000 Port of Seattle Rev. Bonds, Ser. A,
FGIC, 5 1/2s, 10/1/22 Aaa 10,777,500
WA State Pub. Pwr. Supply Syst.
Rev. Bonds
6,000,000 (Nuclear No. 3), Ser. B, MBIA,
7 1/8s, 7/1/16 Aaa 7,774,680
5,000,000 (Nuclear No. 1), Ser. A, AMBAC,
5.7s, 7/1/09 Aaa 5,310,400
--------------
23,862,580
West Virginia (1.3%)
- -------------------------------------------------------------------------------
5,000,000 Econ. Dev. Auth. Lease Rev. Bonds
(Correctional Juvenile Safety),
Ser. A, MBIA, 5s, 6/1/29 Aaa 5,246,700
- -------------------------------------------------------------------------------
Total Investments
(cost $367,243,567) $394,068,814
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $399,839,163.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at January 31, 2005 for the
securities listed. Ratings are generally ascribed to securities at the
time of issuance. While the agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at January 31, 2005. Securities rated by Putnam are indicated
by "/P". Security ratings are defined in the Statement of Additional
Information.
The rates shown on VRDN and Mandatory Put Bonds are the current interest
rates at January 31, 2005.
The dates shown on Mandatory Put Bonds are the next mandatory put dates.
The fund had the following industry group (concentrations) greater than
10% at January 31, 2005 (as a percentage of net assets):
Health care 16.0%
Utilities 15.7
Transportation 12.1
The fund had the following insurance (concentrations) greater than 10%
at January 31, 2005 (as a percentage of net assets):
AMBAC 28.9%
FGIC 27.0
MBIA 21.4
FSA 18.1
Interest rate swap contracts outstanding at January 31, 2005 (Unaudited)
Unrealized
Notional Termination appreciation/
amount date (depreciation)
- -------------------------------------------------------------------------------
Agreement with Citibank,
N.A. dated December 14, 2004
to receive quarterly the notional
amount multiplied by 3.13% and
pay quarterly the notional amount
multiplied by the Bond Market
Association Municipal Swap Index. $10,000,00 3/17/10 $174,301
Agreement with Citibank,
N.A. dated December 14, 2004
to receive quarterly the notional
amount multiplied by 4.106% and
pay quarterly the notional amount
multiplied by the Bond Market
Association Municipal Swap Index. 8,000,00 3/17/25 197,359
Agreement with Citibank,
N.A. dated November 4, 2004
to receive quarterly the notional
amount multiplied by 4.067% and
pay quarterly the notional amount
multiplied by the Bond Market
Association Municipal Swap Index. 8,000,00 2/28/05 (9,157)
Agreement with JP Morgan Chase
Bank dated November 4, 2004
to receive quarterly the notional
amount multiplied by 2.946% and
pay quarterly the notional amount
multiplied by the Bond Market
Association Municipal Swap Index. 10,000,00 2/18/14 58,884
- -------------------------------------------------------------------------------
$421,387
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities
January 31, 2005 (Unaudited)
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$367,243,567) (Note 1) $394,068,814
- -------------------------------------------------------------------------------
Cash 3,379,896
- -------------------------------------------------------------------------------
Interest and other receivables 3,527,543
- -------------------------------------------------------------------------------
Receivable for open swap contracts (Note 1) 430,544
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 121,505
- -------------------------------------------------------------------------------
Total assets $401,528,302
Liabilities
- -------------------------------------------------------------------------------
Distributions payable to shareholders 456,823
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 583,945
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 340,572
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 33,873
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 61,473
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,787
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 131,776
- -------------------------------------------------------------------------------
Payable for open swap contracts (Note 1) 9,157
- -------------------------------------------------------------------------------
Other accrued expenses 69,733
- -------------------------------------------------------------------------------
Total liabilities 1,689,139
- -------------------------------------------------------------------------------
Net assets $399,839,163
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Unlimited shares authorized) (Notes 1 and 4) $373,988,261
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 273,937
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (1,669,669)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 27,246,634
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $399,839,163
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($286,888,147 divided by 18,852,791 shares) $15.22
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.50 of $15.22)* $15.94
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($102,157,821 divided by 6,703,318 shares)** $15.24
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($9,625,278 divided by 631,387 shares)** $15.24
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,167,917 divided by 76,541 shares) $15.26
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $15.26)*** $15.77
- -------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or
more and on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
*** On single retail sales of less than $50,000. On sales of $50,000 or more
and on group sales, the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
Statement of operations
Six months ended January 31, 2005 (Unaudited)
Interest income: $8,892,867
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,026,660
- -------------------------------------------------------------------------------
Investor servicing fees (Note 2) 143,374
- -------------------------------------------------------------------------------
Custodian fees (Note 2) 62,460
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 7,743
- -------------------------------------------------------------------------------
Administrative services (Note 2) 7,900
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 290,870
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 457,929
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 49,576
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 2,980
- -------------------------------------------------------------------------------
Other 86,419
- -------------------------------------------------------------------------------
Non-recurring costs (Notes 2 and 5) 8,381
- -------------------------------------------------------------------------------
Costs assumed by manager (Notes 2 and 5) (8,381)
- -------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2) (2,840)
- -------------------------------------------------------------------------------
Total expenses 2,133,071
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (14,360)
- -------------------------------------------------------------------------------
Net expenses 2,118,711
- -------------------------------------------------------------------------------
Net investment income 6,774,156
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 2,028,329
- -------------------------------------------------------------------------------
Net realized gain on swap contracts (Note 1) 16,860
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments and swap
contracts during the period 8,814,834
- -------------------------------------------------------------------------------
Net gain on investments 10,860,023
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $17,634,179
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of changes in net assets
Six months ended Year ended
January 31 July 31
Decrease in net assets 2005* 2004
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $6,774,156 $15,472,332
- -------------------------------------------------------------------------------
Net realized gain on investments 2,045,189 5,042,151
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 8,814,834 4,246,111
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 17,634,179 24,760,594
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From ordinary income
Class A -- (155,348)
- -------------------------------------------------------------------------------
Class B -- (63,444)
- -------------------------------------------------------------------------------
Class C -- (5,724)
- -------------------------------------------------------------------------------
Class M -- (621)
- -------------------------------------------------------------------------------
From tax-exempt income
Class A (5,019,410) (11,278,226)
- -------------------------------------------------------------------------------
Class B (1,508,942) (3,653,149)
- -------------------------------------------------------------------------------
Class C (131,034) (313,118)
- -------------------------------------------------------------------------------
Class M (18,768) (45,600)
- -------------------------------------------------------------------------------
From net realized short-term gain on investments
Class A (492,411) (1,116,737)
- -------------------------------------------------------------------------------
Class B (179,407) (456,430)
- -------------------------------------------------------------------------------
Class C (17,027) (41,167)
- -------------------------------------------------------------------------------
Class M (2,020) (4,466)
- -------------------------------------------------------------------------------
From net realized long-term gain on investments
Class A (1,515,112) (4,339,321)
- -------------------------------------------------------------------------------
Class B (552,023) (1,773,555)
- -------------------------------------------------------------------------------
Class C (52,391) (159,963)
- -------------------------------------------------------------------------------
Class M (6,217) (17,352)
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (17,611,097) (126,651,035)
- -------------------------------------------------------------------------------
Total decrease in net assets (9,471,680) (125,314,662)
Net assets
- -------------------------------------------------------------------------------
Beginning of period 409,310,843 534,625,505
- -------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $273,937 and $177,935,
respectively) $399,839,163 $409,310,843
- -------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2005 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.92 $14.93 $15.46 $15.18 $14.52 $14.72
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .27 (c) .53 .58 .67 .71 .73
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .40 .25 (.16) .27 .66 (.20)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .67 .78 .42 .94 1.37 .53
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.26) (.53) (.59) (.66) (.71) (.73)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.11) (.26) (.36) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.37) (.79) (.95) (.66) (.71) (.73)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.22 $14.92 $14.93 $15.46 $15.18 $14.52
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.52* 5.20 2.71 6.38 9.63 3.86
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $286,888 $287,528 $368,419 $363,096 $322,302 $260,637
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .43* (c) .85 .84 .82 .83 .81
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.76* (c) 3.49 3.76 4.39 4.74 5.15
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 5.98* 26.81 42.88 54.72 36.91 22.45
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an involuntary contractual expense limitation in effect
during the period. As a result of such limitation, expenses of the fund
for the period ended January 31, 2005 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
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2005 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.94 $14.95 $15.48 $15.20 $14.54 $14.74
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .22 (c) .44 .48 .59 .65 .68
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .40 .24 (.16) .27 .66 (.20)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .62 .68 .32 .86 1.31 .48
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.21) (.43) (.49) (.58) (.65) (.68)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.11) (.26) (.36) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.32) (.69) (.85) (.58) (.65) (.68)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.24 $14.94 $14.95 $15.48 $15.20 $14.54
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.16* 4.52 2.04 5.81 9.18 3.44
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $102,158 $110,498 $150,266 $171,801 $196,934 $238,508
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .76* (c) 1.50 1.49 1.35 1.23 1.21
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.43* (c) 2.83 3.10 3.86 4.34 4.75
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 5.98* 26.81 42.88 54.72 36.91 22.45
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an involuntary contractual expense limitation in effect
during the period. As a result of such limitation, expenses of the fund
for the period ended January 31, 2005 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
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2005 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.94 $14.95 $15.49 $15.21 $14.53 $14.72
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .21 (c) .41 .46 .55 .59 .62
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .40 .25 (.17) .27 .68 (.19)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .61 .66 .29 .82 1.27 .43
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.20) (.41) (.47) (.54) (.59) (.62)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.11) (.26) (.36) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.67) (.83) (.54) (.59) (.62)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.24 $14.94 $14.95 $15.49 $15.21 $14.53
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.11* 4.40 1.82 5.53 8.89 3.11
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $9,625 $10,097 $13,793 $11,885 $9,638 $1,123
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .83* (c) 1.65 1.64 1.62 1.63 1.61
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.36* (c) 2.69 2.95 3.58 3.88 4.33
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 5.98* 26.81 42.88 54.72 36.91 22.45
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an involuntary contractual expense limitation in effect
during the period. As a result of such limitation, expenses of the fund
for the period ended January 31, 2005 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
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2005 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $14.96 $14.97 $15.50 $15.22 $14.56 $14.76
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .24 (c) .49 .54 .62 .66 .69
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .41 .24 (.16) .28 .67 (.20)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .65 .73 .38 .90 1.33 .49
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.24) (.48) (.55) (.62) (.67) (.69)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.11) (.26) (.36) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.35) (.74) (.91) (.62) (.67) (.69)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.26 $14.96 $14.97 $15.50 $15.22 $14.56
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.38* 4.93 2.40 6.05 9.28 3.55
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,168 $1,188 $2,148 $2,154 $1,696 $2,692
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .58* (c) 1.15 1.14 1.12 1.13 1.11
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.61* (c) 3.19 3.45 4.08 4.45 4.82
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 5.98* 26.81 42.88 54.72 36.91 22.45
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an involuntary contractual expense limitation in effect
during the period. As a result of such limitation, expenses of the fund
for the period ended January 31, 2005 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
January 31, 2005 (Unaudited)
Note 1
Significant accounting policies
Putnam AMT-Free Insured Municipal Fund (the "fund") formerly Putnam
Tax-Free Insured Fund, is a series of Putnam Tax-Free Income Trust (the
"trust"), a Massachusetts business trust, which is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund pursues its objective of seeking
high current income exempt from federal income tax by investing in tax
exempt securities that are covered by insurance guaranteeing the timely
payment of principal and interest, are rated AAA or Aaa, or are backed
by the U.S. government.
The fund offers class A, class B, class C and class M shares. Class A
shares are sold with a maximum front-end sales charge of 4.50%. 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 exchanging 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. Risk of loss 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 of 1986 (the "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 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.
The aggregate identified cost on a tax basis is $367,243,705, resulting
in gross unrealized appreciation and depreciation of $26,976,912 and
$151,803, respectively, or net unrealized appreciation of $26,825,109.
E) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid monthly. Distributions from capital gains, if any,
are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. Reclassifications are
made to the fund's capital accounts to reflect income and gains
available for distribution (or available capital loss carryovers) under
income tax regulations.
F) Expenses of the trust Expenses directly charged or attributable to
any fund will be paid from the assets of that fund. Generally, expenses
of the trust will be allocated among and charged to the assets of each
fund on a basis that the Trustees deem fair and equitable, which may be
based on the relative assets of each fund or the nature of the services
performed and relative applicability to each fund.
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on the lesser of (i) an annual rate of 0.50% of the average net
asset value of the fund or (ii) the following annual rates: 0.60% of the
first $500 million of average net assets, 0.50% of the next $500
million, 0.45% of the next $500 million, 0.40% of the next $5 billion,
0.375% of the next $5 billion, 0.355% of the next $5 billion, 0.34% of
the next $5 billion and 0.33% thereafter.
Putnam Management has agreed to waive fees and reimburse expenses of the
fund through July 31, 2005 to the extent necessary to ensure that the
fund's expenses do not exceed the average expenses of the front-end load
funds viewed by Lipper Inc. as having the same investment classification
or objective as the fund. The expense reimbursement is based on a
comparison of the fund's expenses with the average annualized operating
expenses of the funds in its Lipper peer group for each calendar quarter
during the fund's last fiscal year, excluding 12b-1 fees and without
giving effect to any expense offset and brokerage service arrangements
that may reduce fund expenses. For the period ended January 31, 2005,
Putnam Management waived $2,840 of its management fee from the fund.
For the period ended January 31, 2005, Putnam Management has assumed
$8,381 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 5).
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company ("PFTC"), a subsidiary of Putnam, LLC. Putnam
Investor Services, a division of PFTC, provides investor servicing agent
functions to the fund. During the six months ended January 31, 2005, the
fund paid PFTC $205,834 for these services.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the six months ended January 31,
2005, the fund's expenses were reduced by $14,360 under these
arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $710, 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 0.20%, 0.85%, 1.00% and 0.50% of the average net assets
attributable to class A, class B, class C and class M shares,
respectively.
For the six months period ended January 31, 2005, Putnam Retail
Management, acting as underwriter, received net commissions of $728 and
$67 from the sale of class A and class M shares, respectively, and
received $73,423 and $113 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 period ended January 31, 2005, Putnam Retail Management, acting
as underwriter, received $90 on class A redemptions.
Note 3
Purchases and sales of securities
During the six months period ended January 31, 2005, cost of purchases
and proceeds from sales of investment securities other than short-term
investments aggregated $23,061,888 and $40,472,774 , respectively. There
were no purchases or sales of U.S. government securities.
Note 4
Capital shares
At January 31, 2005, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended January 31, 2005
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 708,621 $10,732,027
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 225,525 3,419,509
- ----------------------------------------------------------------
934,146 14,151,536
Shares repurchased (1,355,186) (20,533,343)
- ----------------------------------------------------------------
Net decrease (421,040) $(6,381,807)
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 1,526,106 $22,970,728
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 806,782 12,201,957
- ----------------------------------------------------------------
2,332,888 35,172,685
Shares repurchased (7,736,415) (116,948,642)
- ----------------------------------------------------------------
Net decrease (5,403,527) $(81,775,957)
- ----------------------------------------------------------------
Six months ended January 31, 2005
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 103,919 $1,575,146
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 60,691 921,738
- ----------------------------------------------------------------
164,610 2,496,884
Shares repurchased (857,197) (13,015,368)
- ----------------------------------------------------------------
Net decrease (692,587) $(10,518,484)
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 312,701 $4,732,438
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 261,180 3,956,188
- ----------------------------------------------------------------
573,881 8,688,626
Shares repurchased (3,227,983) (48,853,704)
- ----------------------------------------------------------------
Net decrease (2,654,102) $(40,165,078)
- ----------------------------------------------------------------
Six months ended January 31, 2005
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 85,065 $1,259,548
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 6,228 130,443
- ----------------------------------------------------------------
91,293 1,389,991
Shares repurchased (135,527) (2,056,797)
- ----------------------------------------------------------------
Net decrease (44,234) $(666,806)
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 72,319 $1,100,638
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 27,782 420,728
- ----------------------------------------------------------------
100,101 1,521,366
Shares repurchased (346,772) (5,260,747)
- ----------------------------------------------------------------
Net decrease (246,671) $(3,739,381)
- ----------------------------------------------------------------
Six months ended January 31, 2005
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 2,212 $33,550
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 960 14,599
- ----------------------------------------------------------------
3,172 48,149
Shares repurchased (6,072) (92,149)
- ----------------------------------------------------------------
Net decrease (2,900) $(44,000)
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 4,299 $64,701
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 3,905 59,209
- ----------------------------------------------------------------
8,204 123,910
Shares repurchased (72,228) (1,094,529)
- ----------------------------------------------------------------
Net decrease (64,024) $(970,619)
- ----------------------------------------------------------------
Note 5
Regulatory matters and litigation
Putnam Management has entered into agreements with the Securities and
Exchange Commission and the Massachusetts Securities Division settling
charges connected 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.
Pursuant to these settlement agreements, Putnam Management will pay a
total of $193.5 million in penalties and restitution, with $153.5
million being paid to shareholders and the funds. The restitution amount
will be allocated to shareholders pursuant to a plan developed by an
independent consultant, with payments to shareholders currently expected
by the end of the summer.
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 will bear any costs incurred by Putnam funds in
connection with these lawsuits. 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.
Results of November 11, 2004
and January 10, 2005
shareholder meetings
(Unaudited)
A special meeting of shareholders of the Trust and of the Fund was held
on November 11, 2004. At that meeting consideration of certain proposals
was adjourned to a final meeting held on January 10, 2005.
November 11, 2004 meeting
At the meeting, each of the nominees for Trustees was elected with all
the funds of the Trust voting together as a single class, as follows:
Votes Votes
For Withheld
- ----------------------------------------------------------------
Jameson A. Baxter 60,059,146 2,521,594
Charles B. Curtis 60,025,213 2,555,527
Myra R. Drucker 60,001,772 2,578,968
Charles E. Haldeman, Jr. 60,044,417 2,536,323
John A. Hill 60,051,310 2,529,430
Ronald J. Jackson 60,089,882 2,490,858
Paul L. Joskow 60,075,111 2,505,629
Elizabeth T. Kennan 60,047,518 2,533,222
John H. Mullin, III 60,055,161 2,525,579
Robert E. Patterson 60,062,446 2,518,294
George Putnam, III 59,999,327 2,581,413
A.J.C. Smith* 60,042,850 2,537,890
W. Thomas Stephens 60,057,865 2,522,875
Richard B. Worley 60,007,405 2,573,335
A proposal to amend the fund's fundamental investment restriction with
respect to borrowing to allow the fund the investment flexibility
permitted by the Investment Company Act was approved as follows:
Votes Votes
For Against Abstentions
- ----------------------------------------------------------------
10,563,383 962,804 4,176,771
A proposal to amend the fund's fundamental investment restriction with
respect to making loans to enhance the fund's ability to participate in
an interfund borrowing and lending program was approved as follows:
Votes Votes
For Against Abstentions
- ----------------------------------------------------------------
10,640,302 923,810 4,138,847
A proposal to amend the fund's fundamental investment restriction with
respect to diversification of investments to enhance the fund's ability
to invest in registered investment companies such as Putnam Prime Money
Market Fund was approved as follows:
Votes Votes
For Against Abstentions
- ----------------------------------------------------------------
10,883,170 684,089 4,135,700
January 10, 2005 meeting
A proposal to amend the Trust's Agreement and Declaration of Trust to
permit the fund to satisfy redemption requests other than in cash was
defeated with all the funds of the Trust voting together as a single
class, as follows:
Votes Votes
For Against Abstentions
- ----------------------------------------------------------------
43,168,440 2,974,023 16,604,099
* Mr. Smith resigned from the Board of Trustees on January 14, 2005.
All tabulations are rounded to nearest whole number.
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
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 Compliance Officer
Judith Cohen
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam AMT-Free
Insured Municipal 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.
SA043-220207 3/05
Not FDIC Insured May Lose Value No Bank Guarantee
Item 2. Code of Ethics:
- -----------------------
Not applicable
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
Not applicable
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
Not applicable
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, that the design and operation of
such procedures are generally effective to provide reasonable
assurance that information required to be disclosed by the registrant
in this report 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
and 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: March 28, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934
and 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: March 28, 2005
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: March 28, 2005
Putnam
Tax-Free
High Yield
Fund
Item 1. Report to Stockholders:
- -------------------------------
The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
1-31-05
[GRAPHIC OMITTED: HARMONICA]
[SCALE LOGO OMITTED]
From the Trustees
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
During the past several months, Putnam has introduced a number of
reforms for the benefit of shareholders, including increasing the amount
of disclosure for our funds. We are now including additional disclosure
about your fund's management team. Following the Outlook for Your Fund,
we provide manager compensation information that pertains to your fund
and list any changes in your fund's Portfolio Leader and Portfolio
Members during the prior year period, as well as these individuals'
other fund management responsibilities at Putnam. We also show how much
these individuals have invested in the fund (in dollar ranges), and fund
ownership (in dollar ranges) is also shown for the members of Putnam's
Executive Board. Finally, on page 20, we provide certain information
about the most recent approval of your fund's management contract with
Putnam by the Trustees.
We are also pleased to announce that three new Trustees have joined your
fund's Board of Trustees. Nominated by your fund's 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 ex-officio
member and past 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. We also announce the departure
of one of your fund's Trustees, A.J.C. Smith, formerly Chairman of
Putnam Investments and Consultant to Marsh & McLennan Companies, Inc.
In the following pages, your fund's management team discusses
performance, strategy, and its outlook for the remainder of fiscal 2005.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
March 16, 2005
Report from Fund Management
Fund highlights
* For the six months ended January 31, 2005, Putnam Tax-Free High Yield
Fund's class A shares returned 6.13% without sales charges and 1.28%
with maximum sales charges reflected.
* The fund's benchmark, the Lehman Municipal Bond Index, returned 4.80%
for the period.
* The average return for the fund's Lipper category, High Yield
Municipal Debt funds, was 5.49%.
* See the Performance Summary beginning on page 11 for additional fund
performance, comparative performance, and Lipper data.
Performance commentary
The strong performance that characterized high-yielding municipal bonds
during your fund's 2004 fiscal year has carried through into the first
half of its 2005 fiscal year. As a result, the fund's return at net
asset value (NAV, without sales charges) exceeded that of its benchmark,
which is composed of higher-grade municipal bonds. Since lower-quality
bonds tend to be more sensitive to economic growth than higher-grade
issues, the fund's emphasis on these bonds has been a positive factor.
Our emphasis on hospital, utilities, and tobacco settlement bonds, which
strengthened during the period, as well as our yield curve positioning,
helped the fund outperform the average for its Lipper peer group.
However, we started the fiscal year with a relatively short duration
because we expected interest rates to rise, depressing bond prices. We
shortened duration still further during the past six months, but
long-term rates have continued to decline, despite several rate
increases by the Federal Reserve Board (the Fed). Although this strategy
limited the fund's ability to participate in the bond price rally in the
past six months, market conditions make us confident in the prudence of
our strategy.
- --------------------------------------------------
TOTAL RETURN FOR
PERIODS ENDED 1/31/05
- --------------------------------------------------
Class A
(inception 9/20/93) NAV POP
- --------------------------------------------------
6 months 6.13% 1.28%
- --------------------------------------------------
1 year 7.32 2.41
- --------------------------------------------------
5 years 30.28 24.48
Annual average 5.43 4.48
- --------------------------------------------------
10 years 68.67 61.06
Annual average 5.37 4.88
- --------------------------------------------------
Annual average
(life of fund)* 6.95 6.70
- --------------------------------------------------
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 short-term trading fee of up to 2% may apply.
* Derived from the historical performance of B shares, adjusted for the
applicable sales charge and lower operating expenses.
FUND PROFILE
Putnam Tax-Free High Yield Fund seeks to provide a high level of current
income free from federal income tax by investing in a diversified
portfolio of lower-rated and investment-grade municipal bonds. The fund
is intended and may be appropriate for investors seeking tax-advantaged
income who are willing to accept some credit risk.
Market overview
The U.S. economy continued to show solid, healthy growth during the past
six months, finishing calendar 2004 with the fastest growth rate since
1999. Consumers continued to drive the economy, as tax cuts, low
mortgage-refinancing rates, and an employment increase of more than two
million jobs fueled spending. Most importantly for the bond market, the
core inflation rate, which excludes volatile food and energy prices,
remained relatively tame.
The Fed continued to raise short-term interest rates during the period
in a deliberate, well-publicized manner. Just after the period ended, on
February 2, 2005, the benchmark federal funds rate rose to 2.50%. As a
result of this series of interest-rate increases, which began in June
2004, short-term rates in the municipal market have increased during the
period. However, longer-term rates have declined due to continued low
inflation and a more moderate outlook for global economic growth. As a
result, the yield curve -- a graphical representation of bond yields of
all maturities -- has flattened.
With bond yields at historically low levels and confidence buoyed by the
growing economy, municipal investors sought out lower-quality bonds,
which typically carry higher yields because of their greater credit
risk. Hospital and utility bonds offered particularly attractive yields
and rallied during the period. Tobacco settlement bonds also performed
well as a result of an improved outlook about ongoing litigation brought
on by a decline in the number of tobacco lawsuits in recent years.
Higher-quality bonds offering lower yields generally underperformed
lower-quality bonds.
- ------------------------------------------------------------------------------
MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 1/31/05
- ------------------------------------------------------------------------------
Bonds
- ------------------------------------------------------------------------------
Lehman Municipal Bond Index (tax-exempt bonds) 4.80%
- ------------------------------------------------------------------------------
Lehman Aggregate Bond Index (broad bond market) 3.81%
- ------------------------------------------------------------------------------
Lehman Government Bond Index (U.S. Treasury and agency securities) 3.30%
- ------------------------------------------------------------------------------
Lehman Intermediate Treasury Bond Index
(intermediate-maturity U.S. Treasury bonds) 1.69%
- ------------------------------------------------------------------------------
Equities
- ------------------------------------------------------------------------------
S&P 500 Index (broad stock market) 8.16%
- ------------------------------------------------------------------------------
S&P Utilities Index (utilities stocks) 20.20%
- ------------------------------------------------------------------------------
Russell 2000 Growth Index (small-company growth stocks) 13.48%
- ------------------------------------------------------------------------------
These indexes provide an overview of performance in different market
sectors for the six months ended 1/31/05.
- ------------------------------------------------------------------------------
Strategy overview
At the beginning of the fund's fiscal year, the portfolio's duration was
slightly defensive. Duration is a measure of a fund's sensitivity to
changes in interest rates. A short duration may help protect principal
when interest rates are rising, but it can reduce the fund's
appreciation potential when rates fall. Although the Fed adjusted
interest rates upward during the past six months, as we had expected,
rates on long-term bonds continued to trend irregularly downward,
limiting the fund's participation in the price rally. However, we
trimmed duration still further because we continued to be concerned
about the outlook for prices. If long-term rates continue to decline as
short-term rates rise, eventually the yield curve could become inverted
- -- a configuration where long-term rates are lower than short-term
rates. This situation, if it occurs, is not likely to endure, in our
opinion.
Also during the past six months, we used interest-rate swap contracts to
position the fund to benefit from further flattening of the yield curve.
Rather than trading large volumes of securities, which takes time and
can be expensive for the fund, this strategy enabled us to synthetically
create an equivalent stream of payments. It is a highly technical
strategy, but it has worked well for the fund over this period.
The increased demand for higher-yielding bonds has provided us with
opportunities to sell bonds into strength, where appropriate. We reduced
the fund's airline-related bonds last year and we continued to trim
individual positions in other sectors as opportunities presented
themselves. Our strategy has been to spread out the fund's assets,
focusing on holdings that seem to have the strongest prospects. Sectors
that have performed the best recently -- and thus are candidates for
trimming -- include hospitals and utilities.
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
7/31/04 1/31/05
Average effective maturity in years 9.3 7.4
Duration in years 5.4 5.0
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
The fund currently owns tobacco settlement bonds issued by Wisconsin,
South Dakota, Rhode Island, New Jersey, South Carolina and Washington,
as well as the District of Columbia. Payments from these high-yielding
bonds are secured by income promised to various states through
settlements from tobacco companies. This income could be jeopardized as
a result of multibillion-dollar judgments against the companies.
However, the recent outperformance of the tobacco sector has reflected
investors' improved outlook. Although litigation remains a concern, the
number of legal challenges has declined in recent years. We anticipate
rulings in several key court cases in mid- to late 2005 that could
further resolve some of the uncertainty.
One of the benefits of owning a diversified portfolio of high-yielding,
lower-quality bonds in an improving economic environment is that some
issues may be upgraded, achieving a higher credit rating, or they may be
prerefunded. Prerefunding occurs when an issuer raises the money to
refinance an older, higher-coupon bond by issuing new bonds at current
lower interest rates. This money is then invested in a secure
investment, usually U.S. Treasury securities, that mature at the older
bond's first call date, when it is used to pay off the old bonds. This
added security is often perceived as a credit upgrade by the market, and
can boost the price of the older bonds, resulting in capital
appreciation for bondholders. A recent example was the fund's position
in Medical University of South Carolina revenue bonds, which were
prerefunded in December, effectively raising the credit rating on these
issues from BBB+ to AAA.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa (7.9%)
A (8.8%)
Baa (36.8%)
Ba (25.0%)
B (9.7%)
Caa (2.4%)
D (1.4%)
VMIG1 (6.8%)
Other (1.2%)
Footnote reads:
As a percentage of market value as of 1/31/05. A bond rated Baa or
higher is considered investment grade. The chart reflects Moody's
ratings; percentages may include bonds not rated by Moody's but
considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
The fund also benefited as the yield curve flattened during the past six
months, when we entered into various interest-rate swaps, as discussed
in the strategy section. An interest-rate swap is a contract entered
into between two parties who each agree to make payments to the other
for a specified period of time based on a notional (or hypothetical)
amount of principal. The amount is notional because there is no actual
exchange of principal. Typically, a series of payments is calculated by
applying a fixed rate of interest to be paid in exchange -- or swapped
- -- for a floating rate. We initiated contracts in two stages, in
November and December, and we plan to maintain this arrangement because
we expect the yield curve to continue to flatten.
Other activities during the six-month period included the sale of some
bonds issued for Hoover Group by Forsyth County, Georgia, Development
Authority. Hoover Group is an industrial container company that
defaulted on their bonds in November of 2002; the bonds had been in the
portfolio for some time. Our sale of the securities was the culmination
of a long series of negotiations. The bonds rose in value during the
past six months and we were able to recoup more than we had expected.
However, these bonds were poor performers overall. We also sold the
fund's position in Handmaker Jewish Services bonds issued by Pima
County, Arizona, Industrial Development Authority. This issue had
detracted from the fund's performance as the project's financial
position weakened. The bonds continued to decline in value and we saw no
upside potential, so we sold them at a loss.
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
Shareholders approve merger of Putnam Municipal Income Fund into Putnam
Tax-Free High Yield Fund
After the close of the period, a meeting was held to allow shareholders
to vote on the pending merger of Putnam Municipal Income Fund into
Putnam Tax-Free High Yield Fund. Putnam Municipal Income Fund is a
nationally diversified fixed-income fund whose objectives, strategy, and
investments are substantially similar to those of your fund. The merger
was approved and is expected to result in lower expenses for
shareholders of each fund due to the larger asset base of the combined
fund. It is scheduled to take place before the end of March 2005.
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.
While short-term interest rates have been on the rise for more than six
months now, they are still near historically low levels. Meanwhile,
long-term rates have declined, flattening the yield curve. Currently,
our outlook is for the yield curve to flatten even more, as short-term
rates rise with the Fed's adjustments, but we expect the prolonged
decline in long-term rates to reverse, sending bond prices down as rates
rise.
Over the rest of fiscal 2005, we expect to maintain a relatively short
portfolio duration and to keep the fund's interest-rate swap agreements
in place -- both as defensive measures. Given the historically low
levels of interest rates, we expect demand for higher-yielding bonds to
remain strong, although it may soften if economic growth slows. This
could make returns on higher-yielding instruments less robust than they
have been during the past 18 months, although the taxable market is
likely to experience any decrease in demand before the municipal
markets. Especially in terms of after-tax returns, we believe
high-yielding municipal bonds are likely to remain attractive to
investors even as rates reach a plateau in coming months.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. 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.
Lower-rated bonds may offer higher yields in return for more risk.
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.
Fund ownership
The table below shows how much the fund's current Portfolio Leader and
Portfolio Members have invested in the fund (in dollar ranges).
Information shown is for the current and prior year ended January 31.
- -------------------------------------------------------------------------------------------------------------
FUND PORTFOLIO LEADER AND PORTFOLIO MEMBERS
- -------------------------------------------------------------------------------------------------------------
$1 - $10,001 - $50,001 - $100,001 - $500,001 - $1,000,001
Year $0 $10,000 $50,000 $100,000 $500,000 $1,000,000 and over
- -------------------------------------------------------------------------------------------------------------
David Hamlin 2005 *
- -------------------------------------------------------------------------------------------------------------
Portfolio Leader 2004 *
- -------------------------------------------------------------------------------------------------------------
Paul Drury 2005 *
- -------------------------------------------------------------------------------------------------------------
Portfolio Member 2004 *
- -------------------------------------------------------------------------------------------------------------
Susan McCormack 2005 *
- -------------------------------------------------------------------------------------------------------------
Portfolio Member 2004 *
- -------------------------------------------------------------------------------------------------------------
James St. John 2005 *
- -------------------------------------------------------------------------------------------------------------
Portfolio Member 2004 *
- -------------------------------------------------------------------------------------------------------------
Fund manager compensation
The total 2004 fund manager compensation that is attributable to your
fund is approximately $250,000. This amount includes a portion of 2004
compensation paid by Putnam Management to the fund managers listed in
this section for their portfolio management responsibilities, calculated
based on the fund assets they manage as a percentage of the total assets
they manage. The compensation amount also includes a portion of the 2004
compensation paid to the Chief Investment Officer of the team and the
Group Chief Investment Officer responsible for the fund's broader
investment category for their oversight responsibilities, calculated
based on the fund assets they oversee taken as a percentage of the total
assets they oversee. These percentages are determined as of the fund's
fiscal period-end. For personnel who joined Putnam Management during or
after 2004, the calculation reflects annualized 2004 compensation or an
estimate of 2005 compensation, as applicable.
Other Putnam 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. The
same group also manages Putnam AMT-Free Insured Municipal Fund*, 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 Income Fund,
Putnam Municipal Opportunities Trust, Putnam New York Investment Grade
Municipal Trust, Putnam Tax Exempt Income Fund, and Putnam Tax-Free
Health Care Fund.
David Hamlin, Paul Drury, Susan McCormack, and James St. John may also
manage other accounts and variable trust funds advised by Putnam
Management or an affiliate.
Changes in your fund's Portfolio Leader and Portfolio Members
During the year ended January 31, 2005, Portfolio Member Richard Wyke
left your fund's management team.
* Formerly Putnam Tax-Free Insured Fund.
Fund ownership
The table below shows how much the members of Putnam's Executive Board
have invested in the fund (in dollar ranges). Information shown is for
the current and prior year ended January 31.
- ------------------------------------------------------------------------------------------------------
PUTNAM EXECUTIVE BOARD
- ------------------------------------------------------------------------------------------------------
$1 - $10,001 - $50,001 - $100,001
Year $0 $10,000 $50,000 $100,000 and over
- ------------------------------------------------------------------------------------------------------
Philippe Bibi 2005 *
- ------------------------------------------------------------------------------------------------------
Chief Technology Officer 2004 *
- ------------------------------------------------------------------------------------------------------
John Boneparth 2005 *
- ------------------------------------------------------------------------------------------------------
Head of Global Institutional Mgmt 2004 *
- ------------------------------------------------------------------------------------------------------
Joshua Brooks N/A
- ------------------------------------------------------------------------------------------------------
Deputy Head of Investments N/A
- ------------------------------------------------------------------------------------------------------
Kevin Cronin 2005 *
- ------------------------------------------------------------------------------------------------------
Head of Investments N/A
- ------------------------------------------------------------------------------------------------------
Charles Haldeman, Jr. 2005 *
- ------------------------------------------------------------------------------------------------------
President and CEO 2004 *
- ------------------------------------------------------------------------------------------------------
Amrit Kanwal 2005 *
- ------------------------------------------------------------------------------------------------------
Chief Financial Officer N/A
- ------------------------------------------------------------------------------------------------------
Steven Krichmar 2005 *
- ------------------------------------------------------------------------------------------------------
Chief of Operations N/A
- ------------------------------------------------------------------------------------------------------
Francis McNamara, III 2005 *
- ------------------------------------------------------------------------------------------------------
General Counsel N/A
- ------------------------------------------------------------------------------------------------------
Richard Monaghan 2005 *
- ------------------------------------------------------------------------------------------------------
Head of Retail Management 2004 *
- ------------------------------------------------------------------------------------------------------
Richard Robie, III 2005 *
- ------------------------------------------------------------------------------------------------------
Chief Administrative Officer N/A
- ------------------------------------------------------------------------------------------------------
Edward Shadek N/A
- ------------------------------------------------------------------------------------------------------
Deputy Head of Investments N/A
- ------------------------------------------------------------------------------------------------------
N/A indicates the individual joined Putnam's Executive Board after the reporting date.
Performance summary
This section shows your fund's performance during the first half of its
fiscal year, which ended January 31, 2005. In accordance with regulatory
requirements, we also include performance for the most current calendar
quarter-end. Performance should always be considered in light of a
fund's investment strategy. Data 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.
- -------------------------------------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 1/31/05
- -------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (2/1/99) (12/29/94)
- -------------------------------------------------------------------------------------------------------------
NAV POP NAV CDSC NAV CDSC NAV POP
- -------------------------------------------------------------------------------------------------------------
6 months 6.13% 1.28% 5.72% 0.72% 5.67% 4.67% 5.93% 2.51%
- -------------------------------------------------------------------------------------------------------------
1 year 7.32 2.41 6.58 1.58 6.45 5.45 6.97 3.56
- -------------------------------------------------------------------------------------------------------------
5 years 30.28 24.48 26.69 24.74 25.28 25.28 28.26 24.14
Annual average 5.43 4.48 4.85 4.52 4.61 4.61 5.10 4.42
- -------------------------------------------------------------------------------------------------------------
10 years 68.67 61.06 59.33 59.33 55.61 55.61 63.72 58.45
Annual average 5.37 4.88 4.77 4.77 4.52 4.52 5.05 4.71
- -------------------------------------------------------------------------------------------------------------
Annual average
(life of fund) 6.95 6.70 6.59 6.59 6.10 6.10 6.74 6.55
- -------------------------------------------------------------------------------------------------------------
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 A, C,
and M shares is derived from the historical performance of class B
shares, adjusted for the applicable sales charge (or CDSC) and higher or
lower operating expenses for such shares.
A 2% short-term trading fee may be applied to shares exchanged or sold
within 5 days of purchase.
For a portion of the period, this fund limited expenses, without which
returns would have been lower.
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/05
- ------------------------------------------------------------------------------
Lehman Lipper High Yield
Municipal Municipal Debt Funds
Bond Index category average*
- ------------------------------------------------------------------------------
6 months 4.80% 5.49%
- ------------------------------------------------------------------------------
1 year 4.85 6.13
- ------------------------------------------------------------------------------
5 years 43.54 35.97
Annual average 7.50 6.30
- ------------------------------------------------------------------------------
10 years 94.08 73.13
Annual average 6.86 5.61
- ------------------------------------------------------------------------------
Annual average
(life of fund) 7.93 6.83
- ------------------------------------------------------------------------------
Index and Lipper results should be compared to fund performance at net
asset value.
* Over the 6-month and 1-, 5-, and 10-year periods ended 1/31/05, there
were 79, 79, 60, and 31 funds, respectively, in this Lipper category.
- ----------------------------------------------------------------------------------------------------
PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 1/31/05
- ----------------------------------------------------------------------------------------------------
Class A Class B Class C Class M
- ----------------------------------------------------------------------------------------------------
Distributions (number) 6 6 6 6
- ----------------------------------------------------------------------------------------------------
Income 1 $0.311880 $0.270785 $0.260777 $0.292685
- ----------------------------------------------------------------------------------------------------
Capital gains 1 -- -- -- --
- ----------------------------------------------------------------------------------------------------
Total $0.311880 $0.270785 $0.260777 $0.292685
- ----------------------------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
- ----------------------------------------------------------------------------------------------------
7/31/04 $12.46 $13.05 $12.48 $12.47 $12.46 $12.88
- ----------------------------------------------------------------------------------------------------
1/31/05 12.90 13.51 12.92 12.91 12.90 13.33
- ----------------------------------------------------------------------------------------------------
Current return (end of period)
- ----------------------------------------------------------------------------------------------------
Current dividend rate 2 4.72% 4.51% 4.07% 3.92% 4.42% 4.28%
- ----------------------------------------------------------------------------------------------------
Taxable equivalent 3 7.26 6.93 6.26 6.04 6.80 6.58
- ----------------------------------------------------------------------------------------------------
Current 30-day SEC yield
(with expense limitation) 4 4.09 3.91 3.45 3.30 3.79 3.67
- ----------------------------------------------------------------------------------------------------
Taxable equivalent 3,4 6.29 6.02 5.31 5.08 5.83 5.65
- ----------------------------------------------------------------------------------------------------
Current 30-day SEC yield
(without expense limitation) 4.05 3.87 3.41 3.25 3.75 3.63
- ----------------------------------------------------------------------------------------------------
1 Capital gains, if any, are taxable for federal and, in most cases, state purposes. For
some investors, investment income may be subject to the federal alternative minimum tax.
Income from federally exempt funds may be subject to state and local taxes.
2 Most recent distribution, excluding capital gains, annualized and divided by NAV or POP
at end of period.
3 Assumes maximum 35.00% federal tax rate for 2005. Results for investors subject to lower
tax rates would not be as 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.
- -------------------------------------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 12/31/04 (MOST RECENT CALENDAR QUARTER)
- -------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (2/1/99) (12/29/94)
- -------------------------------------------------------------------------------------------------------------
NAV POP NAV CDSC NAV CDSC NAV POP
- -------------------------------------------------------------------------------------------------------------
6 months 6.00% 1.24% 5.65% 0.65% 5.56% 4.56% 5.83% 2.37%
- -------------------------------------------------------------------------------------------------------------
1 year 7.09 2.31 6.42 1.42 6.25 5.25 6.77 3.34
- -------------------------------------------------------------------------------------------------------------
5 years 27.70 22.00 24.17 22.26 22.89 22.89 25.81 21.74
Annual average 5.01 4.06 4.43 4.10 4.21 4.21 4.70 4.01
- -------------------------------------------------------------------------------------------------------------
10 years 71.53 63.84 61.89 61.89 58.24 58.24 66.20 60.78
Annual average 5.54 5.06 4.94 4.94 4.70 4.70 5.21 4.86
- -------------------------------------------------------------------------------------------------------------
Annual average
(life of fund) 6.92 6.67 6.56 6.56 6.06 6.06 6.70 6.52
- -------------------------------------------------------------------------------------------------------------
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 would 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 Tax-Free High Yield Fund from August 1, 2004, to
January 31, 2005. It also shows how much a $1,000 investment would be
worth at the close of the period, assuming actual returns and expenses.
- ------------------------------------------------------------------------------
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming actual returns for the 6 months ended 1/31/05
- ------------------------------------------------------------------------------
Class A Class B Class C Class M
- ------------------------------------------------------------------------------
Expenses paid per $1,000* $4.68 $8.04 $8.81 $6.23
- ------------------------------------------------------------------------------
Ending value (after expenses) $1,061.30 $1,057.20 $1,056.70 $1,059.30
- ------------------------------------------------------------------------------
* 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 1/31/05.
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
January 31, 2005, use the calculation method below. To find the value of
your investment on August 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 08/01/2004 in both the "from" and "to" fields.
Alternatively, call Putnam at 1-800-225-1581.
- ------------------------------------------------------------------------------
HOW TO CALCULATE THE EXPENSES YOU PAID
- ------------------------------------------------------------------------------
Total
Value of your Expenses paid expenses
investment on 8/1/04 [DIV] $1,000 x per $1,000 = paid
- ------------------------------------------------------------------------------
Example Based on a $10,000 investment in class A shares of your fund.
- ------------------------------------------------------------------------------
$10,000 [DIV] $1,000 x $4.68 (see table above) = $46.80
- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming a hypothetical 5% annualized return for the 6 months ended 1/31/05
- ------------------------------------------------------------------------------
Class A Class B Class C Class M
- ------------------------------------------------------------------------------
Expenses paid per $1,000* $4.58 $7.88 $8.64 $6.11
- ------------------------------------------------------------------------------
Ending value (after expenses) $1,020.67 $1,017.39 $1,016.64 $1,019.16
- ------------------------------------------------------------------------------
* 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 1/31/05.
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.
- ------------------------------------------------------------------------------
EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA
- ------------------------------------------------------------------------------
Class A Class B Class C Class M
- ------------------------------------------------------------------------------
Your fund's annualized
expense ratio 0.90% 1.55% 1.70% 1.20%
- ------------------------------------------------------------------------------
Average annualized expense
ratio for Lipper peer group++ 0.90% 1.55% 1.70% 1.20%
- ------------------------------------------------------------------------------
++ Average of the expenses of front-end load funds viewed by Lipper as
having the same investment classification or objective as the fund, as of
12/31/04, calculated in accordance with Lipper's standard reporting
methodology for comparing expenses within a given universe (excluding
12b-1 fees and without giving effect to any expense offset and brokerage
service arrangements that may reduce fund expenses). To facilitate
comparison, Putnam has adjusted this average to reflect the 12b-1 fees
carried by each class 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 Tax-Free
High Yield Fund 18% 29% 20% 18% 12%
- ------------------------------------------------------------------------------
Lipper High Yield Municipal
Debt Funds category average 30% 34% 36% 30% 34%
- ------------------------------------------------------------------------------
Turnover data for the fund is calculated based on the fund's fiscal-year
period, which ends on July 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 12/31/04.
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 0.12
Municipal bond
fund average 0.21
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 December 31, 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 of U.S.
investment-grade 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 U.S.
Treasury securities 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 small-cap 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
utility 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.
Trustee approval of management contract
General conclusions
The Board of Trustees of the Putnam funds oversees the management of
each fund and, as required by law, determines annually whether to
approve the continuance of each fund's management contract with Putnam
Management. In this regard the Board of Trustees, with the assistance of
its Contract Committee consisting solely of Independent Trustees,
requests and evaluates all information it deems reasonably necessary in
the circumstances. Over the course of several months beginning in March
and ending in June of 2004, the Contract Committee reviewed the
information provided by Putnam Management and other information
developed with the assistance of the Board's independent counsel and
independent staff. The Contract Committee reviewed and discussed key
aspects of this information with all of the Independent Trustees. Upon
completion of this review, the Contract Committee recommended and the
Independent Trustees approved the continuance of your fund's contract,
effective July 1, 2004.
This approval was based on the following conclusions:
* That the fee schedule currently in effect for your fund represents
reasonable compensation in light of the nature and quality of the
services being provided to the fund, the fees paid by competitive funds
and the costs incurred by Putnam Management in providing such service,
and
* That such fee schedule represents an appropriate sharing between fund
shareholders and Putnam Management of such economies of scale as may
exist in the management of the fund at current asset levels.
These conclusions were based on a comprehensive consideration of all
information provided to the Trustees and were not the result of any
single factor. Some of the factors that figured particularly in the
Trustees' deliberations are described below.
Model fee schedules and categories; total expenses
The Trustees, working in cooperation with Putnam Management, have
developed and implemented a series of model fee schedules for the Putnam
funds designed to ensure that each fund's management fee is consistent
with the fees for similar funds in the Putnam complex and compares
favorably with fees paid by competitive funds sponsored by other advisors.
The Trustees reviewed the model fee schedule currently in effect for the
fund, including fee levels and breakpoints, and the assignment of the fund
to a particular fee category under this structure. The Trustees also
reviewed comparative fee and expense information for competitive funds.
The Trustees concluded that no changes should be made in the fund's
current fee schedule at this time. The Trustees noted that expense ratios
for a number of Putnam funds had been increasing recently as a result of
declining net assets and the natural operation of fee breakpoints. They
noted that such expense ratio increases were currently being controlled by
expense limitations implemented in January 2004. They also noted that the
competitive landscape regarding mutual fund fees may be changing as a
result of fee reductions accepted by various other fund groups in
connection with recent regulatory settlements and greater focus on fees
and expenses in the mutual fund industry generally. The Trustees indicated
an intention to monitor these developments closely.
Economies of scale
As noted above, the Trustees concluded that the fee schedule currently
in effect for your fund represents an appropriate sharing of economies
of scale at current asset levels. The Trustees indicated their intention
to continue their ongoing consideration of economies of scale and in
particular to consider further the possible operation of such economies
in the event that a significant recovery in the equity markets or net
fund sales were to raise asset levels substantially above current
levels. In this regard, the Trustees noted that they had reviewed data
relating to the substantial increase in asset levels of the Putnam funds
that occurred during the years leading up to the market peak in 2000,
the subsequent decline in assets and the resulting impact on revenues
and expenses of Putnam Management. The Trustees also noted that recent
declines in net assets in many Putnam funds, together with significant
changes in the cost structure of Putnam Management have altered the
economics of Putnam Management's business in significant ways. The
Trustees concluded that they would monitor these changes carefully and
evaluate the resulting impact on Putnam Management's economics and the
sharing of economies of scale between the parties.
Investment performance
The quality of the investment process provided by Putnam Management
represented a major factor in the Trustees' evaluation of the quality of
services provided by Putnam Management under the Management Contracts.
The Trustees recognized that a high quality investment process -- as
measured by the experience and skills of the individuals assigned to the
management of fund portfolios, the resources made available to such
personnel, and in general the ability of Putnam Management to attract
and retain high-quality personnel -- does not guarantee favorable
investment results for every fund in every time period. The Trustees
considered the investment performance of each fund over multiple time
periods and considered information comparing the fund's performance with
various benchmarks and with the performance of competitive funds. The
Trustees noted the satisfactory investment performance of many Putnam
funds.
They also noted the disappointing investment performance of certain
funds in recent years and continued to discuss with senior management of
Putnam Management the factors contributing to such under-performance and
actions being taken to improve performance. The Trustees recognized
that, in recent years, Putnam Management has made significant changes in
its investment personnel and processes and in the fund product line in
an effort to address areas of underperformance. The Trustees indicated
their intention to continue to monitor performance trends to assess the
effectiveness of these changes and to evaluate whether additional
remedial changes are warranted. As a general matter, the Trustees
concluded that consultation between the Trustees and Putnam Management
represents the most effective way to address investment performance
problems. The Trustees believe that investors in the Putnam funds and
their financial advisors have, as a general matter, effectively placed
their trust in the Putnam organization, under the supervision of the
funds' Trustees, to make appropriate decisions regarding the management
of the funds. The Trustees believe that the termination of the
Management Contract and engagement of a new investment adviser for
under-performing funds, with all the attendant disruptions, would not
serve the interests of fund shareholders at this time and would not
necessarily provide any greater assurance of improved investment
performance.
Brokerage and soft-dollar allocations; other benefits
The Trustees considered various potential benefits that Putnam
Management may receive in connection with the services it provides under
the Management Contract with your fund. These include principally
benefits related to brokerage and soft-dollar allocations, which pertain
mainly to funds investing in equity securities. The Trustees believe
that soft-dollar credits and other potential benefits associated with
the allocation of fund brokerage represent assets of the funds that
should be used for the benefit of fund shareholders. The Trustees noted
recent trends in the allocation of fund brokerage, including commission
costs, the allocation of brokerage to firms that provide research
services to Putnam Management, and the sources and application of
available soft-dollar credits. Effective December 31, 2003, reflecting a
decision made by the Trustees earlier that year, Putnam Management
ceased allocating brokerage in connection with the sale of fund shares.
In addition, in preparing its budget for commission allocations in 2004,
Putnam Management voluntarily reduced substantially the allocation of
brokerage commissions to acquire research services from third-party
service providers. In light of evolving best practices in the mutual
fund industry, the Trustees concluded that this practice should be
further curtailed and possibly eliminated in the near future. The
Trustees indicated that they would continue to monitor the allocation of
the funds' brokerage to ensure that the principle of "best price and
execution" remains paramount in the portfolio trading process.
Comparison of retail and institutional fee schedules
The information examined by the Trustees as part of the annual contract
reviews included information regarding fees charged by Putnam Management
and its affiliates to institutional clients such as defined benefit
pension plans and college endowments. This information included
comparison of such fees with fees charged to the Putnam funds, as well
as a detailed assessment of the differences in the services provided to
these two types of clients. The Trustees devoted special attention to
these issues and reviewed recent articles by critics of mutual fund
fees, articles by the ICI defending such fee differences, and relevant
guidance provided by decisions of the courts. The Trustees observed, in
this regard, that the differences in fee rates between institutional
clients and mutual funds are by no means uniform when examined by
individual asset sectors, suggesting that differences in the pricing of
investment management services to these types of clients reflects to a
substantial degree historical competitive forces operating in separate
market places. In reaching their conclusions, the Trustees considered
the fact that fee rates across all asset sectors are higher on average
for mutual funds than for institutional clients, and also considered the
differences between the services that Putnam provides to the Putnam
funds and those that it provides to institutional clients of the firm.
Settlement of regulatory charges related to market timing
Finally, in reaching their conclusions, the Trustees considered all
matters pertinent to the administrative charges filed against Putnam
Management by the SEC and the Commonwealth of Massachusetts in October
2003 relating to market timing, the firm's settlement of those charges,
and the conclusions and recommendations of the Trustees' Audit and
Pricing Committee based on its review of these matters. The Trustees
considered the actions taken by the owner of Putnam Management and its
new senior management to terminate or discipline the individuals
involved, to implement new compliance systems, to indemnify the funds
against all costs and liabilities related to these matters, and
otherwise to ensure that the interests of the funds and their
shareholders are fully protected. The Trustees noted that, in addition
to the settlements of the regulatory charges which will provide
comprehensive restitution for any losses suffered by shareholders, the
new senior management of Putnam Management has moved aggressively to
control expense ratios of funds affected by market timing, to reduce
charges to new investors, to improve disclosure of fees and expenses,
and to emphasize the paramount role of investment performance in
achieving shareholders' investment goals.
Other information for shareholders
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
January 31, 2005 (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
PSFG Permanent School Fund Guaranteed
U.S. Govt. Coll. U.S. Government Collateralized
VRDN Variable Rate Demand Notes
Municipal bonds and notes (96.5%) (a)
Principal amount Rating (RAT) Value
Alabama (0.6%)
- -------------------------------------------------------------------------------
$5,000,000 Jackson Cnty., Hlth. Care Auth.
Rev. Bonds, 5.7s, 5/1/19 BB+ $4,765,200
1,000,000 Phenix City, Indl. Dev. Board
Rev. Bonds (Mead Coated Board),
Ser. A, 5.3s, 4/1/27 Baa2 1,000,370
--------------
5,765,570
Arizona (1.5%)
- -------------------------------------------------------------------------------
1,500,000 AZ Hlth. Fac. Auth.
Rev. Bonds (Bethesda Foundation),
Ser. A, 6.4s, 8/15/27 BB-/P 1,509,885
Casa Grande, Indl. Dev. Auth.
Rev. Bonds (Casa Grande Regl. Med.
Ctr.), Ser. A
4,000,000 7 5/8s, 12/1/29 B-/P 4,278,320
500,000 7 1/4s, 12/1/19 B-/P 530,040
Cochise Cnty., Indl. Dev. Auth.
Rev. Bonds (Sierra Vista Regl.
Hlth. Ctr.)
3,365,000 7 3/4s, 12/1/30 BB+/P 3,753,557
990,000 Ser. A, 6.2s, 12/1/21 BB+/P 1,047,806
Scottsdale, Indl. Dev. Auth.
Rev. Bonds
1,500,000 (Westminster Village 1st. Mtg.),
Ser. A, U.S. Govt. Coll., 8 1/4s,
6/1/15 AAA/P 1,559,790
2,300,000 (Westminster Village 1st. Mtge.),
Ser. A, U.S. Govt. Coll., 8s,
6/1/11 AAA/P 2,389,792
--------------
15,069,190
Arkansas (1.2%)
- -------------------------------------------------------------------------------
6,600,000 AR State Hosp. Dev. Fin. Auth.
Rev. Bonds (Washington Regl. Med.
Ctr.), 7 3/8s, 2/1/29 Baa3 7,365,072
3,650,000 Northwest Regl. Arpt. Auth.
Rev. Bonds, 7 5/8s, 2/1/27 BB/P 4,200,201
--------------
11,565,273
California (8.2%)
- -------------------------------------------------------------------------------
3,000,000 ABAG Fin. Auth. COP (American
Baptist Homes), Ser. A, 5.85s,
10/1/27 BB+ 2,984,820
7,500,000 CA State Dept. of Wtr. Resources
Rev. Bonds, Ser. A, 5 3/8s, 5/1/22 A2 8,169,225
4,300,000 CA Statewide Cmnty. Dev. Auth. Apt.
Dev. Rev. Bonds (Irvine Apt.
Cmntys.), Ser. A-3, 5.1s, 5/15/25 Baa2 4,526,825
1,000,000 CA Statewide Cmnty. Dev. Auth.
Multi-Fam. Rev. Bonds (Hsg. Equity
Res.), Ser. B, 5.2s, 12/1/29 Baa1 1,049,640
1,000,000 CA Statewide Cmnty. Dev. Auth.
Special Tax Rev. Bonds (Citrus
Garden Apt. Project - D1), 5 1/4s,
7/1/22 A 1,034,550
1,500,000 Capistrano, Unified School Dist.
Cmnty. Fac. Special Tax (No 98-2
Ladera), 5.7s, 9/1/20 BBB/P 1,576,170
750,000 Capistrano, Unified School Dist.
Cmnty. Fac. Special Tax Bonds
(Ladera), Ser. 98-2, 5 3/4s, 9/1/29 BBB/P 779,468
Chula Vista, Cmnty. Fac. Dist.
Special Tax Rev. Bonds
2,855,000 (No. 08-1 Otay Ranch Village Six),
6s, 9/1/33 BB-/P 2,887,262
1,100,000 (No. 07-I Otay Ranch Village
Eleven), 5.8s, 9/1/28 BB-/P 1,131,680
18,000,000 Corona, COP (Vista Hosp. Syst.),
zero %, 7/1/29 (In default) (NON)
(F) D/P 50,400
3,000,000 Elk Grove CA Special Tax Rev. Bonds
(Poppy Ridge Cmnty. Facs. - No
03-01), 6s, 9/1/34 BB/P 3,132,390
1,750,000 Folsom, Special Tax Rev. Bonds
(Cmnty. Facs. Dist. No. 10),
5 7/8s, 9/1/28 BB 1,783,688
300,000 Foothill/Eastern Corridor Agcy.
Rev. Bonds (CA Toll Roads), 5 3/4s,
1/15/40 Baa3 307,701
7,835,000 Gilroy, Rev. Bonds (Bonfante Gardens
Park), 8s, 11/1/25 D/P 5,641,278
6,000,000 Golden State Tobacco Securitization
Corp. Rev. Bonds, Ser. B, 5 5/8s,
6/1/38 A- 6,468,420
995,000 Irvine, Impt. Board Act of 1915
Special Assmt. Bonds (Assmt. Dist.
No. 00-18-GRP 3), 5.55s, 9/2/26 BB+ 1,007,816
3,500,000 Los Angeles, Regl. Arpt. Impt. Corp.
Lease Rev. Bonds, Ser. C, 7 1/2s,
12/1/24 B- 3,478,055
Oakley, Pub. Fin. Auth. Rev. Bonds
2,510,000 6s, 9/2/34 BB-/P 2,551,766
1,435,000 5 7/8s, 9/2/24 BB-/P 1,457,214
1,520,000 Orange Cnty., Cmnty. Fac. Dist.
Special Tax (No. 03-1 Ladera
Ranch), Ser. A, 5.4s, 8/15/22 BB/P 1,578,581
1,625,000 Orange Cnty., Cmnty. Fac. Dist.
Special Tax Rev. Bonds (No. 02-1
Ladera Ranch), Ser. A, 5.55s,
8/15/33 BBB 1,667,169
1,500,000 Roseville, Cmnty. Fac. Special Tax
Bonds (Dist. 1), 6s, 9/1/33 BB/P 1,550,580
700,000 Sacramento, Special Tax Rev. Bonds
(North Natomas Cmnty. Fac.), Ser.
4-A, 6s, 9/1/28 BB/P 739,200
1,500,000 San Joaquin Hills, Trans. Corridor
Agcy. Rev. Bonds, Ser. A, 5 1/2s,
1/15/28 Baa2 1,448,775
4,915,000 Santaluz Cmnty., Facs. Dist. No. 2
Special Tax Rev. Bonds (Impt. Area
No. 1), Ser. B, 6 3/8s, 9/1/30 BB+/P 5,036,941
350,000 Southern CA Pub. Pwr. Auth. IFB
(Transmission), 9.688s, 7/1/12 Aa3 354,067
4,560,000 Sunnyvale, Special Tax Rev. Bonds
(Cmnty. Fac. Dist. No. 1), 7 3/4s,
8/1/32 BB-/P 4,811,986
7,000,000 Thousand Oaks, Cmnty. Fac. Dist.
Special Tax Rev. Bonds (Marketplace
94-1), zero %, 9/1/14 B/P 3,518,340
9,500,000 Vallejo, COP (Marine World
Foundation), 7.2s, 2/1/26 BBB-/P 9,988,395
--------------
80,712,402
Colorado (0.7%)
- -------------------------------------------------------------------------------
5,000,000 CO Hlth. Fac. Auth.
Rev. Bonds (Evangelical Lutheran),
5.9s, 10/1/27 A3 5,401,950
CO Springs, Hosp. Rev. Bonds
755,000 6 3/8s, 12/15/30 A3 839,235
745,000 6 3/8s, 12/15/30 (Prerefunded) A3 883,347
--------------
7,124,532
Connecticut (1.9%)
- -------------------------------------------------------------------------------
CT State Dev. Auth. Rev. Bonds (East
Hills Woods)
4,038,535 Ser. A, 7 3/4s, 11/1/17 B-/P 3,244,034
457,428 Ser. B, zero %, 3/1/21 B-/P 15,141
2,000,000 CT State Dev. Auth. 1st. Mtg. Gross
Rev. Hlth. Care Rev. Bonds (Elim
Street Park Baptist, Inc.), 5.85s,
12/1/33 BBB+ 2,111,220
6,000,000 CT State Dev. Auth. Poll. Control
Rev. Bonds (Western MA), Ser. A,
5.85s, 9/1/28 A3 6,405,780
7,400,000 CT. State Special Tax Oblig. VRDN
(Trans. Infrastructure), Ser. 1,
1.85s, 9/1/20 VMIG1 7,400,000
--------------
19,176,175
Delaware (0.2%)
- -------------------------------------------------------------------------------
2,000,000 GMAC Muni. Mtge. Trust 144A sub.
notes, Ser. A1-3, 5.3s, 10/31/39 A3 2,014,100
District of Columbia (2.4%)
- -------------------------------------------------------------------------------
17,000,000 DC G.O. Bonds, Ser. A, 6 3/8s,
6/1/26 AAA 18,253,410
5,500,000 DC Tobacco Settlement Fin. Corp.
Rev. Bonds, 6 1/2s, 5/15/33 BBB 5,429,215
--------------
23,682,625
Florida (5.3%)
- -------------------------------------------------------------------------------
3,105,000 Cap. Trust Agcy. Multi-Fam.
Rev. Bonds
(American Opportunity-Senior),
Ser. A, 5 7/8s, 6/1/38 Baa1 2,984,278
5,000,000 Cap. Trust Agcy. Rev. Bonds
(Seminole Tribe Convention), Ser. A,
10s, 10/1/33 (acquired 4/23/02,
cost $5,000,000) (RES) B/P 5,724,700
3,000,000 CFM Cmnty. Dev. Dist. Rev. Bonds,
Ser. A, 6 1/4s, 5/1/35 BB-/P 3,152,520
Fishhawk, Cmnty. Dev. Dist. II
Rev. Bonds, Ser. B
2,500,000 5 1/8s, 11/1/09 BB- 2,531,250
1,165,000 5s, 11/1/07 BB-/P 1,180,518
1,000,000 Halifax, Hosp. Med. Ctr. Rev. Bonds,
Ser. A, 7 1/4s, 10/1/29 BBB- 1,093,630
4,000,000 Hernando Cnty. Wtr . and Swr.
Rev. Bonds, MBIA, 5s, 6/1/29 Aaa 4,209,920
4,085,000 Islands at Doral III, Cmnty. Dev.
Dist. Special Assmt. Rev. Bonds,
Ser. 04-A, 5.9s, 5/1/35 BB 4,186,308
3,300,000 Lee Cnty., Indl. Dev. Auth. Hlth.
Care Fac. Rev. Bonds (Shell Point
Village), Ser. A, 5 1/2s, 11/15/29 BBB- 3,307,095
2,000,000 Middle Village Cmnty. Dev. Dist.
Special Assmt., Ser. A, 6s, 5/1/35 BB-/P 2,066,700
1,000,000 Old Palm, Cmnty. Dev. Dist. Special
Assmt. (Palm Beach Gardens),
Ser. A, 5.9s, 5/1/35 BB- 1,022,170
Orange Cnty., Hlth. Fac. Auth.
Rev. Bonds
1,400,000 (Orlando Regl. Hlth. Care), 5 3/4s,
12/1/32 A2 1,511,412
3,750,000 (Adventist Hlth. Syst.), 5 5/8s,
11/15/32 A 4,009,875
3,710,000 Reunion West, Cmnty. Dev. Dist.
Special Assmt., 6 1/4s, 5/1/36 BB-/P 3,872,090
3,000,000 South Village Cmnty. Dev. Dist.
Rev. Bonds, Ser. A, 5.7s, 5/1/35 BB-/P 3,026,790
1,200,000 St. Johns Cnty., Hlth. Care Indl.
Dev. Auth. Rev. Bonds (Glenmoor St.
Johns Project), Ser. A, 8s, 1/1/30 B-/P 1,274,376
1,000,000 Sterling Hill, Cmnty. Dev. Dist.
Rev. Bonds, Ser. B, 5 1/2s, 11/1/10 BB- 1,019,120
990,000 Verandah, West Cmnty. Dev. Dist.
Rev. Bonds (Cap. Impt.), Ser. A,
6 5/8s, 5/1/33 BB-/P 1,041,906
2,250,000 Westchester Cmnty. Dev. Dist. No. 1
Special Assmt. (Cmnty.
Infrastructure), 6 1/8s, 5/1/35 BB- 2,343,983
World Commerce Cmnty. Dev. Dist.
Special Assmt., Ser. A-1
1,250,000 6 1/2s, 5/1/36 BB-/P 1,296,013
1,000,000 6 1/4s, 5/1/22 BB-/P 1,034,280
--------------
51,888,934
Georgia (4.0%)
- -------------------------------------------------------------------------------
Atlanta, Wtr. & Waste Wtr. VRDN
6,965,000 Ser. C, FSA, 1.9s, 11/1/41 VMIG1 6,965,000
1,500,000 Ser. B, 1.85s, 11/1/38 VMIG1 1,500,000
8,000,000 Burke Cnty., Poll. Control Dev.
Auth. Mandatory Put Bonds (GA Power
Co.), 4.45s, 12/1/08 A2 8,404,400
3,400,000 Effingham Cnty., Indl. Dev. Auth.
Rev. Bonds (Pacific Corp.), 6 1/2s,
6/1/31 Ba3 3,577,344
6,000,000 Forsyth Cnty., Hosp. Auth.
Rev. Bonds (GA Baptist Hlth. Care
Syst.), U.S. Govt. Coll., 6 3/8s,
10/1/28 AAA 7,706,220
800,000 Fulton Cnty., Res. Care Fac.
Rev. Bonds (Canterbury Court), Class
A, 6 1/8s, 2/15/34 B+/P 821,384
6,875,000 Rockdale Cnty., Dev. Auth. Solid
Waste Disp. Rev. Bonds (Visay Paper,
Inc.), 7 1/2s, 1/1/26 B+ 7,047,631
3,160,000 Savannah, Econ. Dev. Auth. Poll.
Control Rev. Bonds (Stone Container
Corp.), 8 1/8s, 7/1/15 B/P 3,297,144
--------------
39,319,123
Illinois (1.5%)
- -------------------------------------------------------------------------------
1,500,000 Chicago, Special Assmt. Bonds (Lake
Shore East), 6 3/4s, 12/1/32 BB 1,589,310
IL Hlth. Fac. Auth. Rev. Bonds
740,000 (Cmnty. Rehab. Providers Fac.),
8 1/4s, 8/1/12 D/P 705,849
610,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, 7 7/8s, 7/1/20 D/P 496,766
4,105,000 (Cmnty. Rehab. Providers Fac.),
Ser. A, U.S. Govt. Coll., 7 7/8s,
7/1/20 AAA/P 4,282,788
1,000,000 (St. Benedict), Ser. 03A-1, 6.9s,
11/15/33 B+ 1,036,550
6,000,000 (Elmhurst Memorial Hlth. Care),
5 5/8s, 1/1/28 A2 6,314,280
--------------
14,425,543
Indiana (1.4%)
- -------------------------------------------------------------------------------
6,500,000 Indianapolis, Arpt. Auth. Rev. Bonds
(Federal Express Corp.), 5.1s,
1/15/17 Baa2 6,981,780
2,200,000 Rockport, Poll. Control Mandatory
Put Bonds (Indiana Michigan Pwr.
Co.), Ser. C, 2 5/8s, 10/1/06 Baa2 2,189,858
4,000,000 Rockport, Poll. Control
Rev. Bonds (Indiana-Michigan Pwr.),
Ser. A, 4.9s, 6/1/25 Baa2 4,142,080
--------------
13,313,718
Iowa (1.4%)
- -------------------------------------------------------------------------------
IA Fin. Auth. Hlth. Care Fac.
Rev. Bonds (Care Initiatives)
9,860,000 9 1/4s, 7/1/25 BBB-/P 12,057,005
775,000 9.15s, 7/1/09 BBB-/P 903,518
300,000 IA Fin. Auth. Retirement Cmnty.
Rev. Bonds (Friendship Haven),
Ser. A, 6s, 11/15/24 BB/P 301,947
45,000 Marion Hlth. Care Fac. Rev. Bonds
(First Mtg.), Ser. IA, 1.76s, 1/1/29 B- 44,336
--------------
13,306,806
Kansas (0.4%)
- -------------------------------------------------------------------------------
Lenexa, Hlth. Care Rev. Bonds
(LakeView Village)
2,250,000 Ser. C, 6 7/8s, 5/15/32 BB+ 2,402,460
1,200,000 Ser. B, 6 1/4s, 5/15/26 BB+ 1,224,648
--------------
3,627,108
Kentucky (1.3%)
- -------------------------------------------------------------------------------
260,000 Kentucky Econ. Dev. Fin. Auth.
Rev. Bonds (First Mtg.), Ser. IA,
6 1/2s, 1/1/29 B- 256,162
4,800,000 KY Econ. Dev. Fin. Auth. VRDN
(Baptist Hlth. Care), Ser. C,
1.93s, 8/15/31 VMIG1 4,800,000
KY Econ. Dev. Fin. Auth. Hlth. Syst.
Rev. Bonds (Norton Healthcare,
Inc.), Ser. A
3,250,000 6 5/8s, 10/1/28 BBB 3,518,548
3,740,000 6 1/8s, 10/1/10 BBB 4,011,524
--------------
12,586,234
Louisiana (3.0%)
- -------------------------------------------------------------------------------
3,000,000 LA Hlth. Ed. Auth. Rev. Bonds
(Lambert House), Ser. A, 6.2s,
1/1/28 B+/P 3,040,230
4,268,000 LA Local Govt. Env. Fac. Cmnty. Dev.
Auth. Rev. Bonds (Hlth. Care - St.
James Place), Ser. A, 7s, 11/1/20 B-/P 4,195,572
4,420,000 LA Pub. Fac. Auth. Hosp. Rev. Bonds
(Lake Charles Memorial Hosp.),
8 5/8s, 12/1/30 CCC/P 4,309,942
6,000,000 Port of New Orleans, Indl. Dev.
Rev. Bonds (Continental Grain Co.),
7 1/2s, 7/1/13 BB- 6,087,540
3,000,000 St. Charles Parish, Poll. Control
Rev. Bonds, Ser. A, 4.9s, 6/1/30 Baa2 3,018,240
9,000,000 W. Feliciana Parish, Solid Waste
Disp. Rev. Bonds (Kaiser Aluminum),
7.7s, 12/1/14 Ba1 9,151,830
--------------
29,803,354
Maine (0.4%)
- -------------------------------------------------------------------------------
3,500,000 Rumford, Solid Waste Disp.
Rev. Bonds (Boise Cascade Corp.),
6 7/8s, 10/1/26 Ba1 3,738,980
Maryland (1.6%)
- -------------------------------------------------------------------------------
5,000,000 Howard Cnty., Rev. Bonds, Ser. A,
U.S. Govt. Coll., 8s, 5/15/29 AAA 6,312,650
MD State Hlth. & Higher Edl. Fac.
Auth. Rev. Bonds
2,000,000 (Mercy Ridge), Ser. A, 6s, 4/1/35 BB+/P 2,070,160
1,500,000 (Medstar Health), 5 1/2s, 8/15/33 Baa2 1,577,205
2,000,000 MuniMae Tax Exempt Bond Subsidiary,
LLC Rev. Bonds, Ser. A-2, 4.9s,
6/30/49 A3 1,989,240
3,400,000 Westminster, Econ. Dev Rev. Bonds
(Carroll Lutheran Village), Ser. A,
6 1/4s, 5/1/34 BB/P 3,542,494
--------------
15,491,749
Massachusetts (4.0%)
- -------------------------------------------------------------------------------
1,890,000 MA State Dev. Fin. Agcy.
Rev. Bonds (Lasell College), 6 3/4s,
7/1/31 BB+ 1,938,535
MA State Hlth. & Edl. Fac. Auth.
Rev. Bonds
5,750,000 (Civic Investments), Ser. A, 9s,
12/15/15 BBB- 6,642,975
4,000,000 (Jordan Hosp.), Ser. E, 6 3/4s,
10/1/33 BBB- 4,255,440
4,900,000 (Winchester Hosp.), Ser. E, 6 3/4s,
7/1/30 BBB 5,782,294
5,850,000 (UMass Memorial), Ser. C, 6 5/8s,
7/1/32 Baa2 6,382,350
2,200,000 (Berkshire Hlth. Syst.), Ser. E,
6 1/4s, 10/1/31 BBB+ 2,356,926
4,500,000 (Hlth. Care Syst. Covenant Hlth.),
Ser. E, 6s, 7/1/31 A- 4,775,760
2,630,000 (Caritas Christi Oblig. Group),
Ser. A, 5 1/4s, 7/1/08 BBB 2,766,313
1,850,000 MA State Indl. Fin. Agcy. R (TNG
Marina Bay LLC Project), 7 1/2s,
12/1/27 B/P 1,900,487
MA State Indl. Fin. Agcy. Rev. Bonds
2,378,153 (Evanswood Bethzatha Corp.), 8s,
1/15/27 (In default) (NON) D/P 2,973
750,000 (1st Mtge. Stone Institution &
Newton), 7.9s, 1/1/24 BB-/P 769,328
1,664,711 (1st. Mtge. Evanswood Bethzatha-A),
7 7/8s, 1/15/20 (In default) (NON) D/P 2,081
1,765,000 (Sr. Living Fac. Forge Hill), 7s,
4/1/17 B/P 1,784,503
--------------
39,359,965
Michigan (6.2%)
- -------------------------------------------------------------------------------
2,186,000 Ann Arbor, Econ. Dev. Corp. Ltd.
Oblig. Rev. Bonds (Glacier Hills,
Inc.), State & Local Govt.
Coll., 8 3/8s, 1/15/19 AAA 2,902,199
8,000,000 Detroit, Swr. Disp. VRDN, Ser. B,
FSA, 1.9s, 7/1/33 VMIG1 8,000,000
10,000,000 Dickinson Cnty., Econ. Dev. Corp.
Rev. Bonds, 5 3/4s, 6/1/16 Baa2 10,915,600
1,500,000 Flint, Hosp. Bldg. Auth. Rev. Bonds
(Hurley Med. Ctr.), 6s, 7/1/20 Baa3 1,551,915
Garden City, Hosp. Fin. Auth.
Rev. Bonds (Garden City Hosp. OB
Group), Ser. A
3,000,000 5 3/4s, 9/1/17 Ba2 2,867,970
1,900,000 5 5/8s, 9/1/10 Ba2 1,888,695
15,000,000 MI State Strategic Fund Ltd. Oblig.
Rev. Bonds (Detroit Edison Co.),
MBIA, 6.4s, 9/1/25 Aaa 15,652,050
MI State Strategic Fund Solid Waste
Disp. Rev. Bonds
2,550,000 (Genesee Pwr. Station), 7 1/2s,
1/1/21 B/P 2,397,357
3,500,000 (SD Warren Co.), Ser. C, 7 3/8s,
1/15/22 BB/P 3,728,375
5,000,000 Midland Cnty., Econ. Dev. Corp.
Rev. Bonds, 6 3/4s, 7/23/09 Ba3 5,206,350
5,455,000 Waterford, Econ. Dev. Corp.
Rev. Bonds (Canterbury Hlth.), 6s,
1/1/39 B-/P 4,096,650
2,000,000 Wayne Charter Cnty., Special Arpt.
Fac. Rev. Bonds (Northwest Airlines,
Inc.), 6s, 12/1/29 B+/P 1,593,700
--------------
60,800,861
Minnesota (0.2%)
- -------------------------------------------------------------------------------
2,075,000 Minneapolis, Rev. Bonds (Walker
Methodist Sr. Svcs.), Ser. A, 6s,
11/15/28 B+/P 1,690,627
800,000 Sauk Rapids Hlth. Care & Hsg. Fac.
Rev. Bonds (Good Shepherd Lutheran
Home), 6s, 1/1/34 B/P 822,160
--------------
2,512,787
Mississippi (0.3%)
- -------------------------------------------------------------------------------
2,500,000 Lowndes Cnty., Solid Waste Disp. &
Poll. Control Rev. Bonds
(Weyerhaeuser Co.), Ser. B, 6.7s,
4/1/22 Baa2 3,031,100
Missouri (1.3%)
- -------------------------------------------------------------------------------
3,250,000 Cape Girardeau Cnty., Indl. Dev.
Auth. Hlth. Care Fac. Rev. Bonds
(St. Francis Med. Ctr.),
Ser. A, 5 1/2s, 6/1/27 A 3,397,615
2,000,000 Kansas City, Indl. Dev. Auth. Hlth.
Fac. Rev. Bonds (First Mtg. Bishop
Spencer), Ser. A, 6 1/4s, 1/1/24 BB-/P 2,079,220
6,950,000 MO State Hlth. & Edl. Fac. Auth.
VRDN (Cox Hlth. Syst.), AMBAC,
1.97s, 6/1/22 VMIG1 6,950,000
--------------
12,426,835
Montana (1.3%)
- -------------------------------------------------------------------------------
11,910,000 Forsyth, Poll. Control VRDN (Pacific
Corp.), 1.78s, 1/1/18 VMIG1 11,910,000
750,000 MT State Board Inv. Exempt Fac.
Rev. Bonds (Still Water Mining
Project), 8s, 7/1/20 B- 803,753
--------------
12,713,753
Nebraska (--%)
- -------------------------------------------------------------------------------
Kearney, Indl. Dev. Rev. Bonds
136,310 (Great Platte River), 8s, 9/1/12 CCC/P 106,584
1,582,934 (Brookhaven), zero %, 9/1/12 CCC/P 31,659
--------------
138,243
Nevada (2.0%)
- -------------------------------------------------------------------------------
5,350,000 Clark Cnty., Indl. Dev. Rev. Bonds
(Southwest Gas Corp. Project),
Ser. C, 5.45s, 3/1/38 Baa2 5,743,279
1,500,000 Clark Cnty., Local Impt. Dist.
Special Assmt. Bonds (No. 142),
6.1s, 8/1/18 BB- 1,546,860
Henderson, Local Impt. Dist. Special
Assmt. Bonds (No. T-14)
3,735,000 5.8s, 3/1/23 BB-/P 3,847,797
2,640,000 5.55s, 3/1/17 BB-/P 2,719,781
1,500,000 Las Vegas, Local Impt. Board Special
Assmt. (Dist. No. 607), 5.9s,
6/1/17 BB- 1,546,875
810,000 Las Vegas, Special Impt. Dist.
Rev. Bonds (No. 809 - Summerlin
Area), 5.65s, 6/1/23 BB 825,706
3,500,000 Washoe Cnty., Wtr. Fac. Mandatory
Put Bonds (Sierra Pacific Pwr. Co.),
5s, 7/1/09 Ba2 3,531,045
--------------
19,761,343
New Hampshire (1.9%)
- -------------------------------------------------------------------------------
NH Higher Ed. & Hlth. Fac. Auth.
Rev. Bonds
3,000,000 (Havenwood-Heritage Heights), 7.35s,
1/1/18 BB-/P 3,111,360
1,000,000 (Riverwoods at Exeter), Ser. A,
6 1/2s, 3/1/23 BB/P 1,026,130
295,000 (Riverwoods at Exeter), Ser. A,
6 3/8s, 3/1/13 BB/P 303,325
3,000,000 (Rivermead at Peterborough), 5 3/4s,
7/1/28 BB/P 2,961,840
2,200,000 NH Hlth. & Ed. Fac. Auth. Rev. Bonds
(Huntington at Nashua), Ser. A,
6 7/8s, 5/1/33 B/P 2,288,682
NH State Bus. Fin. Auth. Rev. Bonds
2,500,000 (Alice Peck Day Hlth. Syst.),
Ser. A, 7s, 10/1/29 BBB-/P 2,556,950
2,450,000 (Franklin Regl. Hosp. Assn.),
Ser. A, 6.05s, 9/1/29 BB-/P 2,403,793
3,550,000 (Proctor Academy), Ser. A, 5.6s,
6/1/28 Baa2 3,656,500
8,551,027 NH State Bus. Fin. Auth. Poll.
Control & Solid Waste Rev. Bonds
(Crown Paper Co.), 7 3/4s, 1/1/22
(In default) (NON) D 86
--------------
18,308,666
New Jersey (4.5%)
- -------------------------------------------------------------------------------
5,000,000 Camden Cnty., Impt. Auth.
Rev. Bonds (Dockside Refrigerated),
8.4s, 4/1/24 (In default) (NON) D/P 4,125,000
NJ Econ. Dev. Auth. Rev. Bonds
7,000,000 (Winchester Gardens), Ser. A,
8 5/8s, 11/1/25 BB-/P 7,867,510
2,100,000 (Cranes Mill), Ser. A, 7 1/2s,
2/1/27 BB-/P 2,228,541
900,000 (Cedar Crest Village, Inc.), Ser. A,
7s, 11/15/16 BB-/P 933,642
5,300,000 (Newark Arpt. Marriot Hotel), 7s,
10/1/14 Ba3 5,573,692
500,000 (First Mtge. Presbyterian Home),
Ser. A, 6 3/8s, 11/1/31 BB/P 519,255
3,000,000 (United Methodist Homes), Ser. A-1,
6 1/4s, 7/1/33 BB+ 3,086,100
500,000 (First Mtge. Presbyterian Home),
Ser. A, 6 1/4s, 11/1/20 BB/P 518,870
5,000,000 (Cigarette Tax), 5 1/2s, 6/15/24 Baa2 5,236,850
5,000,000 NJ Hlth. Care Fac. Fin. Auth.
Rev. Bonds (South Jersey Hosp.),
6s, 7/1/12 Baa1 5,642,550
Tobacco Settlement Fin. Corp.
Rev. Bonds
2,000,000 6 3/4s, 6/1/39 BBB 2,035,380
6,260,000 (Asset Backed Bonds), 6s, 6/1/37 BBB 5,960,021
--------------
43,727,411
New Mexico (2.5%)
- -------------------------------------------------------------------------------
5,500,000 Farmington, Poll. Control Rev. Bonds
(Tucson Elec. Pwr. Co. San Juan),
Ser. A, 6.95s, 10/1/20 Ba3 5,805,030
18,800,000 Farmington, Poll. Control VRDN (AZ
Pub. Svc. Co.), Ser. A, 1.82s,
5/1/24 VMIG1 18,800,000
--------------
24,605,030
New York (6.0%)
- -------------------------------------------------------------------------------
375,000 Capital Compost Escrow zero %,
10/31/05 (F) D/P 75,000
1,250,000 Huntington, Hsg. Auth. Rev. Bonds
(Gurwin Jewish Sr. Residence),
Ser. A, 6s, 5/1/39 B+/P 1,211,075
1,575,000 Nassau Cnty., Indl. Dev. Agcy.
Rev. Bonds (North Shore Hlth. Syst.
Project D), 5 1/4s, 11/1/07 A3 1,676,619
NY City, G.O. Bonds
12,560,000 Ser. B, FGIC, 6s, 8/1/06 Aaa 13,242,636
8,000,000 Ser. C, 5 1/2s, 8/1/13 A2 8,982,800
NY City, Indl. Dev. Agcy. Rev. Bonds
4,000,000 (Paper Inc.), 7.8s, 1/1/16 B- 4,196,040
3,250,000 (Brooklyn Navy Yard Cogen.
Partners), 5.65s, 10/1/28 BBB- 3,203,850
500,000 NY City, Indl. Dev. Agcy. Civic Fac.
Rev. Bonds (Brooklyn Polytech. U.
Project J), 6 1/8s, 11/1/30 BB+ 489,490
5,400,000 NY City, Indl. Dev. Agcy. Special
Arpt. Fac. Rev. Bonds (Airis JFK I
LLC), Ser. A, 5 1/2s, 7/1/28 Baa3 5,449,896
3,325,000 NY City, Indl. Dev. Agcy. Special
Fac. Rev. Bonds (British Airways),
5 1/4s, 12/1/32 BB+ 2,684,638
5,000,000 Onondaga Cnty., Indl. Dev. Agcy.
Rev. Bonds (Solvay Paperboard, LLC),
7s, 11/1/30 (acquired 12/9/98, cost
$5,000,000) (RES) BB-/P 5,314,250
2,500,000 Port Auth. NY & NJ Rev. Bonds
(Kennedy Intl. Arpt. - 4th
Installment), 6 3/4s, 10/1/11 BB+/P 2,647,325
700,000 Port. Auth. NY & NJ Special
Obligation Rev. Bonds, 7s, 10/1/07 BB+/P 725,326
4,000,000 Suffolk Cnty., Indl. Dev. Agcy.
Rev. Bonds (Peconic Landings),
Ser. A, 8s, 10/1/20 B+/P 4,327,640
Suffolk Cnty., Indl. Dev. Agcy.
Civic Fac. Rev. Bonds
3,800,000 (Southampton Hosp. Assn.), Ser. B,
7 5/8s, 1/1/30 B-/P 3,905,032
1,000,000 (Gurwin Jewish-Phase II), 6.7s,
5/1/39 B+/P 1,039,110
--------------
59,170,727
North Carolina (2.5%)
- -------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Syst.
Rev. Bonds, Ser. C
7,500,000 5 3/8s, 1/1/17 Baa2 8,066,775
1,000,000 5 3/8s, 1/1/16 Baa2 1,074,180
2,000,000 5.3s, 1/1/15 Baa2 2,149,500
4,500,000 NC Med. Care Comm. Retirement Fac.
Rev. Bonds (1st Mtge. -Givens
Estates Project), Ser. A, 6 1/2s,
7/1/32 BB-/P 4,725,720
NC State Muni. Pwr. Agcy. Rev. Bonds
(No. 1, Catawba Elec.)
4,000,000 Ser. B, 6 1/2s, 1/1/20 Baa1 4,535,880
4,000,000 Ser. A, 5 1/2s, 1/1/13 Baa1 4,411,880
--------------
24,963,935
Ohio (2.3%)
- -------------------------------------------------------------------------------
1,000,000 OH State Env. Impt. Rev. Bonds (USX
Corp.), 5 5/8s, 5/1/29 Baa1 1,036,340
OH State Higher Edl. Fac. Mandatory
Put Bonds (Kenyon College Project)
2,500,000 4.95s, 7/1/15 A2 2,645,900
5,000,000 4.85s, 7/1/14 A2 5,290,200
6,500,000 OH State Solid Waste Mandatory Put
Bonds, 4.85s, 11/1/07 BBB 6,753,305
6,000,000 OH State Wtr. Dev. Auth. Poll.
Control Fac. Rev. Bonds, 6.1s,
8/1/20 Baa2 6,187,320
700,000 OH State Wtr. Dev. Auth. Solid Waste
Disp. Rev. Bonds (Bay Shore Power
Co.), Ser. A, 5 7/8s, 9/1/20 BB+/P 707,406
--------------
22,620,471
Oklahoma (0.6%)
- -------------------------------------------------------------------------------
3,075,000 OK Dev. Fin. Auth. Rev. Bonds
(Hillcrest Hlth. Care Syst.),
Ser. A, U.S. Govt. Coll., 5 5/8s,
8/15/29 AAA 3,449,935
2,350,000 Ottawa Cnty., Fin. Auth. Indl.
Rev. Bonds (Doane Products Co.),
7 1/4s, 6/1/17 B-/P 2,285,117
--------------
5,735,052
Oregon (0.6%)
- -------------------------------------------------------------------------------
5,350,000 Multnomah Cnty., Hosp. Fac. Auth.
Rev. Bonds (Terwilliger Plaza),
6 1/2s, 12/1/29 BB-/P 5,488,458
Pennsylvania (6.1%)
- -------------------------------------------------------------------------------
6,500,000 Allegheny Cnty., Hosp. Dev. Auth.
Rev. Bonds (Hlth. Syst.), Ser. B,
9 1/4s, 11/15/15 B2 7,603,830
7,925,000 Carbon Cnty., Indl. Dev. Auth.
Rev. Bonds (Panther Creek
Partners), 6.65s, 5/1/10 BBB- 8,553,928
1,700,000 Chester Cnty., Hlth. & Ed. Fac.
Auth. Rev. Bonds (Jenners Pond,
Inc.), 7 5/8s, 7/1/34 BB-/P 1,847,815
3,750,000 Dauphin Cnty., Gen. Auth. Rev. Bonds
(Office & Pkg.), Ser. A, 6s,
1/15/25 D/P 1,950,000
1,500,000 Lancaster Cnty., Hosp. Auth.
Rev. Bonds (Gen. Hosp.), 5 1/2s,
3/15/26 A 1,577,625
Lehigh Cnty., Gen. Purpose Auth.
Rev. Bonds
2,250,000 (St. Luke's Hosp. - Bethlehem),
5 3/8s, 8/15/33 Baa2 2,297,025
2,860,000 (Lehigh Valley Hosp. Hlth. Network),
Ser. A, 5 1/4s, 7/1/32 A2 2,952,521
1,400,000 Montgomery Cnty., Indl. Auth.
Resource Recvy. Rev. Bonds
(Whitemarsh Cont Care), 6 1/4s,
2/1/35 B/P 1,416,576
1,750,000 New Morgan, Indl. Dev. Auth. Solid
Waste Disp. Rev. Bonds (New Morgan
Landfill Co., Inc.), 6 1/2s, 4/1/19 BB- 1,732,273
2,000,000 PA Econ. Dev. Fin. Auth. Rev. Bonds
(Amtrak), Ser. A, 6 3/8s, 11/1/41 A3 2,112,980
9,000,000 PA State Econ. Dev. Fin. Auth.
Resource Recvy. Rev. Bonds (Colver),
Ser. E, 8.05s, 12/1/15 BBB-/P 9,266,940
PA State Higher Edl. Fac. Auth.
Rev. Bonds
1,500,000 (Widener U.), 5.4s, 7/15/36 BBB+ 1,572,495
1,345,000 (Philadelphia College of Osteopathic
Med.), 5s, 12/1/13 A 1,447,247
Philadelphia, Hosp. & Higher Ed.
Fac. Auth. Rev. Bonds
4,858,731 (Graduate Hlth. Syst. Oblig. Group),
7 1/4s, 7/1/18 (In default) (NON) Ca 6,073
3,000,000 (Jeanses Hosp. Project), 5 7/8s,
7/1/17 Baa2 3,075,180
Scranton, G.O. Bonds, Ser. C
3,060,000 7.1s, 9/1/31 AAA/P 3,764,779
1,000,000 7s, 9/1/22 AAA/P 1,224,430
2,500,000 West Cornwall, Tpk. Muni. Auth.
Rev. Bonds (Elizabethtown College),
6s, 12/15/27 BBB+ 2,682,625
2,000,000 West Shore, Area Hosp. Auth.
Rev. Bonds (Holy Spirit Hosp.),
6 1/4s, 1/1/32 BBB+ 2,146,880
2,000,000 York Cnty., Indl. Dev. Auth.
Rev. Bonds (PSEG Power, LLC),
Ser. A, 5 1/2s, 9/1/20 Baa1 2,128,340
--------------
59,359,562
Puerto Rico (0.8%)
- -------------------------------------------------------------------------------
7,400,000 PR Indl. Tourist Edl. Med. & Env.
Control Fac. Rev. Bonds (Cogen.
Fac.-AES), 6 5/8s, 6/1/26 Baa3 8,103,370
Rhode Island (0.1%)
- -------------------------------------------------------------------------------
710,000 Tobacco Settlement Fin. Corp.
Rev. Bonds, Ser. A, 6 1/4s, 6/1/42 BBB 685,122
South Carolina (2.6%)
- -------------------------------------------------------------------------------
2,120,000 Florence Cnty., Indl. Dev. Auth.
Rev. Bonds (Stone Container Corp.),
7 3/8s, 2/1/07 B/P 2,131,872
4,000,000 SC Hosp. Auth. Rev. Bonds (Med. U.),
Ser. A, 6 1/2s, 8/15/32 AAA 4,835,680
SC Jobs Econ. Dev. Auth. Hosp. Fac.
Rev. Bonds (Palmetto Hlth. Alliance)
3,800,000 Ser. A, 7 3/8s, 12/15/21 Baa2 4,659,408
5,000,000 Ser. C, 6s, 8/1/20 Baa2 5,454,600
9,000,000 SC Tobacco Settlement Rev. Mgt.
Rev. Bonds, Ser. B, 6 3/8s, 5/15/30 BBB 8,915,220
--------------
25,996,780
South Dakota (0.2%)
- -------------------------------------------------------------------------------
1,650,000 SD Edl. Enhancement Funding Corp.
Rev. Bonds, Ser. B, 6 1/2s, 6/1/32 BBB 1,655,264
Tennessee (1.6%)
- -------------------------------------------------------------------------------
1,000,000 Elizabethton, Hlth. & Edl. Fac.
Board Rev. Bonds (Hosp. Ref. &
Impt.), Ser. B, 8s, 7/1/33 Baa2 1,204,630
6,500,000 Johnson City, Hlth. & Edl. Fac.
Board Hosp. Rev. Bonds (Mountain
States Hlth.), Ser. A, 7 1/2s,
7/1/33 BBB+ 7,734,025
Memphis-Shelby Cnty., Arpt. Auth.
Rev. Bonds (Federal Express Corp.)
4,000,000 5.05s, 9/1/12 Baa2 4,323,680
2,000,000 4 1/2s, 7/1/14 Baa2 2,043,060
--------------
15,305,395
Texas (5.1%)
- -------------------------------------------------------------------------------
6,850,000 Abilene, Hlth. Fac. Dev. Corp.
Rev. Bonds (Sears Methodist
Retirement), Ser. A, 5.9s, 11/15/25 BB/P 6,736,564
3,985,000 Crawford Ed. Fac. Rev. Bonds (U. St.
Thomas), 5 3/8s, 10/1/27 BBB+ 4,158,706
Dallas-Fort Worth, Intl. Arpt. Fac.
Impt. Corp. Rev. Bonds (American
Airlines, Inc.)
2,500,000 8 1/4s, 11/1/36 Caa2 2,009,650
3,000,000 6 3/8s, 5/1/35 Caa2 1,886,550
5,000,000 Edgewood, Indpt. School Dist. Bexar
Cnty. G.O. Bonds, Ser. A, PSFG, 5s,
2/15/29 Aaa 5,202,650
500,000 Georgetown, Hlth. Fac. Dev. Corp.
Rev. Bonds, 6 1/4s, 8/15/29 BB 500,250
Houston, Arpt. Syst. Rev. Bonds
7,000,000 (Special Fac. - Continental
Airlines, Inc.), Ser. E, 6 3/4s,
7/1/21 B- 6,064,310
3,000,000 (Continental Airlines, Inc.),
Ser. C, 5.7s, 7/15/29 B- 2,103,450
5,500,000 Lufkin, Hlth. Fac. Dev. Corp.
Rev. Bonds (Memorial Hlth. Syst. of
East TX), 5.7s, 2/15/28 BBB 5,669,345
5,265,000 Round Rock, Hotel Occupancy Tax
Rev. Bonds (Convention Ctr.
Complex), 5.85s, 12/1/24 BBB/P 5,268,896
4,500,000 Sam Rayburn Muni. Pwr. Agcy.
Rev. Bonds, 6s, 10/1/21 Baa2 4,893,525
Tomball, Hosp. Auth. Rev. Bonds
(Tomball Regl. Hosp.)
1,750,000 6 1/8s, 7/1/23 Baa3 1,765,610
3,295,000 6s, 7/1/25 Baa3 3,331,410
--------------
49,590,916
Utah (1.1%)
- -------------------------------------------------------------------------------
Carbon Cnty., Solid Waste Disp.
Rev. Bonds (Laidlaw Env.), Ser. A
1,000,000 7 1/2s, 2/1/10 BB- 1,026,380
600,000 7.45s, 7/1/17 BB-/P 623,226
4,000,000 Tooele Cnty., Harbor & Term. Dist.
Port Fac. Rev. Bonds (Union
Pacific), Ser. A, 5.7s, 11/1/26 Baa2 4,170,080
4,480,000 UT Cnty., Env. Impt. Rev. Bonds
(Marathon Oil), 5.05s, 11/1/17 Baa1 4,893,101
--------------
10,712,787
Virginia (2.7%)
- -------------------------------------------------------------------------------
5,250,000 Henrico Cnty. Econ. Dev. Auth.
Rev. Bonds (United Methodist),
Ser. A, 6.7s, 6/1/27 BB+/P 5,569,410
4,000,000 Henrico Cnty., Indl. Dev. Auth.
Rev. Bonds, FSA, 5.929s, 8/23/27 Aaa 4,800,160
2,500,000 James Cnty., Indl. Dev. Auth.
Rev. Bonds (Williamsburg), Ser. A,
6 1/8s, 3/1/32 BB-/P 2,630,625
4,000,000 Peninsula Ports Auth. Rev. Bonds (VA
Baptist Homes), Ser. A, 7 3/8s,
12/1/32 B+/P 4,259,400
Roanoke Cnty. Indl. Dev. Auth.
Rev. Bonds (Res. Care Fac.), Ser. A
2,000,000 6.3s, 7/1/35 B 2,009,720
1,000,000 4.4s, 7/1/08 B 1,002,160
1,000,000 Russell Cnty. Indl. Dev. Auth. Poll.
Control Rev. Bonds (Appalachian Pwr.
Co.), Ser. I, 2.7s, 11/1/07 Baa2 998,450
5,510,000 Suffolk, Redev. & Hsg. Auth.
Rev. Bonds (Beach-Oxford Apts.),
6 1/4s, 10/1/33 BB-/P 5,429,940
--------------
26,699,865
Washington (1.0%)
- -------------------------------------------------------------------------------
4,840,000 Tobacco Settlement Auth. of WA
Rev. Bonds, 6 1/2s, 6/1/26 BBB 4,934,090
5,500,000 Washington Cnty., Hsg. & Redev.
Auth. Rev. Bonds (Healtheast),
5 1/2s, 11/15/27 Ba1 5,219,115
--------------
10,153,205
West Virginia (0.7%)
- -------------------------------------------------------------------------------
3,475,000 Mason Cnty., Poll. Control FRB
(Appalachian Pwr. Co. Project),
Ser. L, 5 1/2s, 10/1/22 Baa2 3,590,010
4,495,000 Princeton, Hosp. Rev. Bonds (Cmnty.
Hosp. Assn., Inc.), 6.1s, 5/1/29 B2 3,468,747
--------------
7,058,757
Wisconsin (0.7%)
- -------------------------------------------------------------------------------
Badger Tobacco Settlement
Asset Securitization Corp.
Rev. Bonds
1,000,000 7s, 6/1/28 BBB 1,031,590
5,500,000 6 3/8s, 6/1/32 BBB 5,446,705
--------------
6,478,295
Wyoming (0.6%)
- -------------------------------------------------------------------------------
5,350,000 Sweetwater Cnty., Poll. Control
Rev. Bonds (Idaho Power Co.),
Ser. A, 6.05s, 7/15/26 Baa1 5,672,767
--------------
Total Municipal bonds and notes
(cost $910,186,280) $945,448,138
Preferred stocks (0.9%) (a)
Number of shares Value
- -------------------------------------------------------------------------------
2,000,000 Charter Mac. Equity Trust 144A
Ser. A, 6.625% cum. pfd. $2,173,960
6,000,000 MuniMae Tax Exempt Bond Subsidiary,
LLC 144A Ser. B, 7 3/4s cum. pfd. 6,993,000
--------------
Total Preferred stocks
(cost $8,000,000) $9,166,960
Corporate bonds and notes (0.3%) (a) (cost $2,500,000)
Principal amount Value
- -------------------------------------------------------------------------------
$2,500,000 GMAC Muni. Mtge. Trust 144A sub.
notes Ser. A1-1, 4.15s, 2039 $2,481,800
Common stocks (0.1%) (a) (cost $9,057,285)
Number of shares Value
- -------------------------------------------------------------------------------
184,103 Tembec, Inc. (Canada) (NON) $1,001,770
- -------------------------------------------------------------------------------
Total Investments
(cost $929,743,565) $958,098,668
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $979,709,031.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at January 31, 2005 for the
securities listed. Ratings are generally ascribed to securities at the
time of issuance. While the agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at January 31, 2005. Securities rated by Putnam are indicated
by "/P". Security ratings are defined in the Statement of Additional
Information.
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at January 31, 2005 was
$11,038,950 or 1.1% of net assets.
(F) Security is valued at fair value following procedures approved by
the Trustees.
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 IFB, which are securities paying interest rates that
vary inversely to changes in the market interest rates, VRDN, mandatory
put bonds and Floating Rate Bonds (FRB) are the current interest rates
at January 31, 2005.
The dates shown on Mandatory Put Bonds are the next mandatory put dates.
The fund had the following industry group concentrations greater than
10% at January 31, 2005 (as a percentage of net assets):
Health care 34.9%
Utilities 19.7
Interest rate swap contracts outstanding at January 31, 2005 (Unaudited)
Unrealized
Notional Termination appreciation/
amount date (depreciation)
- ------------------------------------------------------------------------------------
Agreement with Citibank, N.A. dated
December 14, 2004 to receive quarterly
the notional amount multiplied by 3.13%
and pay quarterly the notional amount
multiplied by the Bond Market
Association Municipal Swap Index. $55,000,000 3/17/10 $(50,364)
Agreement with Citibank, N.A. dated
November 4, 2004 to receive quarterly
the notional amount multiplied by 4.067%
and pay quarterly the notional amount
multiplied by the Bond Market
Association Municipal Swap Index. 25,000,000 2/28/05 544,690
Agreement with Citibank, N.A. dated
December 14, 2004 to receive quarterly
the notional amount multiplied by 4.106%
and pay quarterly the notional amount
multiplied by the Bond Market
Association Municipal Swap Index. 18,000,000 3/17/25 444,058
Agreement with JP Morgan Chase Bank
dated November 4, 2004 to receive
quarterly the notional amount multiplied
by 2.946% and pay quarterly the notional
amount multiplied by the Bond Market
Association Municipal Swap Index. 40,000,000 2/18/14 235,536
- ------------------------------------------------------------------------------------
$1,173,920
- ------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities
January 31, 2005 (Unaudited)
Assets
- -------------------------------------------------------------------------------
Investment in securities, at value (identified cost
$929,743,565) (Note 1) $958,098,668
- -------------------------------------------------------------------------------
Cash 8,833,303
- -------------------------------------------------------------------------------
Interest and other receivables 12,886,464
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 368,083
- -------------------------------------------------------------------------------
Receivable for securities sold 4,959,966
- -------------------------------------------------------------------------------
Receivable for open swap contracts (Note 1) 1,224,284
- -------------------------------------------------------------------------------
Total assets 986,370,768
Liabilities
- -------------------------------------------------------------------------------
Distributions payable to shareholders 1,443,732
- -------------------------------------------------------------------------------
Payable for securities purchased 2,385,854
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,216,790
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 958,096
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 73,653
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 139,505
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,989
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 271,919
- -------------------------------------------------------------------------------
Payable for open swap contracts (Note 1) 50,364
- -------------------------------------------------------------------------------
Other accrued expenses 118,835
- -------------------------------------------------------------------------------
Total liabilities 6,661,737
- -------------------------------------------------------------------------------
Net assets $979,709,031
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Unlimited shares authorized) (Notes 1 and 4) $1,130,656,859
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 2,949,028
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (183,425,879)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 29,529,023
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $979,709,031
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($787,397,361 divided by 61,041,087 shares) $12.90
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.50 of $12.90)* $13.51
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($174,613,995 divided by 13,515,049 shares)** $12.92
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($11,141,457 divided by 863,253 shares)** $12.91
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($6,556,218 divided by 508,284 shares) $12.90
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of 12.90)*** $13.33
- -------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or
more and on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
*** On single retail sales of less than $50,000. On sales of $50,000 or
more and on group sales, the offering price is reduced.
The accompanying notes are an integral part of these financial
statements.
Statement of operations
Six months ended January 31, 2005 (Unaudited)
Interest income: $29,132,933
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,998,002
- -------------------------------------------------------------------------------
Investor servicing fees (Note 2) 391,255
- -------------------------------------------------------------------------------
Custodian fees (Note 2) 76,683
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 19,708
- -------------------------------------------------------------------------------
Administrative services (Note 2) 13,256
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 799,251
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 761,225
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 55,195
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 16,958
- -------------------------------------------------------------------------------
Other 140,809
- -------------------------------------------------------------------------------
Non-recurring costs (Notes 2 and 6) 20,692
- -------------------------------------------------------------------------------
Costs assumed by Manager (Notes 2 and 6) (20,692)
- -------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2) (157,178)
- -------------------------------------------------------------------------------
Total expenses 5,115,164
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (23,636)
- -------------------------------------------------------------------------------
Net expenses 5,091,528
- -------------------------------------------------------------------------------
Net investment income 24,041,405
- -------------------------------------------------------------------------------
Net realized loss on investments (including realized gain of
$141,748 on affiliated issues) (Notes 1, 3 and 5) (143,608)
- -------------------------------------------------------------------------------
Net realized gain on swap contracts (Notes 1 and 3) 30,910
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments and swap
contracts during the period 33,735,180
- -------------------------------------------------------------------------------
Net gain on investments 33,622,482
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $57,663,887
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Six months ended Year ended
January 31 July 31
Decrease in net assets 2005* 2004
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $24,041,405 $58,837,341
- -------------------------------------------------------------------------------
Net realized loss on investments (112,698) (68,993,242)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 33,735,180 85,385,128
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 57,663,887 75,229,227
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From ordinary income
Class A (74,319) (203,556)
- -------------------------------------------------------------------------------
Class B (16,587) (46,466)
- -------------------------------------------------------------------------------
Class C (1,051) (2,543)
- -------------------------------------------------------------------------------
Class M (620) (1,816)
- -------------------------------------------------------------------------------
From tax-exempt income
Class A (19,395,333) (48,239,448)
- -------------------------------------------------------------------------------
Class B (3,766,308) (9,618,834)
- -------------------------------------------------------------------------------
Class C (223,318) (514,977)
- -------------------------------------------------------------------------------
Class M (154,573) (418,432)
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (51,474,075) (265,227,788)
- -------------------------------------------------------------------------------
Total decrease in net assets (17,442,297) (249,044,633)
Net assets
- -------------------------------------------------------------------------------
Beginning of period 997,151,328 1,246,195,961
- -------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $2,949,028 and
$2,539,732, respectively) $979,709,031 $997,151,328
- -------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2005 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.46 $12.31 $12.88 $13.39 $13.27 $14.13
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .32 (c) .68 (c) .74 .83 .80 .80
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .43 .15 (.57) (.52) .11 (.85)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations: .75 .83 .17 .31 .91 (.05)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.31) (.68) (.74) (.82) (.79) (.81)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.68) (.74) (.82) (.79) (.81)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.90 $12.46 $12.31 $12.88 $13.39 $13.27
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 6.13* 6.87 1.34 2.38 7.10 (.24)
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $787,397 $798,737 $1,000,769 $1,115,695 $1,145,710 $1,114,842
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .45*(c) .92 (c) .91 .90 .88 .86
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.49*(c) 5.43 (c) 5.83 6.31 6.01 5.95
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.35* 18.25 28.90 19.87 17.95 12.05
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an involuntary contractual expense limitation in effect during the period. As a result of such limitation, expenses
of the fund for the periods ended January 31, 2005 and July 31, 2004 reflect a reduction of 0.02% and 0.02%, respectively,
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
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2005 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.48 $12.33 $12.90 $13.41 $13.29 $14.15
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .28 (c) .60 (c) .67 .76 .73 .73
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .43 .15 (.57) (.52) .12 (.86)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations: .71 .75 .10 .24 .85 (.13)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.27) (.60) (.67) (.75) (.73) (.73)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.27) (.60) (.67) (.75) (.73) (.73)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.92 $12.48 $12.33 $12.90 $13.41 $13.29
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.72* 6.16 0.82 1.88 6.55 (.82)
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $174,614 $180,830 $222,970 $281,825 $356,506 $441,174
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .78*(c) 1.57 (c) 1.43 1.40 1.39 1.44
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.16*(c) 4.78 (c) 5.32 5.83 5.49 5.36
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.35* 18.25 28.90 19.87 17.95 12.05
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an involuntary contractual expense limitation in effect during the period. As a result of such limitation, expenses
of the fund for the periods ended January 31, 2005 and July 31, 2004 reflect a reduction of 0.02% and 0.02%, respectively,
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
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2005 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.47 $12.31 $12.89 $13.39 $13.27 $14.13
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .27 (c) .58 (c) .64 .72 .69 .69
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .43 .16 (.58) (.51) .12 (.85)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations: .70 .74 .06 .21 .81 (.16)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.26) (.58) (.64) (.71) (.69) (.70)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.26) (.58) (.64) (.71) (.69) (.70)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.91 $12.47 $12.31 $12.89 $13.39 $13.27
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.67* 6.11 0.45 1.64 6.25 (1.05)
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $11,141 $10,600 $12,028 $11,002 $6,779 $3,945
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .86*(c) 1.72 (c) 1.71 1.70 1.68 1.66
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.09*(c) 4.64 (c) 5.02 5.46 5.20 5.16
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.35* 18.25 28.90 19.87 17.95 12.05
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an involuntary contractual expense limitation in effect during the period. As a result of such limitation, expenses
of the fund for the periods ended January 31, 2005 and July 31, 2004 reflect a reduction of 0.02% and 0.02%, respectively,
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
January 31
Per-share (Unaudited) Year ended July 31
operating performance 2005 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.46 $12.31 $12.89 $13.39 $13.27 $14.14
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .30 (c) .64 (c) .70 .79 .76 .77
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .43 .15 (.58) (.51) .12 (.87)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations: .73 .79 .12 .28 .88 (.10)
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.29) (.64) (.70) (.78) (.76) (.77)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.29) (.64) (.70) (.78) (.76) (.77)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.90 $12.46 $12.31 $12.89 $13.39 $13.27
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 5.93* 6.56 0.96 2.16 6.79 (.62)
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $6,556 $6,985 $10,429 $11,706 $11,474 $13,745
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .60*(c) 1.22 (c) 1.21 1.20 1.18 1.16
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.34*(c) 5.13 (c) 5.54 6.00 5.70 5.65
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.35* 18.25 28.90 19.87 17.95 12.05
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an involuntary contractual expense limitation in effect during the period. As a result of such limitation, expenses
of the fund for the periods ended January 31, 2005 and July 31, 2004 reflect a reduction of 0.02% and 0.02%, respectively,
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
January 31, 2005 (Unaudited)
Note 1
Significant accounting policies
Putnam Tax-Free High Yield Fund (the "fund") is a series of Putnam
Tax-Free Income Trust (the "trust"), a Massachusetts business trust,
which is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The
fund pursues its objective of seeking high current income exempt from
federal income tax by investing primarily in high-yielding, lower rated
tax-exempt securities constituting a portfolio that Putnam Investment
Management, LLC ("Putnam Management"), the fund's manager, an indirect
wholly-owned subsidiary of Putnam, LLC, believes does not involve undue
risk to income or principal. The fund invests in higher yielding, lower
rated bonds that have a higher rate of default due to the nature of the
investments.
The fund offers class A, class B, class C and class M shares. Class A
shares are sold with a maximum front-end sales charge of 4.50%. 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 exchanging 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 including certain restricted
securities are valued at fair value following procedures approved by the
Trustees. Such valuations and procedures are reviewed periodically by the
Trustees.
B) Security transactions and related investment income Security
transactions are recorded on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on
the identified cost basis.
Interest income is recorded on the accrual basis. All premiums/discounts
are amortized/accreted on a yield-to-maturity basis. 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. Risk of loss 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
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code of 1986 (the "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 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 July 31, 2004, the fund had a capital loss carryover of $138,126,405
available to the extent allowed by tax law to offset future capital
gains, if any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- --------------------------------
$21,345,454 July 31, 2006
23,390,767 July 31, 2007
7,813,842 July 31, 2008
1,682,906 July 31, 2009
1,466,587 July 31, 2010
4,722,800 July 31, 2011
77,704,049 July 31, 2012
Pursuant to federal income tax regulations applicable to regulated
investment companies, the fund has elected to defer to its fiscal year
ending July 31, 2005 $41,584,036 of losses recognized during the period
November 1, 2003 to July 31, 2004.
The aggregate identified cost on a tax basis is $929,497,048, resulting
in gross unrealized appreciation and depreciation of $56,214,368 and
$27,612,748, respectively, or net unrealized appreciation of
$28,601,620.
E) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid monthly. Distributions from capital gains, if any,
are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are
determined in accordance with income tax regulations, which may differ
from generally accepted accounting principles. Reclassifications are
made to the fund's capital accounts to reflect income and gains
available for distribution (or available capital loss carryovers) under
income tax regulations.
F) Expenses of the trust Expenses directly charged or attributable to any
fund will be paid from the assets of that fund. Generally, expenses of the
trust will be allocated among and charged to the assets of each fund on a
basis that the Trustees deem fair and equitable, which may be based on the
relative assets of each fund or the nature of the services performed and
relative applicability to each fund.
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on the following annual rates: 0.65% of the first $500 million
of average net assets, 0.55% of the next $500 million, 0.50% of the next
$500 million, 0.45% of the next $5 billion, 0.425% of the next $5
billion, 0.405% of the next $5 billion, and 0.39% of the next $5 billion
and 0.38% thereafter.
Effective January 28, 2004, Putnam Management has agreed to waive fees
and reimburse expenses of the fund through July 31, 2005 to the extent
necessary to ensure that the fund's expenses do not exceed the average
expenses of the front-end load funds viewed by Lipper Inc. as having the
same investment classification or objective as the fund. The expense
reimbursement is based on a comparison of the fund's expenses with the
average annualized operating expenses of the funds in its Lipper peer
group for each calendar quarter during the fund's last fiscal year,
excluding 12b-1 fees and without giving effect to any expense offset and
brokerage service arrangements that may reduce fund expenses. For the
period ended January 31, 2005, Putnam Management waived $157,178 of its
management fee from the fund.
For the period ended January 31, 2005, Putnam Management has assumed
$20,692 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 January 31, 2005, the
fund paid PFTC $467,938 for these services.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the six months ended January 31,
2005, the fund's expenses were reduced by $23,636 under these
arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $1,230, 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 0.20%, 0.85%, 1.00% and 0.50% of the average net assets
attributable to class A, class B, class C and class M shares,
respectively.
For the six months ended January 31, 2005, Putnam Retail Management,
acting as underwriter, received net commissions of $1,295 and $111 from
the sale of class A and class M shares, respectively, and received
$93,622 and $613 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
exchanged from other Putnam funds that were purchased without an initial
sales charge as part of an investment of $1 million or more. For the six
months ended January 31, 2005, Putnam Retail Management, acting as
underwriter, received no monies on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended January 31, 2005, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $104,806,303 and $177,308,224, respectively.
There were no purchases or sales of U.S. government securities.
Note 4
Capital shares
At January 31, 2005, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended January 31, 2005
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 992,568 $12,600,617
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 947,186 12,030,582
- ----------------------------------------------------------------
1,939,754 24,631,199
Shares repurchased (4,984,281) (63,277,439)
- ----------------------------------------------------------------
Net decrease (3,044,527) $(38,646,240)
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 2,732,805 $34,050,893
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 2,371,678 29,690,091
- ----------------------------------------------------------------
5,104,483 63,740,984
Shares repurchased (22,318,200) (278,790,981)
- ----------------------------------------------------------------
Net decrease (17,213,717) $(215,049,997)
- ----------------------------------------------------------------
Six months ended January 31, 2005
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 206,572 $2,623,520
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 149,165 1,897,469
- ----------------------------------------------------------------
355,737 4,520,989
Shares repurchased (1,326,282) (16,853,863)
- ----------------------------------------------------------------
Net decrease (970,545) $(12,332,874)
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 930,003 $11,644,576
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 387,564 4,859,493
- ----------------------------------------------------------------
1,317,567 16,504,069
Shares repurchased (4,916,360) (61,526,126)
- ----------------------------------------------------------------
Net decrease (3,598,793) $(45,022,057)
- ----------------------------------------------------------------
Six months ended January 31, 2005
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 82,231 $1,045,924
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 10,274 130,586
- ----------------------------------------------------------------
92,505 1,176,510
Shares repurchased (79,294) (1,010,261)
- ----------------------------------------------------------------
Net increase 13,211 $166,249
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 180,330 $2,259,492
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 21,463 268,452
- ----------------------------------------------------------------
201,793 2,527,944
Shares repurchased (328,482) (4,093,502)
- ----------------------------------------------------------------
Net decrease (126,689) $(1,565,558)
- ----------------------------------------------------------------
Six months ended January 31, 2005
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 4,559 $58,023
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 7,639 96,999
- ----------------------------------------------------------------
12,198 155,022
Shares repurchased (64,364) (816,232)
- ----------------------------------------------------------------
Net decrease (52,166) $(661,210)
- ----------------------------------------------------------------
Year ended July 31, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 18,623 $232,608
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 22,470 281,100
- ----------------------------------------------------------------
41,093 513,708
Shares repurchased (327,841) (4,103,884)
- ----------------------------------------------------------------
Net decrease (286,748) $(3,590,176)
- ----------------------------------------------------------------
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:
Affiliate Purchase cost Sales cost Dividend income Market value
- ------------------------------------------------------------------------------
Hoover Group, Inc. * $-- $-- $-- $--
- ------------------------------------------------------------------------------
Market values are shown for those securities affiliated at period end.
* Security was acquired as part of a corporate action.
Note 6
Regulatory matters and litigation
Putnam Management has entered into agreements with the Securities and
Exchange Commission and the Massachusetts Securities Division settling
charges connected 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.
Pursuant to these settlement agreements, Putnam Management will pay a
total of $193.5 million in penalties and restitution, with $153.5
million being paid to shareholders and the funds. The restitution amount
will be allocated to shareholders pursuant to a plan developed by an
independent consultant, with payments to shareholders currently expected
by the end of the summer.
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 will bear any costs incurred by Putnam funds in
connection with these lawsuits. 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.
Note 7
Actions by the Trustees
The Trustees approved the merger of Putnam Municipal Income Fund into
the fund. The transaction is scheduled to occur in March 2005. It is
subject to a number of conditions and there is no guarantee that it will
occur.
Results of November 11, 2004
and January 10, 2005
shareholder meetings
(Unaudited)
A special meeting of shareholders of the Trust and of the Fund was held
on November 11, 2004. At that meeting consideration of certain proposals
was adjourned to a final meeting held on January 10, 2005.
November 11, 2004 meeting
At the meeting, each of the nominees for Trustees was elected with all
the funds of the Trust voting together as a single class, as follows:
Votes Votes
For Withheld
- ------------------------------------------------------------------------------
Jameson A. Baxter 60,059,146 2,521,594
Charles B. Curtis 60,025,213 2,555,527
Myra R. Drucker 60,001,772 2,578,968
Charles E. Haldeman, Jr. 60,044,417 2,536,323
John A. Hill 60,051,310 2,529,430
Ronald J. Jackson 60,089,882 2,490,858
Paul L. Joskow 60,075,111 2,505,629
Elizabeth T. Kennan 60,047,518 2,533,222
John H. Mullin, III 60,055,161 2,525,579
Robert E. Patterson 60,062,446 2,518,294
George Putnam, III 59,999,327 2,581,413
A.J.C. Smith* 60,042,850 2,537,890
W. Thomas Stephens 60,057,865 2,522,875
Richard B. Worley 60,007,405 2,573,335
A proposal to amend fund's fundamental investment restriction with respect
to borrowing to allow the fund the investments flexibility permitted by
the Investment Company Act was approved as follows:
Votes Votes
For Against Abstentions
- ------------------------------------------------------------------------------
32,131,341 2,350,948 12,395,492
A proposal to amend the fund's fundamental investment restriction with
respect to making loans to enhance the fund's ability to participate in an
interfund borrowing and lending program was approved as follows:
Votes Votes
For Against Abstentions
- ------------------------------------------------------------------------------
32,187,305 2,334,917 12,355,559
A proposal to amend the fund's fundamental investment restriction with
respect to diversification of investments to enhance the fund's ability to
invest in registered investment companies such as Putnam Prime Money
Market was approved as follows:
Votes Votes
For Against Abstentions
- ------------------------------------------------------------------------------
32,901,189 1,736,388 12,240,204
January 10, 2005 meeting
A proposal to amend the Trust's Agreement and Declaration of Trust to
permit the fund to satisfy redemption requests other than in cash was
defeated with all the funds of the Trust voting together as a single
class, as follows:
Votes Votes
For Against Abstentions
- ------------------------------------------------------------------------------
43,168,440 2,974,023 16,604,099
* Mr. Smith resigned from the Board of Trustees on January 14, 2005.
All tabulations are rounded to the nearest whole number.
Services for shareholders
Investor services
Help your investment grow Set up a program for systematic investing with
as little as $25 a month from a Putnam fund or from your own savings or
checking account. (Regular investing does not guarantee a profit or
protect against loss in a declining market.)
Switch funds easily* You can move money from one Putnam fund to another
within the same class of shares without a service charge.
Access your money easily You can have checks sent regularly or redeem
shares any business day at the then-current net asset value, which may be
more or less than the original cost of the shares. Class B and class C
shares carry a sales charge that is applied to certain withdrawals.
How to buy additional shares You may buy shares through your financial
advisor or directly from Putnam. To open an account by mail, send a check
made payable to the name of the fund along with a completed fund
application. To add to an existing account, complete the investment slip
found at the top of your Confirmation of Activity statement and return it
with a check payable to your fund.
For more information
Visit www.putnaminvestments.com A secure section of our Web site contains
complete information on your account, including balances and transactions,
updated daily. You may also conduct transactions, such as exchanges,
additional investments, and address chang on today to get your password.
Use our toll-free number 1-800-225-1581 Ask a helpful Putnam
representative or your financial advisor for details about any of these or
other services, or see your prospectus.
* This privilege is subject to change or termination. An exchange of funds
may result in a taxable event. In addition, a 2% redemption fee will be
applied to shares exchanged or sold within 5 days of purchase, and certain
funds have imposed a 1% redemption fee on total assets redeemed or
exchanged between 6 and 90 days of purchase.
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 befor
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
Limited Duration Government
Income Fund++
Money Market Fund [SECTION MARK]
U.S. Government Income Trust
* 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.
++ Formerly Putnam Intermediate U.S. Government Income Fund.
[SECTION MARK] 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.
The Putnam family of funds
Tax-free Income Funds
AMT-Free Insured Municipal Fund**
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund [SECTION MARK]
Tax-Free High Yield 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
Putnam RetirementReady [REGISTRATION MARK] Funds
Putnam RetirementReady Funds -- nine investment portfolios that offer
diversification among stocks, bonds, and money market instruments and
adjust to become more conservative over time based on a target date for
withdrawing assets.
The nine portfolios:
Putnam RetirementReady 2045 Fund
Putnam RetirementReady 2040 Fund
Putnam RetirementReady 2035 Fund
Putnam RetirementReady 2030 Fund
Putnam RetirementReady 2025 Fund
Putnam RetirementReady 2020 Fund
Putnam RetirementReady 2015 Fund
Putnam RetirementReady 2010 Fund
Putnam RetirementReady Maturity Fund
** Formerly Putnam Tax-Free Insured 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.
Putnam puts your interests first
Beginning in January 2004, Putnam began introducing a number of voluntary
initiatives designed to reduce fund expenses, provide investors with more
useful information, and help safeguard the interests of all Putnam
investors. Visit www.putnaminvestments.com for details.
Cost-cutting initiatives
Reduced sales charges
The maximum sales charge for class A shares has been reduced to 5.25% for
equity funds (formerly 5.75%) and 4.50% for most income funds (formerly
4.75%).*
Lower class B purchase limit
To help ensure that investors are in the most cost-effective share class,
the maximum amount that can be invested in class B shares has been reduced
to $100,000. (Larger trades or accumulated amounts will be directed to
class A shares.)
Ongoing expenses will be limited
Through calendar 2005, total ongoing expenses, including management fees
for all funds, will be maintained at or below the average of each fund's
industry peers in its Lipper load-fund universe. For more information,
please see the Statement of Additional information.
Improved disclosure
Putnam fund prospectuses and shareholder reports have been revised to
disclose additional information that will help shareholders compare funds
and weigh their costs and risks along with their potential benefits.
Shareholders will find easy-to-understand information about fund expense
ratios, portfolio manager compensation, risk comparisons, brokerage
commissions, and employee and trustee ownership of Putnam funds.
Disclosure of breakpoint discounts has also been enhanced to alert
investors to potential cost savings.
Protecting investors' interests
Short-term trading fee introduced
To discourage short-term trading, which can interfere with a fund's
long-term strategy, a 2% short-term trading fee will be imposed on any
Putnam fund shares (other than money market funds) redeemed or exchanged
within five calendar days of purchase.
* The maximum sales charge for class A shares of Putnam Limited Duration
Government Income Fund (formerly Putnam Intermediate U.S. Government
Income Fund) and Putnam Floating Rate Income Fund remains 3.25%.
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
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 Tax-Free High
Yield Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, the most recent copy of Putnam's
Quarterly Performance Summary, and Putnam's Quarterly Ranking Summary. For
more recent performance, please visit www.putnaminvestments.com. Investors
should 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.
SA042-220211 3/05
Not FDIC Insured May Lose Value No Bank Guarantee
Item 2. Code of Ethics:
- -----------------------
Not applicable
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
Not applicable
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
Not applicable
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, that the design and operation of
such procedures are generally effective to provide reasonable
assurance that information required to be disclosed by the registrant
in this report 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
and 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: March 28, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934
and 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: March 28, 2005
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: March 28, 2005