Putnam
Municipal
Opportunities
Trust
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-02
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FROM THE TRUSTEES
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Dear Fellow Shareholder:
Putnam Municipal Opportunities Trust's mandate requires its managers to
look beyond the current market environment for opportunities they
believe may come to fruition at some later date. At the same time, they
also seek to take advantage of opportunities already present.
To a certain extent, this strategy is reflected in the fund's results
for the semiannual period ended October 31, 2002. As they explain in
the following report, the managers have positioned the fund with a
significant portion of high-quality bonds not only for their safety but
also to take advantage of equity investors' current nervousness about
prospects for the economy and the stock market.
At the same time, they are looking ahead to the opportunities for
lower-rated issues that will accompany a strengthening economy and a
brighter mood among stock investors. Because of this somewhat
countercyclical positioning, the fund underperformed its benchmark and
came in below its Lipper category average for the period. You will find
a full discussion of performance and prospects in the management report.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
December 18, 2002
REPORT FROM FUND MANAGEMENT
This fund is managed by the
Putnam Tax Exempt Fixed-Income Team
A significant turn in the financial markets occurred as Putnam Municipal
Opportunities Trust reached the midpoint of its fiscal year on October
31, 2002. During the first five months of the period, interest rates
traced a steady decline, while the stock market experienced some of its
most disappointing months ever. However, early in October, the summer
doldrums gave way to a vigorous upturn. While the stock market enjoyed
four consecutive weeks of positive performance, interest rates trended
sharply up, only to decline again at the end of October, as the mood on
Wall Street wavered.
Interest rates on municipal bonds generally followed the taxable
markets, but the decline was far more gradual. Credit spreads -- the
difference in interest rates between bonds at the highest and lowest
ends of the credit spectrum -- remained wide during most of the fiscal
period, reflecting investor concerns about the weak economy, corporate
accounting scandals, and the prospect of U.S. military involvement in
Iraq. Job losses and the weak economy put a strain on most states, and
many municipalities have been grappling with declining tax revenues.
Total return for 6 months ended 10/31/02
NAV Market price
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1.47% 0.56%
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Past performance does not indicate future results. Performance based on
market prices for the shares will vary from performance based on the
portfolio's net asset value. Performance information for longer periods
and explanation of performance calculation methods begin on page 8.
Since your fund seeks investment opportunities at both ends of the
quality spectrum, regardless of market trends, it maintains a generous
portion of high-quality bonds, counterbalanced with bonds rated below
investment grade. We believe lower-quality bonds will outperform
high-quality issues when the economy enters a sustained recovery, but
this positioning held the port folio back during the first half of
fiscal 2003. During this period, the fund underperformed its benchmark,
the Lehman Municipal Bond Index, which is more heavily weighted in
high-quality bonds, and results were also below the average for the
Lipper General Municipal Debt Fund category. For details, please see
page 8.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 24.6%
Transportation 11.5%
Housing 10.5%
Water and sewer 9.7%
Utilities 8.1%
Footnote reads:
*Based on portfolio market value as of 10/31/02. Holdings will vary over time.
The fund's performance at market price, which reflects changes in the
demand for shares as well as underlying performance, was somewhat lower
than its return at net asset value for this period. We believe this
difference reflects investors' strong preference for high-quality bonds
over lower-quality bonds. As this preference increased over the course
of the fiscal year, demand for fund shares declined so that the market
price fell slightly more than the net asset value.
* SLOWLY DECLINING MUNICIPAL RATES IN FIRST HALF HAD POSITIVE IMPLICATIONS
Municipal-bond issuers are usually able to offer significantly lower
rates than comparable taxable issuers because the interest they pay is
not subject to federal income tax. However, the difference in the rate
of decline in the taxable versus tax-free bond markets during the first
half of the fund's fiscal year has created an unusually attractive
environment for tax-averse investors. While rates on 10-year Treasuries
fell from 5.07% at the end of April to 3.93% at the end of October,
rates on comparable municipal bonds declined from 4.24% to 3.85%,
shrinking the difference in yields in the taxable versus tax-free
markets.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aaa/AAA -- 45.2%
Aa/AA -- 7.7%
A -- 14.8%
Baa/BBB -- 18.4%
Ba/BB -- 8.8%
B -- 3.0%
Ca/CCC/D -- 0.4%
VMIGI -- 1.7%
Footnote reads:
*As a percentage of market value as of 10/31/02. A bond rated BBB/Baa or
higher is considered investment grade. All ratings reflect Moody's and
Standard & Poor's descriptions unless noted otherwise; percentages may
include unrated bonds considered by Putnam Management to be of comparable
quality. Ratings will vary over time.
One of the concerns investors in both the bond and stock markets shared
this summer was the prospect of deflation -- a scenario where sluggish
economic growth and corporate layoffs cause consumers to retrench,
squeezing corporate profits and setting in motion a slowing economic
spiral. Although the hopeful mood investors displayed early in October
wavered in the last days of the month, in early November the results of
the mid-term elections and the Fed's 0.5% cut in the federal funds rate
were regarded as positives. By cutting the federal funds target rate to
a 41-year low of 1.25%, the Fed's goal was to boost consumer and
investor confidence and pump more money into an anemic economy.
Moreover, the Fed also shifted its bias from weakness to neutral -- a
statement that expectations for the economy were balanced between
strength and weakness.
Fund Profile
The fund seeks to provide high current income free from federal income
tax, consistent with the preservation of capital, by investing in
investment-grade and some below-investment-grade municipal bonds. The
fund may be appropriate for investors who are seeking tax-exempt income
and are willing to accept a moderate degree of credit risk.
The prospect of stronger growth with little or no inflation is the best
kind of news for bond investors because it should help keep interest
rates and prices relatively stable. Stability and attractive
tax-equivalent yields should help maintain demand for municipal
securities. This will be important since the supply of bonds is likely
to increase, as municipalities bring new issues to market.
* WITH SUPERVISION, LOWER-QUALITY ISSUES CAN OFFER OPPORTUNITIES IN A RECOVERY
From the standpoint of portfolio strategy, the past six months have been
fairly quiet. We maintained what we call a credit barbell, with emphasis
on both top-rated and lower-rated bonds. Although lower-rated bonds tend
to underperform during periods of uncertainty, we favored bonds in
sectors that feature strong yields -- especially those closely tied to
the overall economy, such as health care and transportation -- in
anticipation of the period of renewed economic growth that we believe is
now underway.
Bear in mind that, while we have been focusing on municipal bonds with
lower ratings and higher yields, we have been doing so selectively and
slowly. The fund's average credit quality was A at the end of October.
Lower-rated securities have their ratings for a reason, and we rely on
the watchfulness of our team of analysts to alert us to potential
problems. A case in point was Sweetwater County, Wyoming, Solid Waste
Disposal Revenue Bonds, which were backed by FMC Corp. and rated Baa2 by
Moody's and BBB - by Standard & Poor's. Despite their attractive 7%
coupon, we eliminated the fund's entire position in these bonds (with a
principal amount in excess of $2.9 million) when our analysts' financial
projections for FMC Corp. turned negative.
We recently purchased $3 million in bonds issued by the Badger Tobacco
Asset Securitization Corp. of Wisconsin. These 6 3/8% bonds, maturing in
2032, offer a higher coupon than you might expect from their ratings: A1
by Moody's and A by Standard & Poor's. These bonds were issued as part
of a legal settlement by tobacco companies that set up a series of
payments to municipalities over 25 years, with the funds to be used for
the common good. However, there are legal challenges and payments are
based on consumption, either of which could affect the income stream
that municipalities are relying upon. Risks specific to these bonds
include the prospect of punitive legal settlements in other states or a
decline in tobacco companies' revenue if people stop smoking. We like
the bonds because of their high return potential and the extra
diversification they provide, but we are being careful to monitor
developments that may impact the tobacco industry and, in turn, affect
the stability of their income.
Among lower-rated credit sectors, airline bonds proved a significant
detractor from performance during the period despite the fund's
diversification by individual names. We have always regarded the airline
industry as a deep cyclical, that is, an industry whose response to the
economic cycle is exaggerated at either end. Amid an already weak
economic cycle, the airline industry experienced a huge setback as a
direct result of last year's terrorist attacks. Then, just when
increasing economic growth seemed ready to lift the industry from its
low point, it was dealt a further blow when the economic recovery lost
steam during the second and third quarters of 2002.
We believe that investors have oversold the airline sub-sector on the
downside, driving down prices to levels that anticipate widespread
bankruptcy -- a scenario that is unlikely in our view. While we are
cognizant of the near-term risks in this industry, we believe that many
carriers will remain viable and recover over the long term. Therefore,
we have not materially adjusted the risk profile of the fund's airline
exposure, which represents 5.2% of the total portfolio. We believe there
is meaningful upside potential on many of these holdings from current
price levels. The fund's holdings remain well-diversified, helping to
minimize the risk of downgrades or defaults by any single holding. U.S.
Airways, Inc. and United Airlines, Inc. are two obligors on bonds owned
by the fund that have entered bankruptcy as of this writing. At current
market value, the fund's positions in these bonds account for .3% of the
fund's total holdings.
* HEALTH CARE, UTILITIES REMAIN ATTRACTIVE INDUSTRIES
Other noteworthy additions to the portfolio during the fiscal period
include two hospital issues -- MediCorp Health System in Fredericksburg,
Virginia, and John C. Lincoln Health Network in Arizona -- and a rare,
non-callable bond issued by Southern Minnesota Municipal Power Agency.
These recent acquisitions illustrate our efforts to maintain a broadly
diversified portfolio.
MediCorp's facilities are located about midway between Washington, DC
and Richmond, Virginia. The $500,000 position we purchased carries a
coupon of 5 1/8%, matures in 2033, and is rated A3 by Moody's. Although
MediCorp has a somewhat heavy debt burden, its operating income is
strong and the hospital's dominant market share is expanding. The
Arizona bonds we purchased are secured by two hospitals, including an
acute-care facility in Deer Valley and North Mountain Hospital in
Phoenix. A relatively high debt level prompted their Standard & Poor's
rating of BBB, but volume growth at both facilities has been strong and
the Phoenix market is one of the fastest growing in a state that
attracts retirees. We purchased $750,000 of the John C. Lincoln Health
Network bonds, which have a coupon of 6 3/8% and mature in 2037.
Non-callable bonds are as scarce as they are attractive because the
issuer cannot call the bonds before the maturity date, assuring
investors uninterrupted income for a long period. We purchased $1.5
million of these bonds issued on behalf of Minnesota Municipal Power,
with a coupon of 5 1/4% and a 2016 maturity date.
* OUTLOOK FOR RISING INTEREST RATES, STEADIED BY LOW INFLATION PROSPECTS
With interest rates close to 40-year lows, we believe that some increase
in rates seems almost certain to lie ahead. The Federal Reserve Board
indicated that if the economy stabilizes, no further rate cuts should be
expected. If this is the case, the Fed's next move would be to raise
rates if inflationary pressures appear on the horizon. However, bonds
with longer maturities generally respond more to inflation expectations
than to the Fed's moves, and if restored economic growth proceeds with
low inflation prospects, it could be a positive for the bond markets. If
the current recovery continues, some lower-rated bonds could be upgraded
by the rating agencies. Upgrades generally increase the market value of
bonds, providing potential for capital appreciation as well as high
current income. However, we believe caution is warranted, especially on
a security-by-security basis, as the Sweetwater sale demonstrates.
Lagging tax revenues also continue to heighten the importance of broad
diversification and careful research to identify bonds with solid
backing. Your fund's management team is working to help provide both
over the remainder of the fiscal year and beyond.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of October 31, 2002, there is no guarantee the
fund will continue to hold these securities in the future.
The fund is managed by the Putnam Tax Exempt Fixed-Income Team. The
members of the team are David Hamlin (Portfolio Leader), Paul Drury
(Portfolio Member), Susan McCormack (Portfolio Member), Richard Wyke
(Portfolio Member), Jerome Jacobs, and Joyce Dragone.
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.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy.
TOTAL RETURN FOR PERIODS ENDED 10/31/02
Lehman
Market Municipal Consumer
(common shares) NAV price Bond Index price index
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6 months 1.47% 0.56% 4.73% 1.00%
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1 year 1.54 -3.24 5.87 2.08
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5 years 27.77 18.32 34.69 12.26
Annual average 5.02 3.42 6.14 2.34
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Life of fund 73.93 55.46 78.67 25.73
(since 5/28/93)
Annual average 6.05 4.79 6.36 2.46
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Past performance does not indicate future results. More recent returns
may be less or more than those shown. Investment return, net asset value
and market price will fluctuate and you may have a gain or a loss when
you sell your shares. Performance does not reflect taxes on reinvested
distributions.
PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 10/31/02
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Distributions (common shares)
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Number 6
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Income 1 $0.453
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Capital gains 1 --
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Total $0.453
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Preferred shares Series A Series B Series C
(800 shares) (1,620 shares) (1,620 shares)
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Income $361.10 $178.67 $179.78
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Total $361.10 $178.67 $179.78
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Share value: (common shares) NAV Market price
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4/30/02 $13.00 $12.50
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10/31/02 12.74 12.14
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Current return (common shares, end of period)
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Current
dividend
rate 2 7.11% 7.46%
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Taxable
equivalent 3 11.58 12.15
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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 market price at end of period.
3 Assumes maximum 38.6% federal tax rate for 2002. Results for investors
subject to lower tax rates would not be as advantageous.
TOTAL RETURN FOR PERIODS ENDED 9/30/02(most recent calendar quarter)
NAV Market price
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6 months 6.91% 8.31%
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1 year 6.25 4.34
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5 years 32.76 26.47
Annual average 5.83 4.81
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Life of fund
(since 5/28/93) 79.50 66.72
Annual average 6.46 5.63
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Past performance does not indicate future results. More recent returns
may be less or more than those shown. Investment return, net asset value
and market price will fluctuate and you may have a gain or a loss when
you sell your shares. Performance does not reflect taxes on reinvested
distributions.
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 value of all your fund's assets, minus any
liabilities and the net assets allocated to remarketed preferred shares,
divided by the number of outstanding common shares.
Market price is the current trading price of one share of the fund.
Market prices are set by transactions between buyers and sellers on the
New York Stock Exchange.
COMPARATIVE BENCHMARKS
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal-bond market. 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.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Lipper Inc. is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, as well as the accompanying Notes,
constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or
loss the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios, and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight table
also includes the current reporting period. For open-end funds, a separate
table is provided for each share class.
THE FUND'S PORTFOLIO
October 31, 2002 (Unaudited)
KEY TO ABBREVIATIONS
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
FNMA Coll. -- Federal National Mortgage Association Collateralized
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
IF COP -- Inverse Floating Rate Certificate of Participation
MBIA -- MBIA Insurance Company
PSFG -- Permanent School Fund Guaranteed
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (100%) (a)
PRINCIPAL AMOUNT RATING (RAT) VALUE
Alabama (3.7%)
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$2,500,000 Butler, Indl. Dev. Board Rev. Bonds (Solid Waste Disp.
James River Corp.), 8s, 9/1/28 BB+ $2,250,000
Jefferson Cnty., Swr. Rev. Bonds
7,000,000 Ser. D, FGIC, 5 3/4s, 2/1/27 Aaa 7,936,250
1,500,000 (Cap. Impt.), Ser. A, FGIC, 5s, 2/1/41 Aaa 1,485,000
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11,671,250
Alaska (1.6%)
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5,000,000 Valdez Marine Term. Rev. Bonds (BP Pipeline, Inc.),
Ser. B, 5 1/2s, 10/1/28 Aa1 5,075,000
Arizona (3.5%)
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750,000 AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds (John C.
Lincoln Hlth. Network), 6 3/8s, 12/1/37 BBB 765,938
950,000 Casa Grande, Indl. Dev. Auth. Rev. Bonds (Casa Grande
Regl. Med. Ctr.), Ser. A, 7 5/8s, 12/1/29 B-/P 888,250
490,000 Cochise Cnty., Indl. Dev. Auth. Rev. Bonds (Sierra Vista
Cmnty. Hosp.), Ser. A, 6 3/4s, 12/1/26 BB+/P 483,875
Mesa, Util. Syst. Rev. Bonds, FGIC
4,000,000 5 1/4s, 7/1/16 Aaa 4,460,000
1,530,000 5 1/4s, 7/1/15 Aaa 1,707,863
2,860,000 Scottsdale, Indl. Dev. Auth. Rev. Bonds
(Westminster Village), 7 7/8s, 6/1/09 BB-/P 2,992,275
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11,298,201
Arkansas (0.3%)
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1,000,000 Northwest Regl. Arpt. Auth. Rev. Bonds, 7 5/8s, 2/1/27 BB/P 1,007,500
California (9.0%)
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1,750,000 CA Statewide Cmnty. Dev. Auth. COP (The Internext
Group), 5 3/8s, 4/1/30 BBB 1,634,063
4,000,000 Chula Vista COP, MBIA, 5s, 8/1/32 Aaa 4,015,000
1,500,000 Gilroy, Rev. Bonds (Bonfante Gardens Park), 8s, 11/1/25 B/P 1,389,375
3,000,000 Metropolitan Wtr. Dist. IFB (Southern CA
Waterworks), 9.979s, 8/10/18 Aa2 3,885,000
5,000,000 San Bernardino Cnty., COP (Med. Ctr. Fin.), Ser. A,
MBIA, 6 1/2s, 8/1/17 Aaa 6,162,500
San Diego Cnty., IF COP, AMBAC
3,000,000 9.47s, 9/1/12 Aaa 3,922,500
3,000,000 9.345s, 9/1/07 Aaa 3,768,750
3,000,000 Southern CA Pub. Pwr. Auth. IFB, FGIC, 9.07s, 7/1/17 AAA 3,254,460
830,000 Sunnyvale, Cmnty. Fac. Dist. Special Tax Rev. Bonds,
7.65s, 8/1/21 BB-/P 739,738
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28,771,386
Colorado (4.1%)
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7,700,000 CO Pub. Hwy. Auth. Rev. Bonds, MBIA, zero %, 9/1/33 Aaa 1,414,875
1,000,000 CO State Edl. Fac. Auth. Rev. Bonds (Ocean
Journey, Inc.), 8 3/8s, 12/1/26 (In default) (NON) D/P 330,000
10,000,000 Denver, City & Cnty. Arpt. Rev. Bonds, Ser. A, MBIA,
5.7s, 11/15/25 Aaa 10,700,000
600,000 Northwest Parkway Pub. Hwy. Auth. Rev. Bonds,
Ser. D, 7 1/8s, 6/15/41 Ba1 614,250
-------------
13,059,125
District of Columbia (4.2%)
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12,450,000 DC G.O. Bonds, Ser. A, 6s, 6/1/26 Baa1 13,321,500
Florida (0.2%)
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600,000 Miami Beach, Hlth. Fac. Auth. Hosp. Rev. Bonds
(Mount Sinai Med. Ctr.), Ser. A, 6.8s, 11/15/31 Ba3 509,250
Georgia (0.3%)
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1,400,000 Effingham Cnty., Indl. Dev. Auth. Poll. Control Rev.
Bonds (Georgia-Pacific Corp. Proj.), 6 1/2s, 6/1/31 BBB- 1,004,500
Hawaii (0.6%)
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1,970,000 HI State Hsg. Fin. & Dev. Corp. Rev. Bonds, Ser. A,
FNMA Coll., 5 3/4s, 7/1/30 AAA 2,009,400
Illinois (5.6%)
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3,500,000 Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
(United Airlines, Inc.), Ser. C, 6.3s, 5/1/16 Ca 490,000
5,000,000 Chicago, Pub. Bldg. Comm. Rev. Bonds (School Reform
Project), FGIC, 5 1/4s, 12/1/15 Aaa 5,606,250
1,680,000 IL Hlth. Fac. Auth. VRDN (Bromenn Hlth. care),
1.95s, 8/15/32 A-1+ 1,680,000
10,000,000 IL Hsg. Dev. Auth. Multi-Fam. Hsg. Rev. Bonds,
Ser. 91-A, 8 1/4s, 7/1/16 A1 10,103,200
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17,879,450
Indiana (3.2%)
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4,405,000 Fort Wayne, Hosp. Auth. Rev. Bonds (Parkview Hlth.
Syst., Inc.), MBIA, 4 3/4s, 11/15/28 AAA 4,151,713
4,150,000 IN State Dev. Fin. Auth. Env. Impt. Rev. Bonds
(USX Corp.), 5.6s, 12/1/32 Baa1 4,015,125
2,000,000 Indianapolis, Arpt. Auth. Special Fac. Rev. Bonds
(Federal Express Corp.), 7.1s, 1/15/17 Baa2 2,127,500
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10,294,338
Kansas (1.7%)
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5,600,000 KS State Dev. Fin. Auth. VRDN (Village Shalom
Oblig. Group), Ser. BB, 1.95s, 11/15/28 A-1+ 5,600,000
Kentucky (1.1%)
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Kenton Cnty., Arpt. Board Rev. Bonds
(Special Fac. - Delta Airlines, Inc.)
3,400,000 Ser. A, 7 1/2s, 2/1/20 Ba3 2,605,250
1,300,000 Ser. B, 7 1/4s, 2/1/22 Ba3 932,750
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3,538,000
Louisiana (3.2%)
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2,000,000 LA Local Govt. Env. Fac. Cmnty. Dev. Auth. Rev. Bonds
(St. James Place), Ser. A, 8s, 11/1/19 B-/P 2,052,500
2,500,000 LA Pub. Fac. Auth. Rev. Bonds (Tulane U.), Ser. A,
AMBAC, 5s, 7/1/32 Aaa 2,496,875
5,500,000 Port of New Orleans, Indl. Dev. Rev. Bonds
(Continental Grain Co.), 7 1/2s, 7/1/13 BB- 5,667,145
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10,216,520
Maine (0.9%)
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3,000,000 Rumford Solid Waste Disp. Rev. Bonds
(Boise Cascade Corp.), 6 7/8s, 10/1/26 Baa3 2,966,250
Maryland (1.6%)
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4,770,000 MD Cmnty. Dev. Admin. Multi-Fam. Hsg. Rev. Bonds,
Ser. E, GNMA Coll., FHA Insd., 6.85s, 5/15/25 Aa3 4,966,763
Massachusetts (8.0%)
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3,555,000 Atlas Boston Tax Exempt Rev. Bonds, Ser. 1, 6.65s,
1/1/35 (In default) (NON) BB+/P 3,452,794
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,620,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s, 8/15/24 AAA/P 2,927,850
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
1,875,000 (UMass Memorial), Ser. C, 6 1/2s, 7/1/21 Baa2 1,926,563
1,300,000 Ser. E, 6 1/4s, 10/1/31 BBB+ 1,319,500
1,800,000 (Hlth. Care Syst. Covenant Hlth.), Ser. E, 6s, 7/1/31 A- 1,840,500
MA State Hsg. Fin. Agcy. Rev. Bonds
3,855,000 (Res. Dev.), Ser. C, FNMA Coll., 6.9s, 11/15/21 Aaa 3,933,334
8,825,000 Ser. 53, MBIA, 6.15s, 12/1/29 Aaa 9,111,813
1,000,000 MA State Indl. Fin. Agcy. Rev. Bonds (1st. Mtge.
Brookhaven), Ser. A, 7s, 1/1/15 BBB/P 1,027,500
-------------
25,539,854
Michigan (2.0%)
-------------------------------------------------------------------------------------------------------------------
4,500,000 Detroit, G.O. Bonds, Ser. A, FGIC, 5s, 7/1/30 Aaa 4,494,375
1,650,000 MI State Strategic Fund Ltd. Rev. Bonds
(Worthington Armstrong Venture), 5 3/4s, 10/1/22 AAA/P 1,815,000
-------------
6,309,375
Minnesota (1.3%)
-------------------------------------------------------------------------------------------------------------------
1,860,000 Minneapolis & St. Paul Metropolitan Arpt. Comm.
Special Fac. Rev. Bonds (Northwest Airlines, Inc.),
Ser. A, 7s, 4/1/25 B+/P 1,243,875
1,250,000 Rochester, Hlth. Care Fac. IFB (Mayo Foundation),
Ser. H, 9.081s, 11/15/15 AA 1,302,788
1,500,000 Southern MN Muni. Pwr. Agcy. Syst. Rev. Bonds,
Ser. A, AMBAC, 5 1/4s, 1/1/16 Aaa 1,665,000
-------------
4,211,663
Mississippi (1.2%)
-------------------------------------------------------------------------------------------------------------------
1,350,000 Clairborne Cnty., Poll. Control Rev. Bonds
(Syst. Energy Resources, Inc.), 7.3s, 5/1/25 BBB- 1,361,813
1,580,000 Mississippi Bus. Fin. Corp. Rev. Bonds (Syst. Energy
Resources, Inc.), 5 7/8s, 4/1/22 BBB- 1,435,825
1,000,000 Mississippi Bus. Fin. Corp. Poll. Control Rev. Bonds
(Syst. Energy Resources, Inc.), 5.9s, 5/1/22 BBB- 911,250
-------------
3,708,888
Montana (2.3%)
-------------------------------------------------------------------------------------------------------------------
5,300,000 MT State Hlth. Fac. Auth. Rev. VRDN (Hlth. Care
Pooled Loan Prog.), Ser. A, FGIC, 1.85s, 12/1/15 VMIG1 5,300,000
2,000,000 MT State Board Inv. Exempt Fac. Rev. Bonds
(Still Water Mining Project), 8s, 7/1/20 Ba2 1,937,500
-------------
7,237,500
Nevada (3.0%)
-------------------------------------------------------------------------------------------------------------------
3,505,000 Clark Cnty., G.O. Bonds (Pk. & Regl. Justice Ctr.),
FGIC, 5 5/8s, 11/1/19 Aaa 3,776,638
Clark Cnty., Indl. Dev. Rev. Bonds (Southwest Gas Corp.)
2,750,000 Ser. B, 7 1/2s, 9/1/32 Baa2 2,801,068
3,000,000 Ser. A, 6 1/2s, 12/1/33 Baa2 3,026,250
-------------
9,603,956
New Hampshire (1.2%)
-------------------------------------------------------------------------------------------------------------------
NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
2,600,000 (Riverwoods at Exeter), Ser. A, 6 1/2s, 3/1/23 Aa2 2,496,000
1,250,000 (NH College), 6 3/8s, 1/1/27 BBB- 1,265,625
-------------
3,761,625
New Jersey (4.4%)
-------------------------------------------------------------------------------------------------------------------
1,890,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds (Raritan Bay
Med. Ctr.), 7 1/4s, 7/1/14 BB/P 1,927,800
10,000,000 Salem Cnty., Indl. Poll Ctrl. Fin. Auth. Rev. Bonds, 8.841s,
10/1/29 (acquired 10/28/94, cost $9,750,000) (RES) Aaa 12,012,500
-------------
13,940,300
New York (1.5%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Buffalo, G.O. Bonds, Ser. D, FGIC, 5 1/2s, 12/15/13 Aaa 1,123,750
1,000,000 NY City Transitional Fin.Auth. Rev. Bonds (Future Tax),
AMBAC, 5 1/4s, 8/1/15 Aaa 1,088,750
2,500,000 Triborough Bridge & Tunnel Auth. Rev. Bonds, Ser. A,
5s, 1/1/32 Aa3 2,487,500
-------------
4,700,000
North Carolina (0.7%)
-------------------------------------------------------------------------------------------------------------------
2,000,000 NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds, Ser. B,
MBIA, 6s, 1/1/22 Aaa 2,320,000
Ohio (1.4%)
-------------------------------------------------------------------------------------------------------------------
1,270,000 Erie Cnty., Ohio Hosp. Fac. Rev. Bonds (Firelands Regl.
Med. Ctr.), 5 5/8s, 8/15/32 A2 1,285,875
1,000,000 Montgomery Cnty., Hosp. Rev. Bonds (Kettering
Med. Ctr.), 6 3/4s, 4/1/22 Baa1 1,057,500
2,165,000 Rickenbacker Port Auth. Rev. Bonds (OASBO
Expanded Asset Pooled), Ser. A, 5 3/8s, 1/1/32 A2 2,148,765
-------------
4,492,140
Oklahoma (0.7%)
-------------------------------------------------------------------------------------------------------------------
OK Dev. Fin. Auth. Rev. Bonds
1,500,000 (Continuing Care Retirement), Ser. A, 8s, 2/1/32 B/P 1,468,125
1,000,000 (Hillcrest Hlth. Care), Ser. A, 5 5/8s, 8/15/29 B2 713,750
-------------
2,181,875
Pennsylvania (5.9%)
-------------------------------------------------------------------------------------------------------------------
5,000,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(Pittsburgh Mercy Hlth. Syst. ), AMBAC,
5 5/8s, 8/15/26 Aaa 5,431,250
1,000,000 Carbon Cnty., Indl. Dev. Auth. Rev. Bonds (Panther
Creek Partners), 6.65s, 5/1/10 BBB- 1,041,250
1,000,000 Delaware Cnty., Hosp. Auth. G.O. Bonds
(Crozer-Chester Med. Ctr.), 6 1/4s, 12/15/31 Baa2 1,011,250
3,000,000 PA Econ. Dev. Fin. Auth. Wastewtr. Treatment Rev.
Bonds (Sun Co., Inc.), Ser. A, 7.6s, 12/1/24 Baa2 3,198,750
PA State Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds
3,000,000 (Colver), Ser. E, 8.05s, 12/1/15 BBB-/P 3,168,750
1,000,000 Ser. D, 7.15s, 12/1/18 BBB- 1,042,500
1,750,000 PA State Higher Edl. Fac. Auth. Rev. Bonds (UPMC
Hlth. Syst.), Ser. A, 6s, 1/15/31 A+ 1,809,063
3,000,000 Philadelphia, Indl. Dev. Auth. Special Fac. Rev. Bonds
(U.S. Airways, Inc.), 8 1/8s, 5/1/30 (In default) (NON) CCC/P 536,250
1,450,000 Sayre Hlth. Care Fac. Auth. Rev. Bonds (Guthrie Hlth.),
Ser. A, 5 7/8s, 12/1/31 A- 1,469,938
-------------
18,709,001
South Carolina (2.4%)
-------------------------------------------------------------------------------------------------------------------
3,000,000 SC Tobacco Settlement Rev. Mgt. Rev. Bonds, Ser. B,
6 3/8s, 5/15/30 A1 2,947,500
4,500,000 Spartanburg Cnty., Solid Waste Disp. Rev. Bonds
(BMW Project), 7.55s, 11/1/24 A1 4,798,125
-------------
7,745,625
Tennessee (1.3%)
-------------------------------------------------------------------------------------------------------------------
4,000,000 Johnson City, Hlth. & Edl. Fac. Board Hosp. Rev. Bonds
(Mtn. States Hlth.), Ser. A, 7 1/2s, 7/1/33 Baa2 4,255,000
Texas (12.2%)
-------------------------------------------------------------------------------------------------------------------
5,500,000 Alliance, Arpt. Auth. Rev. Bonds (American Airlines, Inc.),
7 1/2s, 12/1/29 BB- 1,540,000
Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
4,800,000 (St. Luke's Lutheran Hospital), 7.9s, 5/1/18 AAA/P 4,944,240
1,760,000 (St. Luke's Lutheran Hosp.), 7.9s, 5/1/11 AAA/P 1,812,877
12,000,000 (St. Luke's Hlth. Syst.), FSA, 6.1s, 11/15/23 Aaa 13,200,000
2,000,000 Hays, Cons. Indpt. School Dist. G.O. Bonds, PSFG,
5 1/2s, 8/15/10 Aaa 2,260,000
3,000,000 Houston, Wtr. & Swr. Rev. Bonds (Jr. Lien), FSA,
5s, 12/1/30 Aaa 2,962,500
3,000,000 Lower Neches Valley Indl. Dev. Swr. Auth. Rev. Bonds
(Mobil Oil Refining Corp.), 6.4s, 3/1/30 Aaa 3,165,000
2,000,000 San Antonio Wtr. Rev. Bonds, Ser. A, FSA, 5s, 5/15/32 Aaa 1,977,500
5,000,000 Titus Cnty. Fresh Wtr. Supply Dist. No. 1 Poll. Rev.
Bonds. (Southwestern Elec. Pwr. Co.), Ser. A,
8.2s, 8/1/11 A2 5,113,300
2,000,000 Tomball, Hosp. Auth. Rev. Bonds (Tomball Regl. Hosp.),
6s, 7/1/29 Baa2 1,980,000
-------------
38,955,417
Utah (0.3%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Salt Lake City, Hosp. IFB (IHC Hosp. Inc.), AMBAC,
11.624s, 5/15/20 (acquired 6/6/97,
cost $1,168,906) (RES) Aaa 1,029,770
Virginia (0.5%)
-------------------------------------------------------------------------------------------------------------------
500,000 Fredericksburg Indl. Dev. Auth. Rev. Bonds (Medicorp
Hlth. Syst.), Ser. B, 5 1/8s, 6/15/33 A3 467,500
1,500,000 Pocahontas Parkway Assn. Toll Rd. Rev. Bonds, Ser. A,
5 1/2s, 8/15/28 Baa3 1,125,000
-------------
1,592,500
Washington (2.7%)
-------------------------------------------------------------------------------------------------------------------
4,000,000 Chelan Cnty. Dev. Corp. Rev. Bonds
(Poll. Control-Alcoa), 5.85s, 12/1/31 A2 4,160,000
2,250,000 King Cnty., G.O. Bonds, Ser. C, 6 1/4s, 1/1/32 Aa1 2,517,188
2,850,000 Port of Seattle, Special Fac. Rev. Bonds (Northwest
Airlines, Inc.), 7 1/4s, 4/1/30 B+/P 1,930,875
-------------
8,608,063
West Virginia (0.5%)
-------------------------------------------------------------------------------------------------------------------
2,000,000 Princeton, Hosp. Rev. Bonds (Cmnty. Hosp. Assn., Inc.),
6.1s, 5/1/29 Ba3 1,500,000
Wisconsin (1.7%)
-------------------------------------------------------------------------------------------------------------------
3,000,000 Badger Tobacco Asset Securitization Corp. Rev. Bonds,
6 3/8s, 6/1/32 A1 2,887,500
2,400,000 WI State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Wheaton Franciscan), 5 3/4s, 8/15/30 A2 2,424,000
-------------
5,311,500
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $322,161,717) $318,902,485
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on portfolio market value.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at October 31, 2002 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 October 31, 2002. Securities rated by Putnam are indicated
by "/P" and are not publicly rated.
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at October 31, 2002 was
$13,042,270 or 4.1% of market value.
The rates shown on IFB and IF COP, which are securities paying
interest rates that vary inversely to changes in the market interest
rates, and VRDN's are the current interest rates at October 31, 2002.
The fund had the following industry group concentrations greater
than 10% at October 31, 2002 (as a percentage of portfolio market
value):
Health care 24.6%
Transportation 11.5
Housing 10.5
The fund had the following insurance concentrations greater than
10% at October 31, 2002 (as a percentage of portfolio market value):
FGIC 12.3%
MBIA 11.9
The accompanying notes are an integral part of these financial statements.
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2002 (Unaudited)
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$322,161,717) (Note 1) $318,902,485
-------------------------------------------------------------------------------------------
Cash 1,172,273
-------------------------------------------------------------------------------------------
Interest and other receivables 6,631,549
-------------------------------------------------------------------------------------------
Receivable for securities sold 3,256,328
-------------------------------------------------------------------------------------------
Total assets 329,962,635
Liabilities
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,219,860
-------------------------------------------------------------------------------------------
Accrued preferred shares distribution payable (Note 1) 39,788
-------------------------------------------------------------------------------------------
Payable for securities purchased 1,076,480
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 600,006
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 22,032
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 23,831
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 825
-------------------------------------------------------------------------------------------
Other accrued expenses 96,356
-------------------------------------------------------------------------------------------
Total liabilities 3,079,178
-------------------------------------------------------------------------------------------
Series A remarketed preferred shares:
(800 shares authorized and issued at $50,000 per share (Note 4) 40,000,000
-------------------------------------------------------------------------------------------
Series B and C remarketed preferred shares:
(3,240 shares authorized and issued at $25,000 per share (Note 4) 81,000,000
-------------------------------------------------------------------------------------------
Net assets $205,883,457
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital -- common shares (Note 1) $225,201,187
-------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 1,229,787
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (17,288,285)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (3,259,232)
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to common shares
outstanding $205,883,457
Computation of net asset value
-------------------------------------------------------------------------------------------
Net asset value per common share ($205,883,457 divided by
16,157,092 shares) $12.74
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENT OF OPERATIONS
Six months ended October 31, 2002 (Unaudited)
Interest income: $10,519,607
-------------------------------------------------------------------------------------------
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,191,394
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 110,715
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,449
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,927
-------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 193,486
-------------------------------------------------------------------------------------------
Other 93,959
-------------------------------------------------------------------------------------------
Total expenses 1,599,930
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (14,993)
-------------------------------------------------------------------------------------------
Net expenses 1,584,937
-------------------------------------------------------------------------------------------
Net investment income 8,934,670
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (805,564)
-------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 202,616
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (4,340,316)
-------------------------------------------------------------------------------------------
Net loss on investments (4,943,264)
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $3,991,406
-------------------------------------------------------------------------------------------
Distributions to Series A, B, and C remarketed preferred shareholders: (Note 1)
-------------------------------------------------------------------------------------------
From tax exempt income (869,576)
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations applicable
to common shareholders $3,121,830
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS
Six months ended Year ended
October 31 April 30
2002* 2002
-------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets
-------------------------------------------------------------------------------------------------------
Operations:
-------------------------------------------------------------------------------------------------------
Net investment income $8,934,670 $18,763,305
-------------------------------------------------------------------------------------------------------
Net realized loss on investments (602,948) (3,546,841)
-------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (4,340,316) 1,900,395
-------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,991,406 17,116,859
Distributions to Series A, B, and C remarketed
preferred shareholders: (Note 1)
-------------------------------------------------------------------------------------------------------
From tax exempt income (869,576) (2,494,618)
-------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations
(applicable to common shareholders) 3,121,830 14,622,241
Distributions to common shareholders: (Note 1)
-------------------------------------------------------------------------------------------------------
From tax exempt income (7,319,163) (14,638,326)
-------------------------------------------------------------------------------------------------------
Total decrease in net assets (4,197,333) (16,085)
Net assets
-------------------------------------------------------------------------------------------------------
Beginning of period 210,080,790 210,096,875
-------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $1,229,787 and $483,856, respectively) $205,883,457 $210,080,790
Number of fund shares
-------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning and end of period 16,157,092 16,157,092
-------------------------------------------------------------------------------------------------------
Remarketed preferred shares outstanding at beginning and
end of period 4,040 4,040
-------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS
(For a common share outstanding throughout the period)
-------------------------------------------------------------------------------------------------------------------
Six months ended
Per-share October 31
operating performance (Unaudited) Year ended April 30
-------------------------------------------------------------------------------------------------------------------
2002 2002 2001 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
Net asset value, beginning
of period (common shares) $13.00 $13.00 $12.51 $14.11 $14.05 $13.61
-------------------------------------------------------------------------------------------------------------------
Investment operations:
-------------------------------------------------------------------------------------------------------------------
Net investment income (a) .55 1.16 1.15 1.18 1.19 1.16
-------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.31) (.10) .56 (1.59) .03 .51
-------------------------------------------------------------------------------------------------------------------
Total from
investment operations .24 1.06 1.71 (.41) 1.22 1.67
-------------------------------------------------------------------------------------------------------------------
Distributions to preferred shareholders:
-------------------------------------------------------------------------------------------------------------------
From net investment income (.05) (.15) (.31) (.28) (.25) (.23)(e)
-------------------------------------------------------------------------------------------------------------------
Total from investment operations
(applicable to common shareholders .19 .91 1.40 (.69) .97 1.44
-------------------------------------------------------------------------------------------------------------------
Distributions to common shareholders:
-------------------------------------------------------------------------------------------------------------------
From net investment income (.45) (.91) (.91) (.91) (.91) (.93)
-------------------------------------------------------------------------------------------------------------------
Total distributions: (.45) (.91) (.91) (.91) (.91) (.93)
-------------------------------------------------------------------------------------------------------------------
Preferred share offering costs -- -- -- -- -- (.07)
-------------------------------------------------------------------------------------------------------------------
Net asset value, end of period
(common shares) $12.74 $13.00 $13.00 $12.51 $14.11 $14.05
-------------------------------------------------------------------------------------------------------------------
Market value, end of period
(common shares) $12.14 $12.500 $13.590 $11.625 $14.750 $13.812
-------------------------------------------------------------------------------------------------------------------
Total return at market value
(common shares)(%)(b) 0.56* (1.57) 25.32 (15.25) 13.57 6.13
-------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
-------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(common shares)(in thousands) $205,883 $210,081 $210,097 $202,063 $228,031 $226,942
-------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c)(d) .76* 1.43 1.44 1.46 1.42 1.30
-------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(d) 3.82* 7.63 6.50 6.93 6.58 6.64
-------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 3.44* 20.84 14.59 13.84 10.18 26.37
-------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Ratios reflect net assets available to common shares only: net
investment income ratio also reflects reduction for dividend payments to
preferred shareholders.
(e) Series B and C preferred shares were issued on July 7, 1997.
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
October 31, 2002 (Unaudited)
Note 1
Significant accounting policies
Putnam Municipal Opportunities Trust (the "fund") is registered under
the Investment Company Act of 1940, as amended, as a non-diversified,
closed-end management investment company. The fund's investment
objective is to seek a high level of current income exempt from federal
income tax and consistent with the preservation of capital. The fund
intends to achieve its objective by investing in a portfolio of
investment grade municipal bonds that Putnam Investment Management, LLC
("Putnam Management"), the fund's manager, an indirect wholly-owned
subsidiary of Putnam, LLC, believes to be consistent with preservation
of capital.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with accounting
principles generally accepted in the United States of America and requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities in the financial statements and the
reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those
estimates.
A) Security valuation Tax-exempt bonds and notes are valued on the basis
of valuations provided by an independent pricing service, approved by
the Trustees, which uses information with respect to transactions in
bonds, quotations from bond dealers, market transactions in comparable
securities and various relationships between securities in determining
value. Restricted securities are stated 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 accounted for 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, the remaining excess premium is amortized to maturity.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed. Realized gains and losses on purchased options are included in
realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. The fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the futures contract. Such receipts or
payments are known as "variation margin." Exchange traded options are
valued at the last sale price, or if no sales are reported, the last bid
price for purchased options and the last ask price for written options.
Options traded over-the-counter are valued using prices supplied by
dealers.
D) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with
the provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986, as amended. Therefore, no
provision has been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on income
and capital gains.
At April 30, 2002, the fund had a capital loss carryover of
approximately $13,290,000 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
-------------- ------------------
$2,046,000 April 30, 2003
4,581,000 April 30, 2004
126,000 April 30, 2007
2,789,000 April 30, 2008
1,503,000 April 30, 2009
2,245,000 April 30, 2010
Pursuant to federal income tax regulations applicable to regulated
investment companies, the fund has elected to defer to its fiscal year
ending April 30, 2003 approximately $2,139,000 of losses recognized
during the period November 1, 2001 to April 30, 2002.
The aggregate identified cost on a tax basis is $322,760,197, resulting
in gross unrealized appreciation and depreciation of $14,562,171 and
$18,419,883, respectively, or net unrealized depreciation of $3,857,712.
E) Distributions to shareholders Distributions to common and preferred
shareholders from net investment income are recorded by the fund on the
ex-dividend date. Distributions from capital gains, if any, are recorded
on the ex-dividend date and paid at least annually. Dividends on
remarketed preferred shares become payable when, as and if declared by the
Trustees. Each dividend period for the remarketed preferred shares is
generally a 28-day period for series A and a 7-day period for series B and
C. The applicable dividend rate for the remarketed preferred shares on
October 31, 2002 was series A 1.55%, series B 1.68%, and series C 1.74%.
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) Determination of net asset value Net asset value of the common shares
is determined by dividing the value of all assets of the fund, less all
liabilities and the liquidation preference of any outstanding remarketed
preferred shares, by the total number of common shares outstanding.
Note 2
Management fee, administrative services
and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.70% of the
first $500 million of the average net asset value of the fund, 0.60% of
the next $500 million, 0.55% of the next $500 million and 0.50%
thereafter.
If dividends payable on remarketed preferred shares during any dividend
payment period plus any expenses attributable to remarketed preferred
shares for that period exceed the fund's gross income attributable to
the proceeds of the remarketed preferred shares during that period, then
the fee payable to Putnam Management for that period will be reduced by
the amount of the excess (but not more than 0.70% of the liquidation
preference of the remarketed preferred shares outstanding during the
period).
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 wholly-owned subsidiary of Putnam, LLC. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
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 October 31,
2002, the fund's expenses were reduced by $14,993 under these
arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $692 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 Compensation of Trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
Note 3
Purchases and sales of securities
During the six months ended October 31, 2002, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $10,932,085 and $22,008,754, respectively. There
were no purchases and sales of U.S. government obligations.
Note 4
Preferred shares
The Series A, B and C shares are redeemable at the option of the fund on
any dividend payment date at a redemption price of $50,000, $25,000 and
$25,000, respectively per share, plus an amount equal to any dividends
accumulated on a daily basis but unpaid through the redemption date
(whether or not such dividends have been declared) and, in certain
circumstances, a call premium.
It is anticipated that dividends paid to holders of remarketed preferred
shares will be considered tax-exempt dividends under the Internal Revenue
Code of 1986. To the extent that the fund earns taxable income and capital
gains by the conclusion of a fiscal year, it will be required to apportion
to the holders of the remarketed preferred shares throughout that year
additional dividends as necessary to result in an after-tax equivalent to
the applicable dividend rate for the period.
Under the Investment Company Act of 1940, the fund is required to maintain
asset coverage of at least 200% with respect to the remarketed preferred
shares as of the last business day of each month in which any such shares
are outstanding. Additionally, the fund is required to meet more stringent
asset coverage requirements under terms of the remarketed preferred shares
and the shares' rating agencies. Should these requirements not be met, or
should dividends accrued on the remarketed preferred shares not be paid,
the fund may be restricted in its ability to declare dividends to common
shareholders or may be required to redeem certain of the remarketed
preferred shares. At October 31, 2002, no such restrictions have been
placed on the fund.
RESULTS OF OCTOBER 3, 2002 SHAREHOLDER MEETING
(Unaudited)
An annual meeting of shareholders of the fund was held on October 3,
2002. At the meeting, each of the nominees for Trustees was elected, as
follows:
Common Shares
Votes
Votes for withheld
Jameson Adkins Baxter 14,566,568 393,173
Charles B. Curtis 14,569,351 390,390
Ronald J. Jackson 14,569,717 390,024
Paul L. Joskow 14,569,717 390,024
Elizabeth T. Kennan 14,566,202 393,539
Lawrence J. Lasser 14,571,317 388,424
John H. Mullin III 14,569,717 390,024
George Putnam, III 14,568,971 390,770
A.J.C. Smith 14,569,351 390,390
W. Thomas Stephens 14,569,384 390,357
W. Nicholas Thorndike 14,669,351 390,390
Preferred Shares
Votes
Votes for withheld
Jameson Adkins Baxter 3,499 188
Charles B. Curtis 3,499 188
John A. Hill 3,623 64
Ronald J. Jackson 3,623 64
Paul L. Joskow 3,623 64
Elizabeth T. Kennan 3,499 188
Lawrence J. Lasser 3,623 64
John H. Mullin III 3,499 188
Robert E. Patterson 3,623 64
George Putnam, III 3,623 64
A.J.C. Smith 3,623 64
W. Thomas Stephens 3,623 64
W. Nicholas Thorndike 3,499 188
All tabulations are rounded to nearest whole number.
FUND INFORMATION
ABOUT PUTNAM INVESTMENTS
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
TRUSTEES
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
President
Charles E. Porter
Executive Vice President, Treasurer
and Principal Financial Officer
Patricia C. Flaherty
Senior Vice President
Karnig H. Durgarian
Vice President and
Principal Executive Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Steven D. Krichmar
Vice President and
Principal Financial Officer
Lawrence J. Lasser
Vice President
Charles E. Haldeman, Jr.
Vice President
Stephen M. Oristaglio
Vice President
Gordon H. Silver
Vice President
Brett C. Browchuk
Vice President
Jerome J. Jacobs
Vice President
Richard G. Leibovitch
Vice President
Richard A. Monaghan
Vice President
Beth S. Mazor
Vice President
John R. Verani
Vice President
Judith Cohen
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or
visit our Web site (www.putnaminvestments.com) any time for up-to-date
information about the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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PUTNAM
INVESTMENTS
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For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
84084 582 12/02