Putnam
Managed
Municipal
Income Trust
SEMIANNUAL REPORT
April 30, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "In today's low interest-rate environment, maintaining the fund's
competitive yield is our number one priority. We've developed tools to
manage the current and future income stream more precisely. However, in a
market with downside risk, we're also balancing the need for sustainable
income with the need for total return strategies that build net asset
value."
-- Richard P. Wyke, fund manager
Putnam Managed Municipal Income Trust
* "Surging tax revenues in most states help bolster municipal credit
bond ratings. Standard & Poor's says the number of rating upgrades in this
year's first quarter was more than nine times the number of downgrades."
-- The Wall Street Journal, April 8, 1998
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
10 Portfolio holdings
19 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The fragility of market rallies was clearly demonstrated once again as Putnam
Managed Municipal Income Trust approached the midpoint of fiscal 1998. The
suggestion that the Federal Reserve Board might be assuming a more cautious
stance on inflation was enough to stop the bond market's most recent advance
in its tracks.
One consequence of this turnabout was a slight erosion in total return as your
fund reached the end of the period. Fund Manager Richard Wyke considers the
development merely a minor setback; he remains confident that the fundamentals
- -- strong demand and attractive value -- are still in place.
In this volatile environment, Rick continues to focus on maintaining a high
level of current tax-free income, consistent with capital preservation. In the
following report, he discusses his strategy during the six months ended April
30, 1998, and looks at prospects for the fiscal year's second half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 17, 1998
Report from the Fund Manager
Richard P. Wyke
Declining interest rates, rising bond prices, and solid economic growth
contributed to solid gains in the fixed-income markets for the past several
months. However, in late April, the bond rally came to a sudden halt, stalled
by a suggestion that the Federal Reserve Board could be moving from a
wait-and-see approach to a more proactive monetary stance. This reversal,
which pushed the widely followed 30-year Treasury bond yield from 5.94% to
6.06%, eroding some of the gains achieved in what otherwise would have been a
strong semiannual period. The fund posted total returns of 2.65% at net asset
value and -3.03% at market price for the six months ended April 30, 1998.
Additional performance information can be found on page 8.
* MUNICIPAL MARKET -- HEAVY SUPPLY, STRONG DEMAND, ATTRACTIVE VALUE
Interest rates generally trended down during the semiannual period with the
bellwether 30-year Treasury bond falling to below 6% in December. However, the
fixed-income market sold off sharply late in April in response to indications
that the Fed might be leaning toward increasing rates in the coming months.
The first quarter of 1998 was also noteworthy for its huge incremental bond
supply, an increase of approximately 70% over the bond supply brought to
market one year ago. Demand for municipal bonds has also risen, fueled
primarily by bargain prices resulting from April's bond market selloff and the
long-awaited Long Island Power Authority's issuance in May -- the largest
municipal bond issue ever to come to market.
The municipal bond market has become attractively priced relative to the
Treasury market, a state of affairs that hasn't occurred since the flat-tax
scare of 1996. Municipal bonds (as represented by 30-year insured municipals)
are now offering almost 90% of the yield of long-term Treasury bonds. The
tax-exempt yield curve remains unusually flat. With the 30-year bond paying
only a modest 30 to 40 basis points more than a 10-year bond, investors are
not compensated for taking on higher risk. For this reason, we have found the
best value (attractive yield with minimal volatility) in the intermediate
range of the yield curve -- anywhere from 8 to 15 years.
* SECTOR EMPHASIS REMAINS HEALTH CARE, AIRLINES, AND UTILITIES
The health-care sector continues to perform well in spite of forthcoming
reductions in the Medicare budget. We have positioned the fund's holdings to
take advantage of merger and acquisition activity while seeking opportunities
to benefit from the potential for credit upgrades inherent in this sector's
lower-quality securities. The fund's Norwood Hospital and Candler Hospital
bonds, both of which are benefiting from respective merger discussions, carry
attractive coupons of 7% and 8%, respectively.
During the past four years, deregulation and the ensuing restructuring of the
utilitites sector have created some dynamic investment opportunities. The
challenge of identifying the potential winners -- and avoiding the losers --
provides an excellent example of Putnam's in-depth research process. For
example, since the deregulation process varies across the nation, we must
thoroughly investigate each state's regulatory structure to discern how
favorable the environment actually is.
[GRAPHIC OMITTED: HORIZONTAL BAR CHART OF TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 30.7%
Utilities 20.7%
Transportation 19.6%
Housing 6.1%
Education 2.9%
Footnote reads:
* Based on net assets as of 4/30/98. Holdings will vary over time.
We also analyze the cost of a utility company's generation process relative to
its competitors. An expensive nuclear plant would be less attractive, since
lower-cost providers have greater pricing flexibility to maintain market
dominance. In addition, while the fund invests in both investor-owned and
municipal utilities, we are particularly attracted to investor-owned companies
because they are for-profit entities and thus more accustomed to a
market-driven environment. Tucson Electric Power, whose bonds were recently
added to the portfolio, exemplifies the kind of company we believe will be a
strong survivor in a more competitive environment.
Bolstered by strong passenger demand and low fuel prices, the airlines
continue to report record earnings. Your fund's investments in revenue bonds
backed by Delta Airlines and American Airlines, which appreciated dramatically
during the period, enjoyed more good news when Standard & Poor's(registered
trademark) changed its outlook for these two carriers from stable to positive
in February. Now that the airlines have survived deregulation and effectively
priced themselves in their hub markets, we believe their bonds represent some
of the best opportunities in the lower-rated sector of the market.
* CHALLENGING MARKET WARRANTS VIGILANCE AND CAUTIOUS OPPORTUNISM
With a strong economy comes rising tax revenues, and state and local
municipalities have been prime beneficiaries. In New York, the quality of
outstanding debt has improved, leading to a series of minor upgrades of the
state's credit rating over the past year. While the improving quality has
favorably affected bond prices, yields have also decreased. Today New York
bonds, which account for close to 10% of all outstanding municipal issuance,
offer a smaller yield advantage, further complicating our search for
above-market yields.
With interest rates hovering around a 20-year low, budget-minded issuers
continue to call in their higher-yielding bonds, many of which were issued
during the late 1980s and early 1990s, and are reissuing new bonds at today's
lower rates. Consequently one of our top priorities is limiting the fund's
call risk. Investing in noncallable bonds or bonds with distant call dates
improves the fund's prospects of maintaining a competitive, sustainable level
of income.
[GRAPHIC OMITTED: PIE CHART CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Ba -- 11.7%
Baa and below -- 28.2%
A -- 9.2%
Aa -- 5.8%
Aaa -- 33.7%
B -- 10.8%
Short term -- 0.6%
Footnote reads:
* As a percentage of market value as of 4/30/98. All ratings reflect Moody's
descriptions unless noted otherwise; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings will vary
over time.
Consequently one of our top priorities is limiting the fund's call risk.
Investing in noncallable bonds or bonds with distant call dates improves the
fund's prospects of maintaining a competetive, sustainable level of income.
Careful security selection and in-depth credit analysis are also fundamental
to the fund's investment strategy, particularly as we attempt to discover
better value in bonds that carry ratings below investment grade. These are the
bonds that can add tremendously to the fund's income level, but they also mean
greater credit risk and require the most meticulous research efforts.
The Asian crisis has had a dramatic impact on interest rates everywhere in the
world except in the United States. We have been predicting that interest rates
will rise slightly, but this has not occurred to any sustainable degree as of
this writing. Nevertheless, we consider a rate increase more likely than a
decline primarily because bond yields are near their record lows. In our
opinion, this is not a good time to expose the portfolio to bonds with longer
maturities and higher interest-rate risk. We believe that a cautious strategy
will produce the best returns in the months ahead.
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 4/30/98, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Managed Municipal Income Trust is designed for investors
seeking high current income free from federal income tax through a
diversified portfolio of tax-exempt securities.
TOTAL RETURN FOR PERIODS ENDED 4/30/98
Lehman Bros.
Market Municipal Consumer
NAV price Bond Index Price Index
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6 months 2.65% -3.03% 2.77% 0.56%
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1 year 8.38 8.51 9.30 1.44
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5 years 39.04 47.79 37.14 12.85
Annual average 6.81 8.13 6.52 2.45
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Life of fund (2/24/89) 116.81 125.62 106.52 33.63
Annual average 8.80 9.27 8.23 3.21
- ------------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset value
and market price will fluctuate so that an investor's shares when sold may
be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 4/30/98
- ------------------------------------------------------------------------------
Distributions (common shares)
- ------------------------------------------------------------------------------
Number 6
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Income $0.381
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Capital gains1 --
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Total $0.381
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Series A Series B Series C
Preferred shares (550 shares) (550 shares) (650 shares)
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Income $1,966.90 $1,718.83 $1,826.20
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Total $1,966.90 $1,718.83 $1,826.20
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Share value (common shares) NAV Market price
- ------------------------------------------------------------------------------
10/31/97 $9.92 $11.75
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4/30/98 9.83 11.00
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Current return (common shares) NAV Market price
- ------------------------------------------------------------------------------
Current dividend rate2 7.75% 6.93%
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Taxable equivalent3 12.83 11.47
- ------------------------------------------------------------------------------
1Capital gains, if any, are taxable for federal and, in most cases, state
tax purposes. For some investors, investment income may also be subject to
the federal alternative minimum tax. Investment income may be subject to
state and local taxes.
2Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3Assumes maximum 39.6% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
TOTAL RETURN FOR PERIODS ENDED 3/31/98
(most recent calendar quarter)
Market
(common shares) NAV price
- ------------------------------------------------------------------------------
6 months 3.66% -4.80%
- ------------------------------------------------------------------------------
1 year 9.61 7.92
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5 years 40.60 43.61
Annual average 7.05 7.51
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Life of fund (2/24/89) 117.49 117.91
Annual average 8.91 8.94
- ------------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset value
and market price will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost.
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 Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index assumes reinvestment of all distributions
and interest payments and does not take in account brokerage fees or
taxes. Securities in the fund do not match those in the indexes and
performance of the fund will differ. It is not possible to invest directly
in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
<TABLE>
<CAPTION>
Portfolio of investments owned
April 30, 1998 (Unaudited)
Key to Abbreviations
AMBAC - AMBAC Indemnity Corporation
COP - Certificate of Participation
FGIC - Financial Guaranty Insurance Company
FSA - Financial Security Assurance
FHA Insd. - Federal Housing Administration Insured
GNMA Coll. - Government National Mortgage Association Collateralized
G.O. Bonds - General Obligation Bonds
IF COP - Inverse Floating Rate Certificate of Participation
IFB - Inverse Floating Rate Bonds
MBIA - Municipal Bond Investors Assurance Corporation
VRDN - Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (98.5%)(a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
<S> <C> <C> <C> <C>
Alabama (0.7%)
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$ 4,000,000 Baldwin Cnty., Eastern Shore Hlth. Care Auth.
Hosp. Rev. Bonds (Thomas Hospital),
6 3/4s, 4/1/21 Baa $ 4,340,000
Alaska (0.4%)
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2,000,000 Valdez, Marine Term. Rev. Bonds (Sohio Pipeline),
7 1/8s, 12/1/25 AA 2,215,000
Arizona (2.9%)
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5,000,000 Apache Cnty., Indl. Dev. Auth. Poll. Control
Rev. Bonds (Tucson Elec. Pwr. Co.), Ser. B,
5 7/8s, 3/1/33 B 5,006,250
4,000,000 Coconino Cnty., Poll. Control Corp. Rev. Bonds
(Tucson/Navajo Elec. Pwr.), Ser. A, 7 1/8s,
10/1/32 B 4,505,000
5,670,735 Phoenix, Indl. Dev. Auth. Arpt. Fac. Rev. Bonds
(American West Airlines, Inc.), Ser. A 95-1,
8.3s, 1/1/06 B+/P 5,703,398
2,750,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A 3,059,375
--------------
18,274,023
Arkansas (0.9%)
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5,000,000 Northwest Regl. Apt. Auth. Apt. Rev. Bonds,
7 5/8s, 2/1/27 B 5,706,250
California (11.4%)
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7,000,000 CA Hlth. Fac. Fin. Auth. IFB (Catholic Healthcare
West), AMBAC, 6.456s, 7/1/17 AAA 6,973,750
5,000,000 CA State G.O. Bonds, MBIA, 5 1/2s, 4/1/12 AAA 5,312,500
Corona, COP
2,775,000 (Vista Hosp. Syst.), Ser. B, 9 1/2s, 7/1/20 B/P 3,316,125
5,000,000 (Hosp. Syst. Inc.), Ser. C, 8 3/8s, 7/1/11 B/P 5,656,250
Kern High School Dist. Rev. Bonds, Ser. A
3,825,000 MBIA, 6 1/2s, 8/1/14 AAA 4,413,094
3,840,000 MBIA, 6 1/2s, 2/1/14 AAA 4,430,400
3,500,000 San Bernardino Cnty., IF COP (PA-100-Med.
Ctr. Fin.), MBIA, 9.1238s, 8/1/28 (acquired
6/27/95 cost $3,777,340) (RES) AAA/P 4,497,500
3,000,000 San Luis Obispo, COP (Vista Hosp. Sys. Inc.),
8 3/8s, 7/1/29 B 3,225,000
8,750,000 Santa Clara Cnty. Fin. Auth. Lease Rev. Bonds
(Vmc. Fac. Replacement), Ser. A, AMBAC,
6 3/4s, 11/15/20 AAA 10,040,625
14,750,000 U. of CA Rev. Bonds (UCSD Med. Ctr. Satellite
Med. Fac.), 7.9s, 12/1/19 BBB 15,671,875
7,500,000 Valley Hlth. Syst. Hosp. Rev. Bonds, 6 1/2s, 5/15/25 BBB 8,100,000
--------------
71,637,119
Colorado (3.6%)
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5,000,000 CO Edl. Fac. Auth. Rev. Bonds (Ocean Journey,
Inc.), 8.3s, 12/1/17 B+/P 5,831,250
Denver, City & Cnty. Arpt. Rev. Bonds
2,940,000 Ser. A, 8 3/4s, 11/15/23 Baa 3,377,325
1,060,000 Ser. A, 8 3/4s, 11/15/23 (Prerefunded) AAA 1,226,950
6,980,000 Ser. A, MBIA, 8 1/2s, 11/15/23 AAA 7,817,600
1,775,000 Ser. A, 7 3/4s, 11/15/21 Baa 1,976,906
1,050,000 Ser. D, 7 3/4s, 11/15/13 Baa 1,312,500
Denver, City & Cnty. Arpt. Rev. Bonds,
Prerefunded, Ser. A
665,000 MBIA, 8 1/2s, 11/15/23 AAA 743,138
465,000 7 3/4s, 11/15/21 AAA 523,125
--------------
22,808,794
Connecticut (0.7%)
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4,000,000 CT State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Norwalk Health Care Inc.), Ser. A, 8.7s, 7/1/22 BB/P 4,515,000
Florida (4.1%)
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3,210,000 Escambia Cnty., Poll. Control Rev. Bonds
(Champion Intl. Corp.), 6.9s, 8/1/22 Baa 3,526,988
5,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds
(FL Crushed Stone Co.), 8 1/2s, 12/1/14 B+/P 5,825,000
9,150,000 Lee Cnty., Board of Directors Hosp. IFB
(Lee Memorial Hosp.), MBIA, 8.685s, 3/26/20 AAA 10,533,938
Orange Cnty., Hlth. Fac. Auth. Rev. Bonds
(Orlando Regl. Hlthcare)
2,000,000 MBIA, 6 1/4s, 10/1/18 AAA 2,277,500
2,170,000 MBIA, 6 1/4s, 10/1/11 AAA 2,446,675
1,240,000 Pinellas Cnty. Hlth. Fac. Auth. Sun. Coast Hlth.
Syst. Rev. Bonds (Sun. Coast Hosp.), Ser. A,
8 1/2s, 3/1/20 BB 1,322,150
--------------
25,932,251
Georgia (4.8%)
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2,000,000 Atlanta, Arpt. Fac. Rev. Bonds, AMBAC,
5 1/4s, 1/1/10 AAA 2,065,000
1,505,000 Atlanta, Special Purpose Fac. Rev. Bonds
(Delta Air Lines, Inc.), Ser. B, 7.9s, 12/1/18 BA 1,602,825
2,500,000 GA Med. Ctr. Hosp. Auth. IFB (Columbus
Regl. Hlth. Care Syst.), Ser. B, MBIA,
8.85s, 8/1/10 AAA 2,918,750
7,000,000 GA Muni. Elec. Auth. Pwr. Rev. Bonds, Ser. Y,
AMBAC, 6.4s, 1/1/13 A 7,936,250
6,250,000 GA Muni. Elec. Auth. Pwr. Rev. Bonds, Ser. Z,
AMBAC, 5 1/2s, 1/1/12 AAA 6,531,250
3,250,000 Gwinnett Cnty., Indl. Dev. Auth. Rev. Bonds
(Kawneer Co. Inc.), Ser. 84, 9 1/2s, 6/1/15 A 3,518,125
3,180,000 Savannah, Hosp. Rev. Bonds (Chandler Hosp.),
7s, 1/1/11 Ba 3,398,625
1,900,000 Savannah, Hosp. Auth. Rev. Bonds (Chandler
Hosp.), 7s, 1/1/23 Ba 2,025,875
--------------
29,996,700
Illinois (3.5%)
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Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
5,158,000 (United Air Lines, Inc.), Ser. B, 8.95s, 5/1/18 Baa 5,776,960
3,090,000 (United Air Lines, Inc.), Ser. 84A, 8.85s, 5/1/18 Baa 3,456,938
1,765,000 (United Air Lines, Inc.), Ser. 84B, 8.85s, 5/1/18 Baa 1,974,594
3,000,000 (American Airlines, Inc.), 8.2s, 12/1/24 Baa 3,592,500
5,000,000 (American Airlines, Inc.), Ser. A, 7 7/8s, 11/1/25 BBB 5,431,250
2,500,000 IL Dev. Fin. Auth. Retirement Hsg. Rev. Bonds
(Regency Park-Lincolnwood), Ser. A, 10 1/4s,
4/15/19 (In default) (NON) D/P 1,800,000
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22,032,242
Indiana (1.7%)
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9,300,000 Indianapolis Indl. Arpt. Auth. Special Fac.
Rev. Bonds (Federal Express Corp.),
7.1s, 1/15/17 Baa 10,439,250
Iowa (1.1%)
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IA Fin. Auth. Hlth. Care Fac. Rev. Bonds
(Care Initiatives)
3,000,000 9 1/4s, 7/1/25 BB 4,027,500
2,350,000 9.15s, 7/1/09 BB 3,072,625
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7,100,125
Kansas (3.0%)
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7,500,000 Burlington, Poll. Control IFB (KS Gas & Electric),
Ser. 91-4, MBIA, 9.83s, 6/1/31 (acquired
12/17/91 cost $7,800,000) (RES) AAA 8,840,625
8,400,000 Witchita, Hosp. IFB, Ser. 111-A, MBIA,
8.935s, 10/20/17 AAA 9,870,000
--------------
18,710,625
Kentucky (2.0%)
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7,785,000 Kenton Cnty., Arpt. Board Special Fac.
Rev. Bonds (Delta Air Lines, Inc.), Ser. A,
7 1/2s, 2/1/20 Baa 8,592,694
1,000,000 Scott Cnty. Indl. Dev. Rev. Bonds (Hoover
Group Inc.), 8 1/2s, 11/1/14 Ba 1,130,000
2,740,000 Trimble Cnty., Poll. Control Rev. Bonds,
Ser. B, 6.55s, 11/1/20 Aa 2,952,350
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12,675,044
Louisiana (3.6%)
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12,500,000 Lake Charles, Harbor & Term. Dist. Port Fac.
Rev. Bonds (Trunkline Co.), 7 3/4s, 8/15/22 A 14,375,000
2,750,000 W. Feliciana Parish Poll. Control Rev. Bonds
(Gulf States Util. Co.), Ser. C, 7s, 11/1/15 Ba 3,028,438
5,050,000 W. Feliciana, Parish Poll. Control Rev. Bonds
(Gulf States Util. Co.), 8s, 12/1/24 Ba 5,397,188
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22,800,626
Maryland (1.5%)
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5,000,000 MD State Cmnty. Dev. Admin. Rev. Bonds
(Residential), Ser. B, FHA Insd., 5.35s, 9/1/30 AA 4,893,750
4,000,000 MD State Hlth. & Higher Edl. Fac. Auth.
Rev. Bonds, Refunded (Doctors Cmnty.
Hosp.), 8 3/4s, 7/1/12 AAA 4,450,000
--------------
9,343,750
Massachusetts (5.2%)
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MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,000,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 Ba 2,047,480
4,000,000 (Rehab. Hosp. Cape & Islands), Ser. A,
7 7/8s, 8/15/24 BB/P 4,480,000
1,010,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 BBB 1,073,125
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
3,000,000 (New England Baptist Hosp.), Ser. B,
7.3s, 7/1/11 AAA 3,318,750
1,100,000 (Beth Israel Hosp.), Ser. E, 7s, 7/1/14 A 1,153,625
1,185,000 (Norwood Hosp.), Ser. C, 7s, 7/1/14 Ba 1,313,869
2,000,000 (Beth Israel Hosp.), Ser. E, 7s, 7/1/09 A 2,095,000
3,400,000 (Sisters Providence Hlth. Syst), Ser. A,
6 5/8s, 11/15/22 Baa 3,803,750
5,000,000 MA State Indl. Fin. Agcy. Res. Recvy.
Rev. Bonds (Southeastern MA), Ser. B,
9 1/4s, 7/1/15 BB/P 5,668,750
MA State Indl. Fin. Agcy. Rev. Bonds
2,000,000 (Orchard Cove Inc.), 9s, 5/1/22 AAA/P 2,380,000
2,800,000 (Mass Tpk.), 9s, 10/1/20 AAA/P 3,150,000
2,000,000 (1st Mtge. Pioneer Valley Living Ctr.), 7s,
10/1/20 B/P 2,005,340
1,323,785 (1st Mtge. Pioneer Valley Living Ctr.),
zero%, 10/1/20 B/P 1,655
--------------
32,491,344
Michigan (5.9%)
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4,295,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment
Rev. Bonds, Ser. A, 9 1/2s, 5/1/21 BBB/P 5,325,800
3,000,000 MI State Hosp. Fin. Auth. Adj. Rate Rev. Bonds
(Detroit-Macomb Hosp. Corp.), Ser. A,
7.4s, 6/1/13 BB/P 3,007,740
3,405,000 MI State Hosp. Fin. Auth. Rev. Bonds (Pontiac
Osteopathic Hosp.), Ser. A, 6s, 2/1/14 Baa 3,507,150
6,365,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds
(Env. Research), 8 1/8s, 10/1/14 A-/P 6,842,375
8,000,000 Midland Cnty., Econ. Dev. Corp. Rev. Bonds
(Poll. Ctrl.), Ser. B, 9 1/2s, 7/23/09 B/P 8,810,000
2,700,000 Pontiac Hosp. Fin. Auth. Rev. Bonds (NOMC
Obligation), 6s, 8/1/18 Baa 2,770,875
6,500,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth. Care, Inc.), 8 3/8s, 7/1/23 B/P 6,500,000
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36,763,940
Minnesota (2.4%)
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1,925,000 Chaska, Indl. Dev. Rev. Bonds (Lifecore Biomedical,
Inc.), 10 1/4s, 9/1/20 BB/P 2,106,335
1,400,000 Duluth, Tax Increment VRDN (Lake Superior
Paper), 4 3/4s, 9/1/10 VMIGI 1,400,000
5,000,000 MN State Hsg. Fin. Agcy. Single Fam. Rev. Bonds,
Ser. E, 6.85s, 1/1/24 AA+ 5,350,000
6,000,000 St. Paul, Hsg. & Hosp. Redev. Auth. Rev. Bonds
(Healtheast), Ser. B, 6 5/8s, 11/1/17 Baa 6,465,000
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15,321,335
Mississippi (1.4%)
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Claiborne Cnty., Poll. Control Rev. Bonds
(Middle South Energy, Inc.)
4,000,000 Ser. C, 9 7/8s, 12/1/14 Ba 4,228,760
4,100,000 Ser. A, 9 1/2s, 12/1/13 Ba 4,325,951
--------------
8,554,711
Missouri (0.6%)
- -------------------------------------------------------------------------------------------------------------
3,700,000 Kansas City, Indl. Dev. Auth. Hlth. Fac. Rev. Bonds
(Park Lane Med. Ctr.), 8 3/4s, 1/1/15 BB/P 3,908,125
Nebraska (2.2%)
- -------------------------------------------------------------------------------------------------------------
2,000,000 Gage Cnty, Indl. Dev. Rev. Bonds (Hoover
Group Inc.), 8 1/2s, 12/1/07 Ba 2,262,500
NE Investment Fin. Auth. Single Fam. Mtge. IFB
900,000 Ser. B, GNMA Coll., 11.267s, 3/15/22 Aaa 1,002,375
1,800,000 GNMA Coll., 9.388s, 9/15/24 Aaa 2,029,500
1,800,000 Ser. B, GNMA Coll., 9.822s, 10/17/23 Aaa 1,971,000
2,150,000 Ser. C, Refunded 7.873s, 3/1/20 Aaa 2,303,188
3,890,000 NE Investment Fin. Auth. Single Fam. Mtge.
Rev. Bonds, Ser. 1, MBIA, 8 1/8s, 8/15/38 Aaa 3,989,156
--------------
13,557,719
Nevada (1.0%)
- -------------------------------------------------------------------------------------------------------------
Clark Cnty., Indl. Dev. Rev. Bonds
4,000,000 (NV Pwr. Co.), 7.8s, 6/1/20 Baa 4,305,000
2,000,000 (Southwest Gas Corp.), Ser. B, 7 1/2s, 9/1/32 Baa 2,217,500
--------------
6,522,500
New Hampshire (0.4%)
- -------------------------------------------------------------------------------------------------------------
2,140,000 NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
(Alice Peck Day Memorial Hosp.), 9 3/8s,
11/1/20 BB/P 2,367,375
New Jersey (1.4%)
- -------------------------------------------------------------------------------------------------------------
8,000,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
(St. Elizabeth Hosp.), Ser. B, 8 1/4s, 7/1/20 Aaa 8,820,000
New York (4.4%)
- -------------------------------------------------------------------------------------------------------------
NY City, G.O. Bonds
560,000 Ser. F, 8 1/4s, 11/15/10 A 632,800
6,440,000 Ser. F, Rfdg., 8 1/4s, 11/15/10 Aaa 7,357,700
4,925,000 Ser. D, 8s, 8/1/18 Aaa 5,540,625
3,200,000 NY City, Muni. Wtr. & Swr. Fin. Auth. VRDN,
Ser. A, FGIC, 3 1/4s, 6/15/25 VMIGI 3,200,000
5,000,000 NY State, Thruway Auth. Svcs. Contract
Rev. Bonds (Hwy. & Brdg.), 6s, 4/1/07 Baa 5,362,500
5,000,000 Port Auth. NY & NJ G.O. Bonds, Ser. 96,
FGIC, 6.6s, 10/1/23 Aaa 5,487,500
--------------
27,581,125
Ohio (4.0%)
- -------------------------------------------------------------------------------------------------------------
1,950,000 Dayton, Special Fac. Rev. Bonds (Emery Air
Freight Corp.), 12 1/2s, 10/1/09 AAA/P 2,074,586
20,000,000 OH State Air Quality Dev. Auth. Rev. Bonds
(Cleveland Co.), FGIC, 8s, 12/1/13 AAA 23,025,000
--------------
25,099,586
Oklahoma (1.1%)
- -------------------------------------------------------------------------------------------------------------
2,870,000 Oklahoma Cnty., Indl. Auth. Rev. Bonds (Epworth
Villa), Ser. A, 10 1/4s, 4/1/19 AAA/P 3,071,589
3,500,000 Tulsa Muni. Arpt. Trust Rev. Bonds (American
Airlines, Inc.), 7 3/8s, 12/1/20 Baa 3,784,375
--------------
6,855,964
Pennsylvania (6.4%)
- -------------------------------------------------------------------------------------------------------------
4,000,000 Allegheny Cnty., Indl. Dev. Auth. Arpt. Special
Fac. Rev. Bonds (U.S. Air, Inc.), Ser. B, 8
1/2s, 3/1/21 B 4,485,000
1,240,000 Langhorne Manor Boro Higher Ed. Hlth. Auth.
Rev. Bonds (Lower-Bucks Hosp.), 7.35s, 7/1/22 Ba 1,315,950
2,370,000 Montgomery Cnty., Higher Ed. & Hlth. Auth.
Rev. Bonds (Northwestern Corp.), Ser. A,
8 3/8s, 6/1/04 BBB/P 2,529,975
7,250,000 PA Convention Ctr. Auth. Rev. Bonds, MBIA,
6.7s, 9/1/14 Aaa 8,192,500
7,750,000 PA Econ. Dev. Fin. Auth. Rev. Bonds (MacMillan
Ltd. Partnership), 7.6s, 12/1/20 Baa 8,437,813
1,000,000 PA State Econ. Dev. Fin. Auth. Res. Recvy.
Rev. Bonds (Colver), Ser. D, 7 1/8s, 12/1/15 BBB 1,112,500
PA State Higher Ed. Assistance Agcy. IFB, Ser. B
2,000,000 AMBAC, 8.107s, 3/1/22 AAA 2,270,000
6,000,000 MBIA, 10.894s, 3/1/20 AAA 6,802,500
5,000,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth.
Rev. Bonds (Graduate Hlth. Syst.),
7 1/4s, 7/1/10 BB 5,300,000
--------------
40,446,238
South Carolina (0.9%)
- -------------------------------------------------------------------------------------------------------------
5,000,000 SC State Hsg. Fin. & Dev. Auth. Multi-Fam. Mtge.
Rev. Bonds, 8 1/2s, 10/1/21 BBB 5,537,500
Tennessee (0.3%)
- -------------------------------------------------------------------------------------------------------------
2,000,000 Memphis-Shelby Cnty. Arpt. Auth. Rev. Bonds
(Federal Express), 6 3/4s, 9/1/12 Baa 2,182,500
Texas (7.3%)
- -------------------------------------------------------------------------------------------------------------
10,100,000 Alliance, Arpt. Auth. Rev. Bonds (Federal
Express Corp.), 6 3/8s, 4/1/21 Baa 10,933,250
3,000,000 Alliance, Arpt. Auth. Special Fac. Rev. Bonds
(American Airlines, Inc.), 7 1/2s, 12/1/29 Baa 3,247,500
3,850,000 Amarillo, Hlth. Fac. Hosp. Corp. IFB (High Plains
Baptist Hosp.), FSA, 8.978s, 1/1/22 AAA 4,441,938
Bell Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Heartway Corp.)
420,000 Ser. B, 10s, 3/1/19 (In default) (NON) CCC/P 105,525
2,490,000 Ser. A, 9 1/2s, 3/1/19 (In default) (NON) CCC/P 2,533,575
3,200,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp.), 7.9s, 5/1/11 AAA/P 3,680,000
7,250,000 Brazos River, Poll. Control Auth. Rev. Bonds
(TX Utils. Elec. Co.), Ser. A, 7 7/8s, 3/1/21 Baa 7,929,688
4,500,000 Dallas-Fort Worth, Intl. Arpt. Fac. Impt. Corp.
Rev. Bonds (American Airlines, Inc.),
7 1/2s, 11/1/25 Baa 4,854,375
2,000,000 Lower Neches Valley, Indl. Dev. Swr. Auth.
Rev. Bonds (Mobil Oil Refining Corp.),
6.4s, 3/1/30 AA2 2,170,000
5,495,000 Texas State Fin. Auth. Rev. Bonds, Ser. A, 5.9s,
10/1/12 AA2 5,913,994
--------------
45,809,845
Utah (3.3%)
- -------------------------------------------------------------------------------------------------------------
15,350,000 Intermountain Pwr. Agcy. Rev. Bonds, Ser. D,
AMBAC, 7 3/4s, 7/1/20 A1 15,743,267
5,000,000 Tooele Cnty., Hazardous Waste Treatment
Rev. Bonds (Union Pacific), Ser. A, 5.7s, 11/1/26 Baa 5,006,250
--------------
20,749,517
Virginia (1.0%)
- -------------------------------------------------------------------------------------------------------------
5,400,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB,
FGIC, 9.215s, 8/15/23 AAA 6,392,250
Washington (2.8%)
- -------------------------------------------------------------------------------------------------------------
5,000,000 King Cnty., G.O. Bonds, Ser. C, 6 1/4s, 1/1/32 Aa 5,431,250
WA State Pub. Pwr. Supply Syst. Rev. Bonds
6,315,000 (Nuclear No. 1), Ser. A, 7 1/2s, 7/1/15 AAA 6,686,000
5,000,000 (Nuclear No. 2), Ser. A, AMBAC, 5.6s, 7/1/09 AAA 5,287,500
--------------
17,404,750
West Virginia (0.6%)
- -------------------------------------------------------------------------------------------------------------
3,500,000 Randolph Cnty. Rev. Bonds (Davis Memorial
Hosp.), Ser. A, 7.65s, 11/1/21 Baa 3,815,000
- -------------------------------------------------------------------------------------------------------------
Total Investments (cost $581,877,798) (b) $618,708,123
- -------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $627,889,203.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available
at April 30, 1998 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 April 30, 1998. Securities rated by Putnam are indicated by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $581,894,615, resulting in gross unrealized appreciation
and depreciation of $41,082,063 and $4,268,555 respectively, or net unrealized appreciation of $36,813,508.
(NON) Non-income producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted
securities held at April 30, 1998 was $13,338,125 or 2.1% of net assets.
The fund had the following industry group (concentrations) greater than 10% at April 30, 1998 (as a
percentage of net assets):
Health care 30.7%
Utilities 20.7
Transportation 19.6
The fund had the following insurance (concentrations) greater than 10% at April 30, 1998 (as a percentage
of net assets):
MBIA 11.8%
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
April 30, 1998 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $581,877,798) (Note 1) $618,708,123
- ---------------------------------------------------------------------------------------------------
Cash 504,210
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 12,480,137
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 250,000
- ---------------------------------------------------------------------------------------------------
Total assets 631,942,470
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 2,923,444
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 999,824
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 40,542
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 11,972
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 838
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 76,647
- ---------------------------------------------------------------------------------------------------
Total liabilities 4,053,267
- ---------------------------------------------------------------------------------------------------
Net assets $627,889,203
Represented by
- ---------------------------------------------------------------------------------------------------
Series A, B and C remarketed preferred shares, without par value: 8,000
shares authorized (1,750 shares issued at $100,000 per share) (Note 4) $175,000,000
- ---------------------------------------------------------------------------------------------------
Paid-in capital -- common shares (unlimited shares authorized) (Note 1) 425,846,968
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 10,926,229
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments
(Note 1) (20,714,319)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 36,830,325
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $627,889,203
Computation of net asset value
- ---------------------------------------------------------------------------------------------------
Series A, B, and C remarketed preferred shares $175,000,000
- ---------------------------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 119,543
- ---------------------------------------------------------------------------------------------------
Net assets allocated to remarketed preferred
shares -- liquidation preference $175,119,543
- ---------------------------------------------------------------------------------------------------
Net assets available to common shares $452,769,660
- ---------------------------------------------------------------------------------------------------
Net asset value per common shares ($452,769,660 divided
by 46,037,615 shares) $9.83
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended April 30, 1998 (Unaudited)
<S> <C>
Tax exempt interest income: $20,402,116
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,045,416
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 248,794
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 9,489
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 5,295
- --------------------------------------------------------------------------------------------------
Reports to shareholders 11,249
- --------------------------------------------------------------------------------------------------
Auditing 22,592
- --------------------------------------------------------------------------------------------------
Legal 8,886
- --------------------------------------------------------------------------------------------------
Postage 24,386
- --------------------------------------------------------------------------------------------------
Exchange listing fees 20,553
- --------------------------------------------------------------------------------------------------
Other 34,920
- --------------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 253,196
- --------------------------------------------------------------------------------------------------
Total expenses 2,684,776
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (27,415)
- --------------------------------------------------------------------------------------------------
Net expenses 2,657,361
- --------------------------------------------------------------------------------------------------
Net investment income 17,744,755
- --------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (1,894,427)
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,594,703)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the period 2,297,851
- --------------------------------------------------------------------------------------------------
Net loss on investments (1,191,279)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $16,553,476
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
April 30 October 31
1998* 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 17,744,755 $ 38,451,774
- ----------------------------------------------------------------------------------------------------------------------
Net realized loss on investments (3,489,130) (12,691,187)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,297,851 18,595,112
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 16,553,476 44,355,699
- ----------------------------------------------------------------------------------------------------------------------
Distributions to remarketed preferred shareholders
from net investment income (3,214,180) (6,313,568)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations
applicable to common shareholders (excluding
cumulative undeclared dividends on remarketed
preferred shares of $119,543 and $128,615 respectively) 13,339,296 38,042,131
- ----------------------------------------------------------------------------------------------------------------------
Distributions to common shareholders
from net investment income (17,509,819) (34,801,505)
- ----------------------------------------------------------------------------------------------------------------------
Issuance of common shares in connection
with reinvestment of distributions 2,016,291 4,236,683
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (2,154,232) 7,477,309
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 630,043,435 622,566,126
- ----------------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $10,926,229 and $13,905,473, respectively) $627,889,203 $630,043,435
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning of period 45,852,179 45,450,073
- ----------------------------------------------------------------------------------------------------------------------
Shares issued in connection with reinvestment of distributions 185,436 402,106
- ----------------------------------------------------------------------------------------------------------------------
Common shares outstanding at end of period 46,037,615 45,852,179
- ----------------------------------------------------------------------------------------------------------------------
Remarketed preferred shares outstanding at
beginning and end of period 1,750 1,750
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ----------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share April 30
operating performance (Unaudited) Year ended October 31
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period
(common shares) $9.92 $9.85 $10.08 $9.49 $10.88 $9.81
- ----------------------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------------------
Net investment income .39 .84 .86 .90 .94 .98
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.03) .13 (.19) .60 (1.37) 1.04
- ----------------------------------------------------------------------------------------------------------------------
Total from
investment operations .36 .97 .67 1.50 (.43) 2.02
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net
investment income
- ----------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.07) (.14) (.14) (.15) (.11) (.11)
- ----------------------------------------------------------------------------------------------------------------------
To common shareholders (.38) (.76) (.76) (.76) (.76) (.76)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments
- ----------------------------------------------------------------------------------------------------------------------
To common shareholders -- -- -- -- (.09) (.08)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.90) (.90) (.91) (.96) (.95)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period
(common shares) $9.83 $9.92 $9.85 $10.08 $9.49 $10.88
- ----------------------------------------------------------------------------------------------------------------------
Market value,
end of period
(common shares) $11.00 $11.75 $10.88 $10.63 $9.25 $11.38
- ----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------
Total investment return
at market value
(common shares) (%)(a) (3.03)* 16.01 10.26 24.23 (11.56) 24.84
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(total fund) (in thousands) $627,889 $630,043 $622,566 $628,454 $596,992 $652,660
- ----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) .59* 1.21 1.24 1.20 1.23 1.22
- ----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 3.17* 7.13 7.31 7.70 9.20 8.44
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 22.06* 9.63 78.92 79.71 48.40 35.16
- ----------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effects of sales charges.
(b) Ratios reflect net assets available to common shares only; net investment income ratio also reflects
reduction for dividend payments to preferred shareholders.
(c) The ratio of expenses to average net assets for the year ended October 31, 1995 and thereafter
includes amounts paid through expense offset arrangements. Prior period ratios
exclude these amounts.(Note 2)
</TABLE>
Notes to financial statements
April 30, 1998 (Unaudited)
Note 1
Significant accounting policies
Putnam Managed Municipal Income Trust (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a 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. The fund intends
to achieve its objective by investing in a diversified portfolio of tax-exempt
municipal securities which Putnam believes does not involve undue risk to
income or principal. Up to 50% of the fund's assets may consist of high-yield
tax-exempt municipal securities that are below investment grade and involve
special risk considerations. The fund also uses leverage by issuing preferred
shares in an effort to increase the income to the common 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 generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis of
valuations provided by a 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. The fair value of
restricted securities is determined by the Putnam Investment Management, Inc.
("Putnam Management"), the fund's manager, a wholly-owned subsidiary of Putnam
Investments, Inc. following procedures approved by the Trustees, and such
valuations and procedures are reviewed periodically by Trustees.
B) 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.
C) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
D) 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. 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.
E) 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 October 31, 1997, the fund had a capital loss carryover of approximately
$13,602,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
------------------ ------------------
$ 2,093,000 October 31, 2002
321,000 October 31, 2003
11,188,000 October 31, 2005
F) Distributions to shareholders Distributions to common and preferred
shareholders are recorded by the fund on the ex-dividend date. 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 B, and a 7 day period for Series C.
The applicable dividend rate for the remarketed preferred shares on April
30, 1998 was Series A 3.68%, Series B 3.90%, and Series C 4.05%. 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.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on original issue discount
bonds are accreted according to the yield-to-maturity basis.
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,
0.60% of the next $500 million, 0.55% of the next $500 million and 0.50% of
any amount over $1.5 billion.
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 net 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 .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 subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the six months ended April 30, 1998, fund expenses were reduced by $27,415
under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the Statement
of operations exclude these credits. The fund could have invested a portion of
the assets utilized in connection with the expense offset arrangements in an
income producing asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $660 has
been allocated to the fund, and an additional fee for each Trustee's meeting
attended. Trustees who are not interested persons of Putnam Management and who
serve on committees of the 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 in the fund and are
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
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
Purchase and sales of securities
During the six months ended April 30, 1998, purchases and sales of investment
securities other than short-term investments aggregated $83,528,666 and
$68,251,372, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
Note 4
Remarketed preferred shares
The Series A (550) B (550) and C (650) shares are redeemable at the option of
the fund on any dividend payment date at a redemption price of $100,000 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 April
30, 1998, no such restrictions have been placed on the fund.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Blake E. Anderson
Vice President
Richard P. Wyke
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit our
website (www.putnaminv.com) any time for up-to-date information about the
fund's NAV.
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PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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42875-052 6/98
