Putnam
Managed
Municipal
Income Trust
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "[T]here is one type of staid, secure bond fund that has been overlooked
amid the global scramble for safety, and that is now emerging as the best
bargain in the bond market: municipal-bond funds."
-- The Wall Street Journal, October 5, 1998
* "After a year in which tax-free bonds underperformed Treasuries,
municipal bonds appear ripe for a rebound. Economic growth, favorable
credit fundamentals, and rising tax revenues are positive factors for the
municipal bond market."
-- Richard P. Wyke, manager
Putnam Managed Municipal Income Trust
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
21 Financial statements
30 Results of October 1, 1998 shareholder meeting
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Thanks in part to the rush of foreign investors to the safety of the U.S.
bond market, yields on long-term municipal bonds have moved remarkably
close to yields on taxable 30-year Treasury bonds. Save for a recent
flurry of new tax-exempt bond issuance in the face of declining interest
rates, the increased demand for tax-exempt bonds is not likely, in
Putnam's view, to be matched by new supply; most issuers have already
refinanced outstanding bonds at lower rates and the flow of refunding has
fallen off markedly.
One of the greatest challenges for Fund Manager Richard Wyke thus may
continue to be that of finding securities that meet Putnam Managed
Municipal Income Trust's strict selection criteria. Rick has also adjusted
the fund's credit and sector strategies in response to the changing
environment and emerging trends he sees developing.
You will find details of these developments and other aspects of the
fund's performance during the fiscal year that closed on October 31, 1998,
in the following report from Rick. He also comments on prospects for the
fiscal year that has just begun.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
December 16, 1998
Report from the Fund Manager
Richard P. Wyke
Falling interest rates, which created a flurry of new municipal bond
issuance, pressured municipal bond prices in the fiscal year ended October
31, 1998. As a result, long-term municipal bond yields are historically
close to the yields on 30-year Treasury bonds, suggesting that tax-free
securities are undervalued relative to Treasuries. Despite the supply and
demand imbalance, Putnam Managed Municipal Income Trust appreciated 6.36%
at net asset value and 4.52% at market price on a total return basis for
the 12-month period. Additional performance information can be found on
page 8.
Today's lower interest rates offer an important benefit for your fund. The
potential for declining income may be offset in part by the declining cost
of leveraging, a strategy that historically has been useful in enhancing
the fund's income level. The fund issues preferred shares to institutional
short-term investors at low rates and reinvests the proceeds in
higher-paying longer-term bonds. The effect is a more positive cash flow
for the fund. As of October 31, 1998, preferred shares had been issued in
an amount equal to 27.87% of fund assets.
* MUNICIPAL BONDS OFFER EXCEPTIONAL VALUE
Throughout the dramatic shifts in the security markets during 1998,
municipal bonds have continued to stand their ground. As foreign investors
and hedge fund shareholders panicked about plummeting stock markets
worldwide, they began a flight to quality -- moving from hedge funds and
emerging-markets funds to the safety of U.S. Treasury bonds. This buying
drove up the prices of Treasuries and consequently, because yields and
prices move in an inverse relationship, pulled down their yields. Since
foreign investors do not benefit from the tax advantages of municipal
bonds, prices in this market did not rise as much as those of Treasuries.
As a result, with municipal bond yields about equal to Treasury yields, we
believe municipals have become an attractive investment choice for
tax-paying U.S. fixed-income investors.
Although there are no guarantees, we currently expect the pace of supply
of tax-free securities to decline -- a positive factor for municipal bond
prices. Normally when interest rates fall, refundings boost the bond
supply. Because rates have been low for some time and most issuers have
already completed their refundings, we expect that the supply of new
issues will slow. Perpetuating the slowdown in supply is the relationship
of Treasury yields to municipal yields. Since Treasury yields fell so
dramatically relative to municipal yields, the Treasury escrows used in
prerefundings are not adequate to pay off the municipal issues.
* CREDIT FUNDAMENTALS AND STRONG ECONOMY BUOY SECTORS
Strong economic growth, which propelled the U.S. stock market to record
highs during the period, is still contributing to rising city and state
tax revenues. This, in turn, is improving investors' perceptions of
issuers' creditworthiness -- prompting credit upgrades around the nation
by the major rating agencies. Predictably municipal bond prices reacted
favorably to the good news. While we expect the credit ratings to remain
stable for the foreseeable future, investors may begin to take profits. In
New York City, for example, bonds are trading at a premium, but their
above-market yield makes them a valuable component of your fund's income
strategy.
[GRAPHIC OMITTED: horizontal bar chart TOP FIVE INDUSTRY SECTORS]
TOP FIVE INDUSTRY SECTORS*
Health care 27.9%
Utilities 20.9%
Transportation 18.8%
Housing 6.8%
Education 3.4%
Footnote reads:
*Based on net assets as of 10/31/98. Holdings will vary over time.
The vigor of the economy, along with low petroleum prices, contributed to
the strong performance of the transportation sector. Airlines are posting
record profits and are in the best fiscal shape of the decade. Current
airline-related bonds in the portfolio include those backed by carriers,
such as American Airlines, that enjoys broad market diversification. Your
fund also holds a significant position in Northwest Regional Airport
bonds, which carry an attractive 7 5/8% coupon. While these holdings, along
with others discussed in this report, were viewed favorably at the end of
the period, all are subject to review and adjustment in accordance with
the fund's investment strategy, and may vary in the future.
The health-care sector, which constituted nearly 28% of net assets at
period's end, experienced some yield spread widening in the secondary
market as a result of Graduate Health System's recent surprise bankruptcy.
Along with many other mutual fund and institutional investors, we believed
the bonds, with an S&P rating of BB, represented a potential turnaround
situation in Philadelphia's highly competitive market. But when merger
talks failed to produce a buyer for the hospital, Graduate Health System
defaulted. As the hospital reorganizes, the gap between yields of
lower-rated and higher-rated health-care securities will create some
attractive income and appreciation opportunities.
At 20.9% of net assets, utilities also represent a mainstay of your fund.
In September, we purchased bonds issued by Connecticut Light & Power Co.,
a subsidiary of Northeast Utilities. CL&P, which has an investment in two
of the three Millstone nuclear plants, rallied on news that the Nuclear
Regulatory Commission allowed the start-up of Millstone 3. The utility,
whose issue carries a 5.95% coupon, is in the process of selling its
generating assets to become a wires company -- essentially a conduit
transmitting and distributing energy from the power source to customers.
This is a less capital intensive, lower risk business that investors and
the rating agencies are likely to view favorably.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Baa -- 25.0%
Ba -- 11.3%
B and under -- 12.4%
A -- 8.4%
Aa -- 4.7%
Aaa -- 37.1%
VMIG1 -- 1.1%
Footnote reads:
*As a percentage of market value as of 10/31/98. A bond rated Baa or
higher is considered investment grade. 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.
* CAUTIONARY OUTLOOK
The bond markets are beginning to move away from their obsession with
international markets. This fall, the Federal Reserve Board cut interest
rates twice in three weeks (and yet a third time in mid November after the
close of this reporting period), helping the U.S. bond markets to refocus
on economic fundamentals.
The intermediate maturity range of the yield curve (8 to 15 years) --
which is where many of the fund's holdings are positioned -- has
outperformed other maturities and this trend is likely to continue over
the near term. However, with yields on short-term securities falling in
response to the Fed's easing, the yield curve has steepened. We expect
there will come a time when a shift into longer maturities will offer
better performance. If this opportunity presents itself, we intend to take
the necessary steps to capture the higher yields.
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 10/31/98, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its 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 10/31/98
Lehman Bros.
Market Municipal Consumer
NAV price Bond Index Price Index
- ---------------------------------------------------------------------------
1 year 6.36% 4.52% 8.02% 1.36%
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5 years 31.99 46.96 36.12 12.42
Annual average 5.71 8.00 6.36 2.37
- ---------------------------------------------------------------------------
Life of fund (2/24/89) 124.64 143.19 117.08 34.70
Annual average 8.72 9.62 8.35 3.13
- ---------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 9/30/98
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------------
1 year 7.14% 3.84%
- ------------------------------------------------------------------------------
5 years 32.97 44.47
Annual average 5.86 7.64
- ------------------------------------------------------------------------------
Life of fund (2/24/89) 124.79 137.68
Annual average 8.80 9.44
- ------------------------------------------------------------------------------
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.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/98
- ------------------------------------------------------------------------------
Distributions (common shares)
- ------------------------------------------------------------------------------
Number 12
- ------------------------------------------------------------------------------
Income $0.762
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Capital gains1 --
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Total $0.762
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Preferred shares Series A Series B Series C
(550 shares) (550 shares) (650 shares)
- ------------------------------------------------------------------------------
Income $3,649.19 $3,686.50 $3,635.55
- ------------------------------------------------------------------------------
Capital gains1 -- -- --
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Total $3,649.19 $3,686.50 $3,635.55
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Share value (common shares) NAV Market price
- ------------------------------------------------------------------------------
10/31/97 $9.92 $11.750
- ------------------------------------------------------------------------------
10/31/98 9.82 11.438
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Current return (common shares)
- ------------------------------------------------------------------------------
Current dividend rate2 7.76% 6.66%
- ------------------------------------------------------------------------------
Taxable equivalent3 12.85 11.03
- ------------------------------------------------------------------------------
1 Capital 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.
2 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3 Assumes maximum 39.6% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
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.
Report of independent accountants
For the fiscal year ended October 31, 1998
To the Trustees and Shareholders of
Putnam Managed Municipal Income Trust
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, except for bond ratings, and
the related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of Putnam Managed Municipal Income Trust (the "fund")
at October 31, 1998, and the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the fund's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements
in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at October
31, 1998 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 7, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
October 31, 1998
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
FRB -- Floating Rate Bonds
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
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (98.6%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
<S> <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 Baa3 $ 4,390,000
Alaska (0.4%)
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2,000,000 Valdez, Marine Term. Rev. Bonds (Sohio Pipeline),
7 1/8s, 12/1/25 AA 2,210,000
Arizona (2.8%)
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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 5,018,750
4,000,000 Coconino Cnty., Poll. Control Corp. Rev. Bonds
(Tucson/Navajo Elec. Pwr.), Ser. A, 7 1/8s,
10/1/32 B 4,485,000
5,304,879 Phoenix, Indl. Dev. Auth. Arpt. Fac. Rev. Bonds
(American West Airlines, Inc.), Ser. A 95-1,
8.3s, 1/1/06 B+/P 5,336,602
2,750,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A3 3,025,000
--------------
17,865,352
Arkansas (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Northwest Regl. Apt. Auth. Rev. Bonds, 7 5/8s,
2/1/27 B+/P 5,712,500
California (9.2%)
- --------------------------------------------------------------------------------------------------------------------------
7,000,000 CA Hlth. Fac. Fin. Auth. IFB (Catholic Healthcare
West), AMBAC, 6.906s, 7/1/17 AAA 7,288,750
Corona, COP (Vista Hosp. Syst.)
2,775,000 Ser. B, 9 1/2s, 7/1/20 (acquired 10/23/92,
cost $2,775,000) (RES) B-/P 3,323,053
5,000,000 Ser. C, 8 3/8s, 7/1/11 (acquired 3/5/96,
cost $5,000,000) (RES) B-/P 5,675,000
3,500,000 San Bernardino Cnty., IF COP (PA-100-Med.
Ctr. Fin.), MBIA, 9.03s, 8/1/28 (acquired 6/27/95,
cost $3,777,340) (RES) AAA/P 4,690,000
3,000,000 San Luis Obispo, COP (Vista Hosp. Sys. Inc.), 8 3/8s,
7/1/29 (acquired 7/28/97, cost $3,000,000) (RES) B-/P 3,236,250
8,750,000 Santa Clara Cnty. Fin. Auth. Lease Rev. Bonds
(Vmc. Fac. Replacement), Ser. A, AMBAC, 6 3/4s,
11/15/20 AAA 10,270,313
14,480,000 U. of CA Rev. Bonds (UCSD Med. Ctr. Satellite
Med. Fac.), 7.9s, 12/1/19 A-/P 15,266,264
7,500,000 Valley Hlth. Syst. Hosp. Rev. Bonds, 6 1/2s, 5/15/25 BBB- 8,118,750
--------------
57,868,380
Colorado (3.6%)
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5,000,000 Colorado Edl. Fac. Auth. Rev. Bonds (Ocean
Journey, Inc.), 8.3s, 12/1/17 B/P 5,950,000
Denver, City & Cnty. Arpt. Rev. Bonds
2,940,000 Ser. A, 8 3/4s, 11/15/23 Baa1 3,344,250
6,980,000 Ser. A, MBIA, 8 1/2s, 11/15/23 AAA 7,765,250
1,775,000 Ser. A, 7 3/4s, 11/15/21 Baa1 1,965,813
1,050,000 Ser. D, 7 3/4s, 11/15/13 Baa1 1,355,813
Denver, City & Cnty. Arpt. Rev. Bonds, Prerefunded,
Ser. A
1,060,000 8 3/4s, 11/15/23 Aaa 1,229,600
665,000 MBIA, 8 1/2s, 11/15/23 Aaa 739,813
465,000 7 3/4s, 11/15/21 Aaa 526,031
--------------
22,876,570
Connecticut (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
3,500,000 CT State Dev. Auth. Poll. Ctrl. Rev. Bonds
(CT Lt. & Pwr. Co.), Ser. B, 5.95s, 9/1/28 Ba3 3,521,875
4,000,000 CT State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Norwalk Health Care Inc.), Ser. A, 8.7s, 7/1/22 BB-/P 4,480,000
--------------
8,001,875
Florida (4.2%)
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3,210,000 Escambia Cnty., Poll. Control Rev. Bonds
(Champion Intl. Corp.), 6.9s, 8/1/22 Baa1 3,494,888
5,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds
(FL Crushed Stone Co.), 8 1/2s, 12/1/14 B+/P 5,787,500
9,150,000 Lee Cnty., Board of Directors Hosp. IFB
(Lee Memorial Hosp.), MBIA, 8.887s, 3/26/20 AAA 10,774,125
Orange Cnty., Hlth. Fac. Auth. Rev. Bonds
(Orlando Regl. Hlthcare)
2,000,000 MBIA, 6 1/4s, 10/1/18 AAA 2,352,500
2,170,000 MBIA, 6 1/4s, 10/1/11 AAA 2,549,750
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+ 1,308,200
--------------
26,266,963
Georgia (5.6%)
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2,000,000 Atlanta, Arpt. Fac. Rev. Bonds, AMBAC, 5 1/4s,
1/1/10 AAA 2,127,500
1,505,000 Atlanta, Special Purpose Fac. Rev. Bonds
(Delta Air Lines, Inc.), Ser. B, 7.9s, 12/1/18 BBB- 1,586,074
2,000,000 De Kalb Cnty., Hsg. Auth. Multi-Fam. Hsg. VRDN
(Wood Hills Apt.), 3.1s, 12/1/07 A- 2,000,000
1,750,000 Fulton Cnty., Dev. Auth Fac. Rev. Bonds
(Delta Airlines, Inc.), 5 1/2s, 5/1/33 Baa3 1,723,750
2,500,000 GA Med. Ctr. Hosp. Auth. IFB (Columbus Regl.
Hlth. Care Syst.), Ser. B, MBIA, 8.901s, 8/1/10 AAA 2,975,000
GA Muni. Elec. Auth. Pwr. Rev. Bonds, AMBAC
7,000,000 Ser. Y, 6.4s, 1/1/13 Aaa 8,260,000
6,250,000 Ser. Z, 5 1/2s, 1/1/12 Aaa 6,828,125
3,250,000 Gwinnett Cnty., Indl. Dev. Auth. Rev. Bonds
(Kawneer Co. Inc.), Ser. 84, 9 1/2s, 6/1/15 A1 3,635,938
3,180,000 Savannah, Hosp. Rev. Bonds
(Chandler Hosp.), 7s, 1/1/11 Ba1 3,617,250
1,900,000 Savannah, Hosp. Auth. Rev. Bonds
(Chandler Hosp.), 7s, 1/1/23 Ba1 2,161,250
--------------
34,914,887
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 Baa2 5,725,380
3,090,000 (United Air Lines, Inc.), Ser. 84A, 8.85s, 5/1/18 Baa2 3,426,038
1,765,000 (United Air Lines, Inc.), Ser. 84B, 8.85s, 5/1/18 Baa2 1,956,944
3,000,000 (American Airlines, Inc.), 8.2s, 12/1/24 Baa2 3,603,750
5,000,000 (American Airlines, Inc.), Ser. A, 7 7/8s, 11/1/25 Baa2 5,393,750
2,500,000 IL Dev. Fin. Auth. Retirement Hsg. Rev. Bonds
(Regency Park-Lincolnwood), Ser. A,
10 1/4s, 4/15/19 (acquired 5/10/90,
cost $2,396,628) (In default) (NON) (RES) D/P 1,925,000
--------------
22,030,862
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 Baa2 10,392,750
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/P 4,016,250
2,350,000 9.15s, 7/1/09 BB/P 3,060,875
--------------
7,077,125
Kansas (3.0%)
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7,500,000 Burlington, Poll. Control IFB (KS Gas & Electric),
Ser. 91-4, MBIA, 9.67s, 6/1/31(acquired 12/17/91,
cost $7,800,000) (RES) Aaa 8,925,000
8,400,000 Witchita, Hosp. IFB, Ser. 111-A, MBIA, 8.55s,
10/20/17 AAA 10,027,500
--------------
18,952,500
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 Baa3 8,514,844
1,000,000 Scott Cnty. Indl. Dev. Rev. Bonds (Hoover
Group Inc.), 8 1/2s, 11/1/14 BA3 1,127,500
2,740,000 Trimble Cnty., Poll. Control Rev. Bonds, Ser. B, 6.55s,
11/1/20 Aa2 2,962,625
--------------
12,604,969
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 A3 14,250,000
W. Feliciana, Parish Poll. Control Rev. Bonds
(Gulf States Util. Co.)
5,050,000 8s, 12/1/24 Ba1 5,337,143
2,750,000 Ser. C, 7s, 11/1/15 Ba1 3,038,750
--------------
22,625,893
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 Aa2 5,043,750
4,000,000 MD State Hlth. & Higher Edl. Fac. Auth. Rev. Bonds,
prerefunded (Doctors Cmnty. Hosp.), 8 3/4s,
7/1/12 Aaa 4,415,000
--------------
9,458,750
Massachusetts (6.4%)
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MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,000,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 Ba2 2,047,860
3,900,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s,
8/15/24 BB/P 4,407,000
1,010,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Baa3 1,122,363
3,000,000 (New England Baptist Hosp.), Ser. B, 7.3s, 7/1/11 AAA 3,330,000
1,100,000 (Beth Israel Hosp.), Ser. E, 7s, 7/1/14 A 1,141,624
1,185,000 (Norwood Hosp.), Ser. C, 7s, 7/1/14 Ba 1,321,275
2,000,000 (Beth Israel Hosp.), Ser. E, 7s, 7/1/09 A 2,075,560
3,400,000 (Sisters Providence Hlth. Syst), Ser. A, 6 5/8s,
11/15/22 Aaa 3,893,000
7,645,000 MA State Hsg. Fin. Agcy. Rev. Bonds, 7s, 7/1/40
(acquired 6/3/98, cost $7,739,333) (RES) Aaa 8,065,475
5,000,000 MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA), Ser. B, 9 1/4s, 7/1/15 BB-/P 5,606,250
MA State Indl. Fin. Agcy. Rev. Bonds
2,000,000 (Orchard Cove Inc.), 9s, 5/1/22 AAA/P 2,392,500
2,760,000 (MA Tpk.), 9s, 10/1/20 AAA/P 3,084,300
2,000,000 (1st Mtge. Pioneer Valley Living Ctr.), 7s, 10/1/20 B/P 2,013,380
1,323,785 (1st Mtge. Pioneer Valley Living Ctr.), zero %,
10/1/20 B/P 1,655
--------------
40,502,242
Michigan (5.6%)
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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 5,298,956
3,405,000 MI State Hosp. Fin. Auth. Rev. Bonds (Pontiac
Osteopathic Hosp.), Ser. A, 6s, 2/1/14 Baa1 3,562,481
6,015,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds
(Env. Research), 8 1/8s, 10/1/14 AAA/P 6,406,035
2,000,000 MI State Strategic Fund Resource Recvy. Ltd.
Rev. Bonds (Wayne Energy), Ser. A, 6.9s, 7/1/19 B/P 2,027,500
8,000,000 Midland Cnty., Econ. Dev. Corp. Rev. Bonds
(Poll. Ctrl.), Ser. B, 9 1/2s, 7/23/09 B+/P 8,680,000
2,700,000 Pontiac Hosp. Fin. Auth. Rev. Bonds (NOMC
Obligation Group), 6s, 8/1/18 Baa3 2,781,000
6,500,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth. Care, Inc.), 8 3/8s, 7/1/23
(acquired 5/18/95, cost $6,679,083) (RES) B-/P 6,175,000
--------------
34,930,972
Minnesota (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,900,000 Chaska, Indl. Dev. Rev. Bonds (Lifecore
Biomedical, Inc.), 10 1/4s, 9/1/20 BB-/P 2,079,702
5,000,000 MN State Hsg. Fin. Agcy. Single Fam. Rev. Bonds,
Ser. E, 6.85s, 1/1/24 AA+ 5,331,250
5,850,000 St. Paul, Hsg. & Hosp. Redev. Auth. Rev. Bonds
(Healtheast), Ser. B, 6 5/8s, 11/1/17 Baa3 6,274,125
--------------
13,685,077
Mississippi (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
4,100,000 Claiborne Cnty., Rev. Bonds (Middle South
Energy, Inc.) Ser. A, 9 1/2s, 12/1/13 Ba1 4,238,170
4,000,000 Claiborne Cnty., Poll. Control Rev. Bonds (Middle
South Energy, Inc.) Ser. C, 9 7/8s, 12/1/14 Ba1 4,135,920
--------------
8,374,090
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 3,880,375
Nebraska (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Gage Cnty, Indl. Dev. Rev. Bonds (Hoover
Group Inc.), 8 1/2s, 12/1/07 Ba3 2,257,500
2,500,000 Kearney, Indl. Dev. Rev. Bonds (Great Platte
River Road), 6 3/4s, 1/1/28 B/P 2,440,625
NE Investment Fin. Auth. Single Fam. Mtge. IFB
700,000 Ser. B, GNMA Coll., 11.419s, 3/15/22 Aaa 769,125
1,700,000 Ser. B, GNMA Coll., 10.094s, 10/17/23 Aaa 1,870,000
1,700,000 GNMA Coll., 9.293s, 9/15/24 Aaa 1,923,125
2,150,000 Ser. C, 7.918s, 3/1/20 Aaa 2,373,063
--------------
11,633,438
Nevada (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
Clark Cnty., Indl. Dev. Rev. Bonds
4,000,000 (NV Pwr. Co.), 7.8s, 6/1/20 Baa3 4,270,000
6,000,000 (Southwest Gas Corp.), Ser. B, 7 1/2s, 9/1/32 Baa3 6,660,000
--------------
10,930,000
New Hampshire (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,085,000 NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
(Alice Peck Day Memorial Hosp.), 9 3/8s, 11/1/20 BB+/P 2,290,894
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 8,760,000
New York (5.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Dutchess Cnty., Indl. Dev. Agency Civic Fac. Rev.
Bonds (Marist College), Ser. A, VRDN, 2.9s, 7/1/28 A-1+ 2,000,000
2,100,000 Long Island, Pwr. Auth. NY Elec. Syst. VRDN, Ser. 1,
3s, 5/1/33 (Bayerische Landesbank (LOC)) VMIG1 2,100,000
NY City, G.O. Bonds
7,000,000 Ser. F, 8 1/4s, 11/15/10 AAA 8,023,750
4,925,000 Ser. D, 8s, 8/1/18 (Group C) Aaa 5,552,938
5,000,000 NY City, Muni. Wtr. & Swr. Fin. Auth. Rev. Bonds,
7.05s, 6/15/17 (acquired 5/21/98,
cost $5,292,577) (RES) AAA/P 5,475,000
1,800,000 NY State Hsg. Fin. Agcy. VRDN (Normadie Court I),
2 3/4s, 5/15/15 (Landesbank Hessien (LOC)) VMIG1 1,800,000
2,000,000 NY State Local Govt. Assistance Corp. VRDN,
Ser. B, 2.7s, 4/1/25 VMIG1 2,000,000
5,000,000 Port Auth. NY & NJ G.O. Bonds, Ser. 96, FGIC, 6.6s,
10/1/23 AAA 5,618,750
--------------
32,570,438
Ohio (3.7%)
- --------------------------------------------------------------------------------------------------------------------------
20,000,000 OH State Air Quality Dev. Auth. Rev. Bonds
(Cleveland Co.), FGIC, 8s, 12/1/13 AAA 23,200,000
Oklahoma (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,870,000 Oklahoma Cnty., Indl. Auth. Rev. Bonds
(Epworth Villa), Ser. A, 10 1/4s, 4/1/19 AAA/P 2,996,424
3,500,000 Tulsa Muni. Arpt. Trust Rev. Bonds (American
Airlines, Inc.), 7 3/8s, 12/1/20 Baa2 3,736,250
--------------
6,732,674
Pennsylvania (6.8%)
- --------------------------------------------------------------------------------------------------------------------------
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+ 4,435,000
4,500,000 Dauphin Cnty., Gen. Auth. Rev. Bonds (Forum Place),
Ser. A, 6s, 1/15/25 BB-/P 4,550,625
1,240,000 Langhorne Manor Boro Higher Ed. Hlth. Auth.
Rev. Bonds (Lower-Bucks Hosp.), 7.35s, 7/1/22 Ba3 1,314,400
2,105,000 Montgomery Cnty., Higher Ed. & Hlth. Auth. Rev.
Bonds (Northwestern Corp.), Ser. A, 8 3/8s,
6/1/04 BBB/P 2,299,713
7,250,000 PA Convention Ctr. Auth. Rev. Bonds, MBIA, 6.7s,
9/1/14 Aaa 8,310,313
7,750,000 PA Econ. Dev. Fin. Auth. Rev. Bonds (MacMillan Ltd.
Partnership), 7.6s, 12/1/20 Baa2 9,464,688
1,000,000 PA State Econ. Dev. Fin. Auth. Res. Recvy. Rev.
Bonds (Colver), Ser. D, 7 1/8s, 12/1/15 BBB- 1,111,250
PA State Higher Ed. Assistance Agcy. IFB, Ser. B
2,000,000 AMBAC, 8.589s, 3/1/22 AAA 2,277,500
6,000,000 MBIA, 11.041s, 3/1/20 AAA 6,765,000
5,000,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth.
Rev. Bonds (Graduate Hlth. Syst.), 7 1/4s, 7/1/10
(acquired 4/11/96, cost $5,028,299) (In default) (NON) (RES) CCC 2,000,000
--------------
42,528,489
Puerto Rico (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,200,000 Cmnwlth. of PR, Hwy. Trans. Auth. VRDN, AMBAC,
2.6s, 7/1/28 VMIG1 1,200,000
1,000,000 Cmnwlth. of PR, Hwy. Trans. Auth. Rev. Bonds,
Ser. A, 5s, 7/1/38 A 976,250
--------------
2,176,250
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 5,443,750
Tennessee (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 Chattanooga, Indl. Dev. Board Rev. Bonds
(Warehouse Row Ltd.), VRDN, 3.15s, 12/15/12 A-1+ 4,000,000
2,000,000 Memphis-Shelby Cnty. Arpt. Auth. Rev. Bonds
(Federal Express), 6 3/4s, 9/1/12 Baa2 2,185,000
--------------
6,185,000
Texas (7.3%)
- --------------------------------------------------------------------------------------------------------------------------
10,100,000 Alliance, Arpt. Auth. Rev. Bonds (Federal
Express Corp.), 6 3/8s, 4/1/21 Baa2 10,895,375
3,000,000 Alliance, Arpt. Auth. Special Fac. Rev. Bonds
(American Airlines, Inc.), 7 1/2s, 12/1/29 Baa2 3,206,250
3,850,000 Amarillo, Hlth. Fac. Hosp. Corp. IFB (High Plains
Baptist Hosp.), FSA, 9.19s, 1/3/22 AAA 4,586,313
Bell Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Heartway Corp.)
420,000 Ser. B, 10s, 3/1/19 CCC+/P 105,525
2,490,000 Ser. A, 9 1/2s, 3/1/19 CCC+/P 2,542,913
3,200,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp.), 7.9s, 5/1/11 AAA/P 3,724,000
7,250,000 Brazos River, Poll. Control Auth. Rev. Bonds
(TX Utils. Elec. Co.), Ser. A, 7 7/8s, 3/1/21 Baa1 7,893,438
4,500,000 Dallas-Fort Worth, Intl. Arpt. Fac. Impt. Corp. Rev.
Bonds (American Airlines, Inc.), 7 1/2s, 11/1/25 Baa2 4,820,625
2,000,000 Lower Neches Valley, Indl. Dev. Swr. Auth. Rev.
Bonds (Mobil Oil Refining Corp.), 6.4s, 3/1/30 Aa2 2,190,000
5,495,000 Texas State Fin. Auth. Rev. Bonds, Ser. A, 5.9s, 10/1/12 Aa2 6,065,106
--------------
46,029,545
Utah (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Tooele Cnty., Hazardous Waste Treatment
Rev. Bonds (Union Pacific), Ser. A, 5.7s, 11/1/26 BBB- 4,956,250
Virginia (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
3,800,000 Culpepper, Ind. Dev. Auth. Res. Care Fac. VRDN
(Baptist Homes), 3.8s, 11/1/17 A-1+ 3,800,000
5,400,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB,
FGIC, 9.418s, 8/15/23 AAA 6,426,000
--------------
10,226,000
Washington (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 King Cnty., G.O. Bonds, Ser. C, 6 1/4s, 1/1/32 AA+ 5,568,750
WA State Pub. Pwr. Supply Syst. Rev. Bonds
6,315,000 (Nuclear Project No. 1), Ser. A, 7 1/2s, 7/1/15 Aaa 6,622,353
5,000,000 (Nuclear Pwr. No. 2), Ser. A, AMBAC, 5.6s, 7/1/09 AAA 5,443,750
--------------
17,634,853
West Virginia (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
3,500,000 Randolph Cnty. Rev. Bonds (Davis Memorial Hosp.),
Ser. A, 7.65s, 11/1/21 Baa1 3,915,625
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $582,629,585) (b) $ 619,835,338
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $628,903,599.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
October 31, 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 October 31, 1998. Securities
rated by Putnam are indicated by "/P" and are not publicly rated. Ratings are not covered by the Report of
independent accountants.
(b) The aggregate identified cost on a tax basis is $582,646,401, resulting in gross unrealized appreciation and
depreciation of $43,797,687 and $6,608,750, respectively, or net unrealized appreciation of $37,188,937.
(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, 1998 was $49,489,778 or 7.9% of net assets.
The rates shown on Floating Rate Bonds (FRB) and Floating Rate Notes (FRN) are the current interest rates
shown at October 31, 1998, which are subject to change based on the terms of the security.
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, 1998.
The fund had the following industry group concentrations greater than 10% at October 31, 1998 (as a percentage
of net assets):
Health care 27.9%
Utilities 20.9
Transportation 18.8
The fund had the following insurance concentration greater than 10% at October 31, 1998 (as a percentage of
net assets):
MBIA 10.5%
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $582,629,585) (Note 1) $619,835,338
- -----------------------------------------------------------------------------------------------
Cash 4,363,287
- -----------------------------------------------------------------------------------------------
Interest and other receivables 12,226,591
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 475,000
- -----------------------------------------------------------------------------------------------
Total assets 636,900,216
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 2,934,991
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 3,809,948
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,083,188
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 38,087
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 14,918
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,509
- -----------------------------------------------------------------------------------------------
Other accrued expenses 112,976
- -----------------------------------------------------------------------------------------------
Total liabilities 7,996,617
- -----------------------------------------------------------------------------------------------
Net assets $628,903,599
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) 427,604,731
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 8,804,371
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (19,711,256)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 37,205,753
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $628,903,599
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Series A, B, and C remarketed preferred shares $175,000,000
- -----------------------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 137,511
- -----------------------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares --
liquidation preference $175,137,511
- -----------------------------------------------------------------------------------------------
Net assets available to common shares $453,766,088
- -----------------------------------------------------------------------------------------------
Net asset value per common shares
($453,766,088 divided by 46,221,286 shares) $9.82
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1998
<S> <C>
Tax exempt interest income: $41,922,238
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,282,395
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 507,835
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 17,198
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 11,970
- -----------------------------------------------------------------------------------------------
Reports to shareholders 36,825
- -----------------------------------------------------------------------------------------------
Registration fees 75
- -----------------------------------------------------------------------------------------------
Auditing 41,834
- -----------------------------------------------------------------------------------------------
Legal 28,416
- -----------------------------------------------------------------------------------------------
Postage 69,422
- -----------------------------------------------------------------------------------------------
Exchange listing fees 41,115
- -----------------------------------------------------------------------------------------------
Other 73,467
- -----------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 465,364
- -----------------------------------------------------------------------------------------------
Total expenses 5,575,916
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (42,183)
- -----------------------------------------------------------------------------------------------
Net expenses 5,533,733
- -----------------------------------------------------------------------------------------------
Net investment income 36,388,505
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (1,097,907)
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,594,704)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the year 2,673,279
- -----------------------------------------------------------------------------------------------
Net loss on investments (19,332)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $36,369,173
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31
-------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 36,388,505 $ 38,451,774
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments (2,692,611) (12,691,187)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,673,279 18,595,112
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 36,369,173 44,355,699
- ---------------------------------------------------------------------------------------------------------------
Distributions to remarketed preferred shareholders from
net investment income (6,397,736) (6,313,568)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations
applicable to common shareholders
(excluding cumulative undeclared dividends on
remarketed preferred shares of $137,511
and $128,615 respectively) 29,971,437 38,042,131
- ---------------------------------------------------------------------------------------------------------------
Distributions to common shareholders from
net investment income (35,091,416) (34,801,505)
- ---------------------------------------------------------------------------------------------------------------
Issuance of common shares in connection
with reinvestment of distributions 3,980,143 4,236,683
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (1,139,836) 7,477,309
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 630,043,435 622,566,126
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $8,804,371 and $13,905,473, respectively) $628,903,599 $630,043,435
- ---------------------------------------------------------------------------------------------------------------
Number of fund shares
- ---------------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning of year 45,852,179 45,450,073
- ---------------------------------------------------------------------------------------------------------------
Shares issued in connection with reinvestment of distributions 369,107 402,106
- ---------------------------------------------------------------------------------------------------------------
Common shares outstanding at end of year 46,221,286 45,852,179
- ---------------------------------------------------------------------------------------------------------------
Remarketed preferred shares outstanding at beginning
and end of year 1,750 1,750
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended October 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period
(common shares) $9.92 $9.85 $10.08 $9.49 $10.88
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .79 .84 .86 .90 .94
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .01 .13 (.19) .60 (1.37)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .80 .97 .67 1.50 (.43)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.14) (.14) (.14) (.15) (.11)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.76) (.76) (.76) (.76) (.76)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders -- -- -- -- (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.90) (.90) (.90) (.91) (.96)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period
(common shares) $9.82 $9.92 $9.85 $10.08 $9.49
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period
(common shares) $11.44 $11.75 $10.88 $10.63 $9.25
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value
(common shares) (%)(a) 4.52 16.01 10.26 24.23 (11.56)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(total fund) (in thousands) $628,904 $630,043 $622,566 $628,454 $596,992
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 1.22 1.21 1.24 1.20 1.23
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 6.57 7.13 7.31 7.70 9.20
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 19.97 9.63 78.92 79.71 48.40
- ------------------------------------------------------------------------------------------------------------------------------------
(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
October 31, 1998
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
taxable 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, 1998, the fund had a capital loss carryover of
approximately $16,290,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
---------------- ----------------
$ 1,886,000 October 31, 2002
321,000 October 31, 2003
11,188,000 October 31, 2005
2,895,000 October 31, 2006
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
October 31, 1998 was Series A 3.55%, Series B 3.60% and Series C 3.40%.
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. These differences include
temporary and permanent differences of losses on wash sale transactions,
defaulted bond interest and unrealized gains and losses on certain futures
contracts. 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. For the year ended October
31, 1998, the fund reclassified $455 to decrease undistributed net
investment income and $206,089 to decrease paid-in-capital, with a
decrease to accumulated net realized loss of $206,544. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
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% 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 .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 year ended October 31, 1998, fund expenses were reduced by $42,183
under expense offset arrangements with PFTC. 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 $650 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 year ended October 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $123,134,296 and
$124,704,798, 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.
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, 1998, no such restrictions have been
placed on the fund.
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
Results of October 1, 1998 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on October 1, 1998.
At the meeting, each of the nominees for Trustees was elected, as follows:
Common Shares Preferred Shares
Votes Votes
Votes for withheld Votes for withheld
Jameson Adkins Baxter 34,131,656 539,076 881 12
Hans H. Estin 34,118,876 551,856 881 12
J.A. Hill not applicable 881 12
Ronald J. Jackson 34,154,182 516,550 881 12
Paul L. Joskow 34,138,463 532,269 881 12
Elizabeth T. Kennan 34,126,422 544,310 881 12
Lawrence J. Lasser 34,119,849 550,883 881 12
John H. Mullin III 34,139,599 531,133 881 12
Robert.E Patterson not applicable 881 12
Donald S. Perkins 34,087,354 583,378 881 12
William F. Pounds 34,092,280 578,452 881 12
George Putnam 34,098,047 572,685 881 12
George Putnam, III 34,098,368 572,364 881 12
A.J.C. Smith 34,121,144 549,588 881 12
W. Thomas Stephens 34,136,644 534,088 881 12
W. Nicholas Thorndike 34,104,748 565,984 881 12
A proposal to ratify the selection of PricewaterhouseCoopers LLP as the
independent auditors of your fund was approved as follows:
Common Shares -- 33,803,674 votes for, and 230,529 votes against, with
636,529 abstentions and broker non-votes.
Preferred Shares -- 893 votes for, and 0 votes against, with 0 abstentions
and broker non-votes.
A proposal to approve an amendment to the fund's fundamental investment
restriction with respect to making loans was approved as follows:
Common Shares -- 26,412,195 votes for, and 2,192,051 votes against, with
6,066,486 abstentions and broker non-votes.
Preferred Shares -- 698 votes for, and 184 votes against, with 11
abstentions and broker non-votes.
All tabulations are rounded to nearest whole number.
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
INDEPENDENT
ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
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
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jerome J. Jacobs
Vice President
Richard P. Wyke
Vice President and Fund Manager
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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
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BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
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47854 12/98
