Putnam
Municipal
Income Fund
ANNUAL REPORT
March 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "The name of the game with this fund is balance. We're trying to
achieve balance between risk and reward, between current income and total
return, and between opportunistic investing and stable net asset value.
The key to it all is a highly disciplined, team-oriented, value-focused
investing process that emphasizes the outperformance of individual
securities in the portfolio."
-- Blake E. Anderson, manager
Putnam Municipal Income Fund
* "Based on tax-equivalent yields alone, muni funds easily outshine
most taxable bond funds."
-- Morningstar Mutual Funds, March 1997
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
25 Financial statements
36 Results of December 5, 1996 shareholder meeting
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
The Federal Reserve Board's increase in the federal funds rate just before the
end of Putnam Municipal Income Fund's fiscal year was hardly a surprise to
your fund's management team. The portfolio had already been positioned
defensively in response to the unsettled market environment that had prevailed
during much of the period.
Besides taking several defensive actions, the team, including newly appointed
Fund Manager Blake Anderson, has been seeking investments in industry sectors
likely to benefit from a strong economy. As a result, Blake believes the
portfolio is positioned not only to weather continued market volatility but
also to benefit from what, in his view, will be sustained strong demand for
municipal bonds.
Blake has been with Putnam since 1987 and also serves as director of
tax-exempt credit research. He has 10 years of investment experience. In the
following report, he reviews your fund's fiscal 1997 performance and presents
his views on prospects for the year ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
May 21, 1997
Report from the Fund Manager
Blake E. Anderson
A steady focus on credit fundamentals and cautious positioning helped Putnam
Municipal Income Fund navigate the choppy waters of the municipal bond market
during the 12 months ended March 31, 1997. The fund's total return of 5.24% at
net asset value for class A shares placed it in the top half of general
municipal debt funds tracked by Lipper Analytical Services, Inc., but slightly
lagging the 5.47% return of the Lehman Brothers Municipal Bond Index. The
fund's return for class A shares taking maximum sales charges into account was
0.19%. Complete performance details begin on page 9.
* RISING INTEREST RATES AND STRENGTHENING ECONOMY CHALLENGE BOND MARKET
The past 12 months have been a somewhat difficult period for the bond market
as a whole, with market psychology dominated by fears of higher inflation
brought on by the economy's relentless strength. As bond investors tried to
anticipate if, when, and by what amount the Federal Reserve Board would raise
short-term interest rates, prices of fixed-income investments fluctuated. The
changes were most pronounced at the short-term end of the market, where fears
of inflation drove up rates more quickly than in the longer end of the yield
curve. The big question on everyone's mind: Is this economic recovery
different from the others or will today's near-full employment and high
industrial capacity utilization lead to inflation as past recoveries have?
The Fed kept the market guessing for much of the period, meeting time and
again without adjusting monetary policy. Finally, at its March 25 session, the
board chose action over words, raising short-term interest rates by a quarter
of a percentage point. Yet despite all the bond market's concern over
inflation, yields remained range bound throughout the fund's fiscal year, as
evidenced by the 30-year Treasury bond, whose yield fluctuated between 6.75%
and 7.12% over the period.
* MUNICIPALS OUTPERFORM TAXABLE BONDS
Amid these choppy market conditions, municipal bond investments generally
outperformed their taxable counterparts. The fading prominence of last year's
flat-tax proposals explains some of this outperformance, although favorable
supply and demand trends probably played a more significant role. Over the
past year, insurance companies have become large buyers of municipal bonds,
keeping demand high. Issuers have continued to meet the demand by structuring
municipal offerings with terms that are especially attractive to the insurance
companies. These issues have consisted mainly of high-quality
intermediate-term securities. The overall result, however, has been strong
municipal market performance, especially relative to that of similar taxable
investments.
In December, this outperformance was even more pronounced as the market
experienced a significant distortion of the normal price relationship between
municipals and Treasury securities. We took advantage of the high price of
municipals to take some profits for the fund.
[GRAPHIC OMITTED: worm chart BOND RETURNS: MUNICIPALS VERSUS TREASURIES]
BOND RETURNS: MUNICIPALS VERSUS TREASURIES
[PLOT POINTS FOR CHART]
$10,000 Municipal bonds 16,989
$10,000 U.S. Treasury securities before taxes 17,523
$10,000 U.S. Treasury securities after taxes 14,380
Lehman Bros. Lehman Bros. Lehman Bros.
Municipal Bond Treasury Bond Treasury Bond
Date Index Index (pre-tax) Index (after-tax)
3/31/90 $ 10,000 $ 10,000 $ 10,000
3/31/91 10,922 11,236 10,866
3/31/92 12,013 12,455 11,677
3/31/93 13,518 14,218 12,960
3/31/94 13,831 14,597 12,969
3/31/95 14,863 15,223 13,163
3/31/96 16,108 16,819 14,167
3/31/97 16,989 17,523 14,380
Footnote reads:
Sources: Lehman Brothers Municipal Bond Index, Lehman Brothers
Treasury Bond Index. This graph compares the growth of a
hypothetical $10,000 investment in tax-free municipal bonds
with a similar investment in U.S. Treasury bonds and shows
the effective after-tax returns of the fully taxable Treasury
securities for an individual paying the maximum 39.6% federal
income tax rate. The performance is not indicative of any Putnam
fund and past performance is not indicative of future results.
* DEFENSIVE POSITIONING PAYS OFF
In anticipation of a rising rate environment, we have attempted to concentrate
the portfolio in holdings that are less sensitive to interest-rate changes. At
the same time, we have retained our focus on the call structure of individual
securities in anticipation of the year 2003, when a significant portion of the
municipal marketplace becomes callable. Primarily our strategy has been to
sell poorly structured long-term bonds and purchase premium noncallable
intermediate municipal bonds. These bonds have continued to perform well and
have helped cushion the fund's net asset value in the face of rising interest
rates.
The strengthening economy has also helped compress credit quality spreads
between various sectors of the municipal market. Lower-rated securities have
been outperforming other credits as the growing economy has bolstered the
financial standing of many of their issuers. The result has meant increased
demand for these higher-yielding investments. For some issuers, the stronger
bottom lines have led to improved credit ratings. The effect has been a
barbell shape for the portfolio, with holdings concentrated in higher-quality
holdings at one end and higher-yielding credits at the other.
The narrowing of credit quality spreads has also prompted us to upgrade
quality among the fund's higher-rated holdings, which already make up more
than 65% of fund assets. In another defensive move, we have shortened the
portfolio's duration, keeping it approximately one-half year shorter than that
of the average municipal bond fund. Duration is a measure of the price
sensitivity of a portfolio of bonds to changes in interest rates. Like
maturity, with which it is often confused, duration is measured in years. In a
rising interest-rate environment, a shorter duration helps protect the fund's
net asset value by cushioning the effect of interest-rate changes.
Within the portfolio's barbell concentration of holdings at the higher-quality
and higher-yielding ends of the municipal market, the fund's sector strategy
has remained fairly constant. Among the higher-quality holdings, general
obligation bonds from wealthy high-tax states like California and New York
remain strong performers and, in our view, should continue to benefit from
improving economic conditions and consistent levels of demand.
[GRAPHIC HORIZONTAL BAR CHART OMITTED: TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals/Health care 17.8%
Transportation 15.2%
Utilities 14.2%
Water and sewerage 3.0%
Housing 2.7%
Footnote reads:
* Based on net assets on 3/31/97. Holdings will vary over time.
Among higher-yielding holdings, industrial revenue bonds issued by
municipalities and backed by the credit of the companies using the facilities
continue to play a crucial role. Health-care investments, particularly
hospitals, remain solid performers. The rising economy has also been positive
for airline issues, whose improving credit fundamentals and high coupons have
made them popular with investors.
* DEFENSIVE STRUCTURE, FOCUS ON HIGH INCOME TO CONTINUE
While current market conditions certainly affect the fund's investment
strategy, our underlying goal is to create a portfolio that will perform well
in all markets. Rather than relying mainly on the blunt tool of duration
management -- extending or reducing portfolio duration in response to or
anticipation of interest-rate changes -- we concentrate on finding individual
municipal securities that we believe will outperform the market. To locate
these issues, we rely heavily on Putnam's extensive credit research
capabilities that enable us to assess credit fundamentals and security
structure while optimizing the risk/reward characteristics of each security
and the portfolio as a whole. This relative-value investment method is at once
top/down and bottom/up and is designed to stabilize the fund's net asset value
while keeping its stream of tax-exempt income high.
In the coming months, we expect to see further action by the Fed to raise
short-term interest rates. If the Fed's strategy achieves its intended effect,
the economy will slow, and the normal price relationship between Treasury
securities and municipal issues will re-establish itself. In the meantime, we
plan to hold steady in our defensive positioning and in our emphasis on high
current income in order to protect the fund's net asset value against a backup
in interest rates. Once the interest-rate cycle peaks, we will look for
opportunities to lock in the higher rates through the purchase of longer-term
securities. Until that time, however, we intend to remain focused on
increasing the portfolio's call protection while optimizing the credit quality
and structure of each portfolio holding.
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 3/31/97, 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 Municipal Income Fund is designed for investors seeking
as high a level of current income exempt from federal income tax as is
consistent with preservation of capital.
TOTAL RETURN FOR PERIODS ENDED 3/31/97
Class A Class B Class M
(inception date) (5/22/89) (1/4/93) (12/1/94)
NAV POP NAV CDSC NAV POP
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1 year 5.24% 0.19% 4.61% -0.35% 4.97% 1.55%
- ------------------------------------------------------------------------------
5 years 40.97 34.29 -- -- -- --
Annual average 7.11 6.07 -- -- -- --
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Life of class 80.23 71.73 24.64 22.66 22.84 18.79
Annual average 7.78 7.12 5.53 4.94 9.23 7.67
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/97
Lehman Bros.
Municipal Consumer
Bond Index Price Index
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1 year 5.47% 2.76%
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5 years 41.42 14.86
Annual average 7.18 2.81
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Life of class A 79.73 29.24
Annual average 7.77 3.32
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Life of class B 30.35 12.76
Annual average 6.44 2.87
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Life of class M 25.08 6.88
Annual average 10.07 2.90
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Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions or,
for class A shares, distribution fees prior to implementation of the class
A distribution plan in 1992. Investment returns and principal value will
fluctuate so that an investor's shares, when sold, may be worth more or
less than their original cost. POP assumes 4.75% maximum sales charge for
class A shares and 3.25% for class M shares. CDSC for class B shares
assumes the applicable sales charge, with the maximum being 5%.
Performance data prior to 5/11/92 do not reflect operation under the
fund's current investment objective and policies.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 5/22/89
$9,525 Fund's class A shares at POP $17,173
$10,000 Lehman Bros. Municipal Bond Index $17,973
$10,000 Consumer Price Index $12,924
(plot points for 10-year total return mountain chart)
Lehman Bros.
Fund's class Municipal Consumer
Date A shares at POP Bond Index Price Index
5/22/89 9,525 10,000 10,000
3/31/90 10,140 10,579 10,396
3/31/91 10,866 11,555 10,905
3/31/92 12,182 12,709 11,252
3/31/93 13,849 14,300 11,599
3/31/94 14,140 14,632 11,890
3/31/95 15,066 15,723 12,229
3/31/96 16,318 17,041 12,577
3/31/97 17,173 17,973 12,924
Footnote reads:
Past performance is no assurance of future results.
A $10,000 investment in the fund's class B shares at
inception on 1/4/93 would have been valued at $12,464
on 3/31/97 ($12,266 with a redemption at the end of
the period). A $10,000 investment in the fund's class
M shares at inception on 12/1/94 would have been
valued at $12,284 at net asset value ($11,879 at public
offering price on 3/31/97).
PRICE AND DISTRIBUTION INFORMATION
12 months ended 3/31/97
Class A Class B Class M
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Distributions (number) 12 12 12
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Income $0.515381 $0.461425 $0.492073
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Total $0.515381 $0.461425 $0.492073
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Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
3/31/96 $8.93 $9.38 $8.92 $8.92 $9.22
- ------------------------------------------------------------------------------
3/31/97 8.87 9.31 8.86 8.86 9.16
- ------------------------------------------------------------------------------
Current return: (end of period) NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
Current dividend rate1 5.70% 5.43% 5.09% 5.45% 5.27%
- ------------------------------------------------------------------------------
Taxable equivalent2 9.44 8.99 8.43 9.02 8.73
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Current 30-day SEC yield3 5.63 5.36 4.99 5.38 5.25
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Taxable equivalent2 9.32 8.87 8.26 8.91 8.69
- ------------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2Assumes maximum 39.6% maximum federal income tax rate. Results for
investors subject to lower tax rates would not be as advantageous. 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.
3Based only on investment income, calculated using SEC guidelines.
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.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 4.75% sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
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.
Lehman Brothers Treasury Bond Index* is an unmanaged list of long-term
Treasury bonds.
Consumer Price Index (CPI)* is a commonly used measure of inflation; it
does not represent an investment return.
* The indexes do not take into account brokerage commissions or other
costs, may include bonds different from those in the fund, and may pose
different risks than the fund. It is not possible to invest directly in an
index.
Report of independent accountants
For the fiscal year ended March 31, 1997
To the Trustees and Shareholders of
Putnam Municipal Income Fund
We have audited the accompanying statement of assets and liabilities of Putnam
Municipal Income Fund, including the portfolio of investments owned, as of
March 31, 1997, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of March 31, 1997, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Putnam Municipal Income Fund as of March 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each
of the periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
May 15, 1997
Portfolio of investments owned
March 31, 1997
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
BAN -- Bond Anticipation note
BIGI -- Bond Investors Guaranty Insurance
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (98.5%) *
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C>
Arizona (3.8%)
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$ 6,000,000 Apache Cnty., VRDN (Tucson Electric), 3 1/2s, 5/15/20 VMIG1 $ 6,000,000
935,000 AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds (St. Luke's
Hlth. Syst.), 7 1/4s, 11/1/14 AAA 1,046,031
4,505,000 Cochise Cnty., Indl. Dev. Rev. Bonds (Sierra Vista
Cmnty. Hosp.), Ser. A, 6 3/4s, 12/1/26 Baa/P 4,465,581
7,000,000 Gila Cnty., Indl. Dev. Auth. Poll. Control Rev. Bonds
(Asarco Inc.), Ser. 85, 8.9s, 7/1/06 Baa 7,277,200
10,535,000 Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac. VRDN
(Samaritan Hlth. Svc. Hosp.-B2), MBIA, 3.85s,
12/1/08 VMIG1 10,535,000
7,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/8s, 7/1/11 Aaa 8,198,750
2,000,000 Mohave Cnty., Indl. Dev. Auth. Hosp. Syst. Rev. Bonds
(Env. Inc. & Phoenix Hosp. & Med. Ctr.), 7s, 7/1/16 Aaa 2,260,000
4,950,000 Payson, Indl. Dev. Auth. Hosp. Rev. Bonds (Payson
Regl. Med. Ctr. Inc.), 7.7s, 10/1/23 B/P 4,479,750
4,000,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds (Casa Grande
Regl. Med. Ctr.), Ser. A, 8 1/8s, 12/1/22 BB/P 4,370,000
--------------
48,632,312
Arkansas (0.1%)
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12,550,000 AR Hsg. Dev. Agcy. Res. Single Fam. Mtge. Rev. Bonds,
Ser. 84A, zero %, 7/1/15 Aa 1,804,063
California (14.4%)
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5,000,000 Anaheim, Pub. Fin. Auth. Lease Rev. Bonds (Public
Improvements), Ser. A, FSA, 6s, 9/1/24 Aaa 5,168,750
CA State G.O. Bonds
18,465,000 6.6s, 2/1/09 Aa 20,542,311
11,300,000 6 1/2s, 2/1/07 Aa 12,528,875
Corona, COP
2,500,000 (Vista Hosp. Syst.), Ser. B, 9 1/2s, 7/1/20 B/P 2,631,250
5,800,000 (Hosp. System Inc.), Ser. C, 8 3/8s, 7/1/11 B/P 6,162,500
33,435,000 Los Angeles, Convention & Exhib. Ctr. Rev. Bonds,
Ser. A, MBIA, 5 1/8s, 8/15/21 Aaa 29,715,347
2,400,000 Los Angeles, Regl. Arpt. Impt. Corp. Lease Rev. Bonds
(United Airlines, Inc.), 6 7/8s, 11/15/12 Baa 2,514,000
5,000,000 Metropolitan Wtr. Dist. Rev. Bonds, Ser. C, 5s, 7/1/27 Aa 4,362,500
3,615,000 Monrovia, Redev. Agcy. Tax Alloc. Rev. Bonds
(Central Redevelopment Project Area-1), Ser. B,
AMBAC, 6.7s, 5/1/21 Aaa 3,849,975
6,150,000 Northern CA Pwr. Agcy. Multi. Cap. Fac. IFB, MBIA,
9.233s, 8/15/17 Aaa 6,826,500
13,000,000 Orange Cnty., COP, Ser. A, MBIA, 6s, 7/1/26 Aaa 12,902,500
2,000,000 Orange Cnty., Rev. Bonds, Ser. A, MBIA, 6s, 6/1/10 Aaa 2,092,500
Orange Cnty., Local Trans. Auth. IFB Bonds
11,200,000 6.2s, 2/14/11 Aa 11,606,000
4,000,000 AMBAC, 6.2s, 2/14/11 Aaa 4,185,000
5,000,000 San Francisco, Bldg. Auth. Lease Rev. Bonds
(San Francisco Civic Ctr. Complex), Ser. A,
AMBAC, 5 1/4s, 12/1/16 Aaa 4,681,250
San Joaquin Hills, Trans. Corridor Agcy. Rev. Bonds
10,710,000 5s, 1/1/33 BB/P 8,875,913
10,000,000 (Toll Rd.), Sr. Lien, zero %, 1/1/10 BB/P 8,237,500
8,000,000 Southern CA Pub. Pwr. Auth. Rev. Bonds (Palo Verde),
Ser. A, AMBAC, 6s, 7/1/07 Aaa 8,500,000
7,250,000 Southern CA Pwr. Auth. Rev. Bonds, Ser. A, MBIA,
5s, 1/1/20 Aaa 6,398,125
11,840,000 Vallejo, COP (Marine World Foundation), 7s, 2/1/17 BB/P 11,914,000
Valley Hlth. Syst. Hosp. Rev. Bonds
6,000,000 (Rfdg. & Impt. Project), 6 1/2s, 5/15/25 BBB 6,045,000
1,000,000 (Impt. Project), Ser. A, 6 1/8s, 5/15/05 BBB 1,011,250
4,300,000 Walnut Creek, COP (John Muir Med. Ctr.), MBIA,
5s, 2/15/16 Aaa 3,864,625
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184,615,671
Colorado (4.2%)
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6,000,000 Arapahoe Cnty. Cap. Impt. Trust Fund Hwy.
Rev. Bonds, Ser. E-470, 7s, 8/31/26 Baa 6,375,000
10,000,000 CO Edl. Fac. Auth. Rev. Bonds (CO. Ocean
Journey, Inc.), 8 3/8s, 12/1/26 B/P 9,837,500
Denver, City & Cnty. Arpt. Rev. Bonds
6,000,000 Ser. A, 8 3/4s, 11/15/23 Baa 7,012,500
2,000,000 Ser. A, 8s, 11/15/25 Baa 2,232,500
5,000,000 Ser. D, 7 3/4s, 11/15/13 Baa 5,987,500
4,000,000 Ser. A, 7 1/2s, 11/15/23 Baa 4,380,000
1,500,000 7 1/4s, 11/15/25 AAA 1,695,000
12,000,000 Ser. B, 7 1/4s, 11/15/23 Baa 12,930,000
3,000,000 Larimer Cnty., School Dist. No. 1 Rev. Bonds
(Poudre Impt.), 7s, 12/15/16 A 3,506,250
--------------
53,956,250
Connecticut (0.5%)
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CT State Dev. Auth. 1st Mtge. Rev. Bonds
2,320,000 (East Hill Woods), 8 3/4s, 7/1/19 (In default) + Caa/P 1,392,000
1,375,000 (Gladeview Hlth. Care), 9 3/4s, 12/15/16 Ba/P 1,502,188
2,500,000 CT State Dev. Auth. Hlth. Care Rev. Bonds
(Alzheimers Resource Ctr.), Ser. A, 10s, 8/15/21 Aaa/P 3,059,375
--------------
5,953,563
District of Columbia (2.9%)
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27,000,000 DC G.O. Bonds, Ser. A, 6 3/8s, 6/1/26 Baa 27,101,250
DC Rfdg. Rev. Bonds (American Geophysical Union)
4,200,000 5 7/8s, 9/1/23 BBB 3,743,250
3,350,000 5 3/4s, 9/1/13 BBB 3,031,750
3,310,000 DC Redev. Land Agcy. Rev. Bonds (Wash. D. C.
Sports Arena), 5 5/8s, 11/1/10 A/P 3,169,325
--------------
37,045,575
Florida (5.7%)
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9,630,000 Broward Cnty., Resource Recvy. Rev. Bonds
(SES Broward Cnty. LP South), 7.95s, 12/1/08 A 10,472,625
Dade Cnty., Rev. Bonds (School Dist.)
3,170,000 MBIA, 6 1/2s, 2/15/06 Aaa 3,498,888
5,885,000 MBIA, 6 1/2s, 2/15/05 Aaa 6,466,144
22,900,000 Hernando Cnty., Indl. Dev. Rev. Bonds (FL Crushed
Stone Co.), 8 1/2s, 12/1/14 B/P 25,390,375
1,700,000 Largo, Sun Coast Hlth. Syst. Rev. Bonds, 6.2s, 3/1/13 BBB 1,634,125
2,000,000 Martin Cnty., Poll. Control VRDN (FL Pwr. Co.),
3.8s, 9/1/24 VMIG1 2,000,000
4,250,000 Ocean Hwy. & Port. Auth. Poll. Control Rev. Bonds
(Solid Waste-Jefferson), 6 1/2s, 11/1/04 B/P 4,308,438
4,750,000 Orange Cnty., Hlth. Fac. Auth. IFB, 10.164s, 10/1/14
(acquired 4/19/95, cost $6,261,830) [DBL. DAGGER] B/P 6,091,875
10,000 Orange Cnty., Hlth. Fac. Auth. Rev. Bonds
(Pooled Hosp. Loan), Ser. B, BIGI, 7 7/8s, 12/1/25 Aaa 10,255
4,000,000 Orange Cnty., Hsg. Fin. Auth. VRDN (Sundown
Assoc. II), Ser. B, 3.6s, 6/1/04 A 4,000,000
6,485,000 Palm Beach Cnty., Student Hsg. Rev. Bonds
(Palm Beach Cmnty. College), Ser. A, 8 1/2s, 3/1/23 B/P 5,188,000
950,000 Palm Beach Cnty., Hlth. Fac. Auth. Rev. Bonds
(JFK Med. Ctr. Inc.), 8 7/8s, 12/1/18 Aaa/P 1,036,688
Sanford Arpt. Auth. Indl. Dev. Rev. Bonds
(Terminals Inc.), Ser. A
2,000,000 7 1/2s, 5/1/10 Ba/P 2,035,000
1,000,000 7.3s, 5/1/04 Ba/P 1,026,250
--------------
73,158,663
Georgia (3.9%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 Atlanta, Metro. Rapid Tran. Auth. Sales Tax Rev. Bonds,
Ser. O, 6.55s, 7/1/20 AA 5,418,750
4,200,000 Atlanta, Special Purpose Fac. Rev. Bonds (Delta Air
Lines, Inc.), Ser. B, 7.9s, 12/1/18 BBB 4,504,500
De Kalb Cnty., Muni. Hsg. Auth. Rev. Bonds
(Briarcliff Park Apts.)
1,500,000 Ser. B, 10s, 4/1/17 B/P 1,558,125
3,700,000 Ser. A, 7 1/2s, 4/1/17 Baa/P 3,824,875
20,510,000 GA State G.O. Bonds, Ser. B, 6 1/4s, 4/1/08 Aaa 22,355,900
2,000,000 Gwinnett Cnty., Indl. Dev. Auth. Rev. Bonds
(Kawneer Co. Inc.), Ser. 84, 9 1/2s, 6/1/15 Baa/P 2,175,000
9,880,000 Rockdale Cnty., Dev. Auth. Solid Waste Disp.
Rev. Bonds (Visay Paper Inc.), 7.4s, 1/1/16 Ba/P 10,262,850
--------------
50,100,000
Hawaii (0.4%)
- ------------------------------------------------------------------------------------------------------------
4,355,000 HI State G.O. Bonds, Ser. CN, FGIC, 6 1/4s, 3/1/08 Aaa 4,670,738
Illinois (5.6%)
- ------------------------------------------------------------------------------------------------------------
Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
3,704,000 (United Air Lines, Inc.), Ser. B, 8.95s, 5/1/18 Baa 4,153,110
1,795,000 (United Air Lines, Inc.), Ser. 84A, 8.85s, 5/1/18 Baa 2,005,913
7,105,000 (United Air Lines, Inc.), Ser. 84B, 8.85s, 5/1/18 Baa 7,939,838
5,300,000 (American Airlines, Inc.), 8.2s, 12/1/24 Baa 6,141,375
2,500,000 (American Airlines, Inc.), Ser. C, 3.85s, 12/1/17 Aa 2,500,000
10,150,000 Cook Cnty. Cmnty. College Dist. No. 508
Rev. Bonds, Ser. C, MBIA, 7.7s, 12/1/07 Aaa 12,230,750
3,000,000 Glenview BAN, 5.4s, 12/1/97 A-1 3,019,560
7,540,000 Hinsdale, Hlth. Fac. Rev. Bonds (Glen Oaks
Medical Ctr. Inc.), 6.95s, 11/15/13 Baa 8,180,900
2,500,000 IL Dev. Fin. Auth. Retirement Hsg. Rev. Bonds
(Regency Park-Lincolnwood), Ser. A, 10 1/4s,
4/15/19 (In default) + D/P 1,800,000
IL Dev. Fin. Auth. Rev. Bonds
1,975,000 (Cmnty. Rehab. Providers Fac.), 8 3/4s, 7/1/11 Ba/P 2,098,438
1,400,000 (Cmnty. Rehab. Providers Fac.), 8 1/4s, 8/1/12 Ba/P 1,452,500
4,955,000 (Cmnty. Rehab. Providers Fac.), Ser. A, 7 7/8s,
7/1/20 Ba/P 4,843,513
1,925,000 (Mercy Hsg. Corp.), 7s, 8/1/24 Baa 1,994,781
IL Edl. Fac. Auth. Rev. Bonds
2,005,000 (Steppenwolf Theatre), 9.65s, 7/1/19 Ba/P 2,091,395
6,000,000 (Northwestern U.), 5 1/2s, 12/1/13 Aa 5,790,000
5,000,000 IL Hlth. Fac. Auth. Rev. Bonds (Hinsdale Hosp.),
Ser. A, 6.95s, 11/15/13 Baa 5,425,000
--------------
71,667,073
Indiana (1.7%)
- ------------------------------------------------------------------------------------------------------------
1,889,900 Hammond, Indl. Port Auth. COP, 9.65s, 6/1/14 Ba/P 2,036,368
19,000,000 Indianapolis, Indl. Arpt. Auth. Special Fac. Rev. Bonds
(Federal Express Corp.), 7.1s, 1/15/17 BBB 20,140,000
--------------
22,176,368
Iowa (0.6%)
- ------------------------------------------------------------------------------------------------------------
6,500,000 IA Fin. Auth. Hlth. Care Fac. Rev. Bonds
(Care Initiatives), 9 1/4s, 7/1/25 Ba/P 7,921,875
Louisiana (4.1%)
- ------------------------------------------------------------------------------------------------------------
1,900,000 Ascension Parish, Poll. Control VRDN (Shell Oil Co.),
3.85s, 9/1/23 VMIG1 1,900,000
4,000,000 Beauregard, Parish Rev. Bonds (Boise Cascade Corp.),
7 3/4s, 6/1/21 Baa 4,330,000
4,500,000 Hodge, Combined Util. Rev. Bonds
(Stone Container Corp.), 9s, 3/1/10 B/P 4,899,375
1,405,991 LA Pub. Fac. Auth. 1st Mtge. Rev. Bonds
(Emily Morten Foundation), 10 1/4s, 5/1/19 B/P 1,492,108
5,000,000 Lake Charles, Harbor & Term. Dist. Port Fac.
Rev. Bonds (Trunkline LNG Co.), 7 3/4s, 8/15/22 Baa 5,656,250
2,000,000 Port of New Orleans, Indl. Dev. Rev. Bonds
(Continental Grain Co.), 7 1/2s, 7/1/13 BB 2,145,000
St. Charles Parish, Poll. Control Rev. Bonds
8,005,000 (LA Pwr. & Lt.), 8 1/4s, 6/1/14 Baa 8,635,394
6,995,000 (Union Carbide), 7.35s, 11/1/22 Baa 7,484,650
W. Feliciana Parish, Poll. Control Rev. Bonds
(Gulf States Util. Co.)
3,000,000 9s, 5/1/15 Ba/P 3,303,750
4,000,000 7.7s, 12/1/14 BB 4,360,000
8,000,000 Ser. C, 7s, 11/1/15 BB 8,330,000
--------------
52,536,527
Maryland (0.1%)
- ------------------------------------------------------------------------------------------------------------
1,650,000 Denton, 1st. Mtge. Rev. Bonds (Shore Nursing
Rehab. Ctr.), 9s, 4/1/20 B/P 1,637,625
Massachusetts (5.8%)
- ------------------------------------------------------------------------------------------------------------
2,420,000 Boston, Nursing Home Rev. Bonds (St. Joseph
Nursing Care Ctr. Inc.), 10s, 1/1/20 Ba/P 2,640,825
5,000,000 MA Muni. Whsl. Elec. Co. Pwr. Supply Syst. IFB,
AMBAC, 6.97s, 7/1/18 Aaa 4,350,000
15,460,000 MA State G.O. Bonds, Ser. A, 6s, 11/1/11 A 16,329,625
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,970,000 (Norwood Hosp.), Ser. E, 8s, 7/1/05 Ba 3,096,225
2,860,000 (MA Eye & Ear Infirmary), Ser. A, 7.3s, 7/1/04 Baa 2,906,475
3,855,000 (Rev. Cooley Dickinson Hosp.), Ser. A, 7 1/8s,
11/15/18 Aaa 4,356,150
5,000,000 MA State Hlth. & Edl. Fac. Auth. VRDN, MBIA
(Capital Assets Program), Ser. D, 3.70s, 1/1/35 A-1 5,000,000
MA State Indl. Fin. Agcy. 1st Mtge. Rev. Bonds
(Pioneer Valley Living Ctr.)
1,540,000 7s, 10/1/20 B/P 1,540,185
1,019,314 zero %, 10/1/20 B/P 1,274
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA)
3,000,000 Ser. B, 9 1/4s, 7/1/15 Ba/P 3,397,500
13,000,000 Ser. A, 9s, 7/1/15 Ba/P 14,690,000
MA State Indl. Fin. Agcy. Rev. Bonds
(Atlanticare Med. Ctr.)
3,900,000 Ser. A, 10 1/8s, 11/1/14 B/P 3,778,125
1,000,000 Ser. B, 10 1/8s, 11/1/14 B/P 968,750
4,250,000 MA State Indl. Fin. Agcy. Solid Waste Disp. Rev. Bonds
(Molten Metal Technology), 8 1/4s, 8/1/14 B/P 4,515,625
2,360,000 MA State Indl. Fin. Agcy. Tunnel Rev. Bonds
(Mass Tpk.,), 9s, 10/1/20 Aaa 2,716,950
3,000,000 MA State Wtr. Resources Auth. Rev. Bonds, Ser. A,
6 1/2s, 7/15/21 Aaa 3,277,500
--------------
73,565,209
Michigan (5.9%)
- ------------------------------------------------------------------------------------------------------------
337,000 Ann Arbor, Econ. Dev. Corp. Ltd. Oblig. Rev. Bonds
(Glacier Hills Inc.), 8 3/8s, 1/15/19 B/P 344,583
1,550,000 Detroit, Econ. Dev. Corp. Ltd. Oblig. Rev. Bonds
(MI Hlth. Care Corp.), 9.1s, 12/1/09 (In default) + D 302,250
Detroit, G.O. Bonds
2,500,000 Ser. A, 6.7s, 4/1/10 BBB 2,671,875
3,000,000 Ser. B, AMBAC, 6 1/4s, 4/1/10 Aaa 3,157,500
4,000,000 Ser. B, AMBAC, 6 1/4s, 4/1/08 Aaa 4,265,000
4,375,000 Detroit, Hosp. Fac. Fin. Auth. Rev. Bonds (MI Hlth.
Care Corp.), 10s, 12/1/20 (In default) + D 853,125
5,705,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment Rev. Bonds
(Chrysler Corp.), Ser. A, 9 1/2s, 5/1/21 Baa/P 6,931,575
4,055,000 Detroit, Wtr. Supply Syst. Rev. Bonds, Ser. B, MBIA,
5.4s, 7/1/11 Aaa 4,014,450
MI State Hosp. Fin. Auth. Rev. Bonds
670,000 (Garden City Hosp.), 8 1/2s, 9/1/17 Aaa 777,200
1,330,000 (Garden City Hosp.), 8 1/2s, 9/1/17 Ba 1,431,413
7,795,000 (Detroit-Macomb Hosp. Corp.), Ser. A, 7.4s, 6/1/13 BB 7,814,488
4,500,000 MI State Hsg. Dev. Auth. Rental Hsg. Rev. Bonds,
Ser. A, FSA, 7.55s, 4/1/23 Aaa 4,815,000
10,000,000 MI State Stragetic Fund Solid Waste Disp. Rev. Bonds
(Genesee Pwr. Station), 7 1/2s, 1/1/21 Ba/P 10,162,500
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
7,700,000 (Mercy Svcs. for Aging), 9.4s, 5/15/20 Baa/P 8,566,250
10,500,000 (Blue Wtr. Fiber), 8s, 1/1/12 (In default) + D/P 7,612,500
11,000,000 Midland Cnty., Econ. Dev. Corp. Poll. Control
Rev. Bonds, Ser. B, 9 1/2s, 7/23/09 B/P 11,962,500
--------------
75,682,209
Minnesota (1.3%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 Intl. Falls, Env. Fac. Rev. Bonds (Boise Cascade Corp.),
7.2s, 10/1/24 Baa 5,387,500
800,000 New Brighton, Indl. Dev. Auth. Rev. Bonds
(Unicare Inc.), 3.75s, 12/1/14 A 800,000
600,000 Robbinsdale, Indl. Dev. VRDN (Unicare Homes Inc.),
3 3/4s, 10/1/14 A 600,000
5,000,000 St. Paul, Hsg. & Hosp. Redev. Auth. Rev. Bonds
(Healtheast), Ser. A, 6 5/8s, 11/1/17 Baa 5,100,000
5,000,000 Western MN Muni. Pwr. Agcy. Rev. Bonds, Ser. A,
AMBAC, 6 1/4s, 1/1/05 Aaa 5,362,500
--------------
17,250,000
Mississippi (1.1%)
- ------------------------------------------------------------------------------------------------------------
Claiborne Cnty., Poll. Control Rev. Bonds
(Middle South Energy, Inc.)
2,400,000 Ser. C, 9 7/8s, 12/1/14 Ba 2,613,000
10,455,000 Ser. A, 9 1/2s, 12/1/13 Ba/P 11,448,225
--------------
14,061,225
Missouri (1.2%)
- ------------------------------------------------------------------------------------------------------------
8,705,000 MO State Environmental Impt. & Energy Res. Auth.
Poll. Control Rev. Bonds, 5 1/4s, 12/1/08 AA 8,596,188
6,775,000 MO State Hlth. & Edl. Fac. Auth. Rev. Bonds
(BJC Hlth. Syst.), Ser. A, 6 1/2s, 5/15/20 Aa 7,325,469
--------------
15,921,657
Nebraska (0.4%)
- ------------------------------------------------------------------------------------------------------------
NE Investment Fin. Auth. Single Fam. Mtge. IFB
3,700,000 Ser. 2, GNMA Coll., 11.591s, 9/10/30 Aaa 4,065,375
1,100,000 Ser. B, GNMA Coll., 11.371s, 3/15/22 Aaa 1,196,250
--------------
5,261,625
Nevada (0.7%)
- ------------------------------------------------------------------------------------------------------------
8,500,000 Clark Cnty., Indl. Dev. Rev. Bonds (Southwest
Gas Corp.), Ser. A, 7.3s, 9/1/27 Baa 8,956,875
New Hampshire (1.0%)
- ------------------------------------------------------------------------------------------------------------
NH Higher Edl. & Hlth. Fac. Auth. Rev. Bonds
2,865,000 (Havenwood-Heritage Heights), 9 3/4s, 12/1/19 Aaa 3,301,913
4,000,000 (1st Mtge. Rivermead Peterborough), 8 1/2s, 7/1/24 B 4,345,000
1,955,000 (Riverwoods 1st. Mtge. at Exeter), 8s, 3/1/01 B/P 2,002,682
2,910,000 (Havenwood-Heritage Heights), 7.1s, 1/1/06 BB/P 2,888,175
--------------
12,537,770
New Jersey (3.1%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 NJ Econ. Dev. Auth. Indl. Dev. Rev. Bonds
(Newrak Arpt. Marriot Hotel), 7s, 10/1/14 B/P 5,181,250
3,000,000 NJ Econ. Dev. Auth. Rev. Bonds, 7s, 2/1/10 Ba/P 2,973,750
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
3,000,000 (St. Elizabeth Hosp.), Ser. B, 8 1/4s, 7/1/20 Aaa 3,371,250
6,550,000 (Kimball Med. Ctr.), Ser. C, 8s, 7/1/13 BBB 6,983,938
6,000,000 (Gen. Hosp. Ctr.-Passaic Inc.), FSA, 6 3/4s, 7/1/19 Aaa 6,495,000
4,000,000 NJ State Hsg. & Mtge. Fin. Agcy. IFB, Ser. I, 8.531s,
11/1/07 (acquired 2/11/93, cost $4,416,240) [DBL. DAGGER] A 4,220,000
9,000,000 NJ State Tpk. Auth. Rev. Bonds, Ser. C, MBIA, 6 1/2s,
1/1/16 Aaa 9,877,500
--------------
39,102,688
New Mexico (1.0%)
- ------------------------------------------------------------------------------------------------------------
12,400,000 Farmington, Poll. Control Auth. VRDN (AZ Pub.
Svcs. Co.), 3.85s, 5/1/24 VMIG1 12,400,000
New York (5.5%)
- ------------------------------------------------------------------------------------------------------------
2,500,000 Metropolitan Trans. Auth. Svcs. Contract Fac.
Rev. Bonds (Commuter Fac.), Ser. O, 5 1/2s, 7/1/17 Baa 2,343,750
NY City, G.O. Bonds
2,760,000 Ser. F, 8 1/4s, 11/15/16 Aaa 3,184,350
5,000,000 Ser. H, 6s, 8/1/10 Baa 4,956,250
1,800,000 NY City, Hsg. Dev. Corp. Special Obligation VRDN
(East 96th St. Project), Ser. A, 3.3s, 8/1/15 VMIG1 1,800,000
3,000,000 NY City, Indl. Dev. Agcy. (Visy Paper Inc.), 7.95s,
1/1/28 Ba/P 3,187,500
10,000,000 NY City, Muni. Assistance Corp. Rev. Bonds, Ser. G,
6s, 7/1/07 Aa 10,650,000
5,000,000 NY City, Muni. Wtr. & Swr. Fin. Auth. IFB, MBIA,
7.625s, 6/15/19 Aaa 4,675,000
4,000,000 NY City, Muni. Wtr. & Swr. Fin. Auth. VRDN, Ser. A,
FGIC, 3.7s, 6/15/25 Aaa 4,000,000
4,000,000 NY City, VRDN, Ser. D, FGIC, 3.55s, 2/1/21 Aaa 4,000,000
1,800,000 NY State Local Govt. Assistance Corp. Rev. Bonds,
Ser. D, 7s, 4/1/18 Aaa 2,000,250
11,125,000 NY State Med. Care Fac. Fin. Agcy. Rev. Bonds, Ser. A,
AMBAC, 6 1/2s, 8/15/29 Aaa 11,806,406
NY State Urban Dev. Corp. Rev. Bonds
3,000,000 (Correctional Cap. Fac.), FSA, 6 1/2s, 1/1/10 Aaa 3,322,500
4,335,000 (Correctional Cap. Fac.), Ser. 6, 5 1/4s, 1/1/12 Baa 4,020,713
7,000,000 Port Auth. NY & NJ Rev. Bonds (Delta Airlines, Inc.),
Ser. 1R, 6.95s, 6/1/08 Baa 7,490,000
2,500,000 Suffolk Cnty., Indl. Dev. Agy. VRDN
(Target Rock Corp.), 3 1/4s, 2/1/07 P-1 2,500,000
--------------
69,936,719
North Carolina (1.9%)
- ------------------------------------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Serv. IFB
3,000,000 FGIC, 8.272s, 1/1/25 (acquired 3/3/93
cost $3,116,820) [DBL. DAGGER] Aaa 3,127,500
6,000,000 (No 1 Catawba Elec.), MBIA, 7.17s, 1/1/20 Aaa 5,355,000
5,250,000 AMBAC, 6s, 1/1/18 Aaa 5,361,563
10,000,000 NC Eastern Muni. Pwr. Syst. Rev. Bonds, MBIA, 6s,
1/1/22 AAA 10,437,500
--------------
24,281,563
Ohio (0.7%)
- ------------------------------------------------------------------------------------------------------------
4,500,000 Dayton, Special Fac. Rev. Bonds (Emery Air
Freight Corp.), Ser. A, 12 1/2s, 10/1/09 Ba 5,028,750
1,180,000 OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds,
Ser. B, GNMA Coll., 8 1/4s, 12/15/19 Aaa 1,228,675
3,000,000 OH Hsg. Fin. Agcy. Rev. Bonds, GNMA Coll., 5.85s,
9/1/16 AAA 2,992,500
--------------
9,249,925
Oklahoma (0.4%)
- ------------------------------------------------------------------------------------------------------------
4,505,000 Tulsa Muni. Arpt. Rev. Bonds (American Airlines, Inc.),
7 3/8s, 12/1/20 Baa 4,769,669
Oregon (0.9%)
- ------------------------------------------------------------------------------------------------------------
Washington Cnty., G.O. Bonds (Criminal Justice Fac.)
5,870,000 6s, 12/1/11 Aa 6,075,450
5,535,000 6s, 12/1/10 Aa 5,763,319
--------------
11,838,769
Pennsylvania (5.4%)
- ------------------------------------------------------------------------------------------------------------
1,500,000 Allegheny Cnty., Hosp. VRDN (Allegheny
Gen. Hosp.), Ser. B, 3.45s, 9/1/20 VMIG1 1,500,000
4,140,000 Dauphin Cnty., Gen. Auth. Hosp. Rev. Bonds
(Northwest Med. Ctr.), 8 5/8s, 10/15/13 Baa 4,740,300
1,180,000 Doylestown, Hosp. Auth. Rev. Bonds (Doylestown
Hosp. Pine Run), Ser. A, 7.2s, 7/1/23 Baa/P 1,215,400
3,000,000 Erie, Higher Ed. Bldg. Auth. College Rev. Bonds
(Mercyhurst College), Ser. A, 5 3/4s, 3/15/13 BBB 2,745,000
2,855,000 Greene Cnty., Hosp. Auth. Rev. Bonds (Greene Cnty.
Memorial Hosp.), 6 1/2s, 1/1/02 Baa/P 2,861,195
1,500,000 Lehigh Cnty., Indl. Dev. Auth. Poll. Control IFB, MBIA
(Pennsylvania Pwr. & Light Co.), 9.397s, 9/1/29
(acquired 6/20/95, cost $1,655,190) [DBL. DAGGER] Aaa 1,597,500
9,000,000 McKeesport, Hosp. Auth. Rev. Bonds
(McKeesport Hosp.), 6 1/4s, 7/1/03 Baa 9,213,750
Montgomery Cnty., Higher Ed. & Hlth. Auth. Hosp.
Rev. Bonds (UTD Hosp.), Ser. B
3,500,000 8 3/8s, 11/1/11 Aaa 3,876,250
2,230,000 7 1/2s, 11/1/12 Ba 2,386,100
4,000,000 PA State COP, Ser. A, AMBAC, 5s, 7/1/15 Aaa 3,620,000
13,000,000 PA State Econ. Dev. Fin. Auth. Recycling Rev. Bonds
(Ponderosa Fibres), Ser. A, 9 1/4s, 1/1/22 B/P 11,618,750
PA State Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds
4,000,000 (Colver), Ser. E, 8.05s, 12/1/15 BBB 4,225,000
2,000,000 (Colver), Ser. D, 7.15s, 12/1/18 BBB 2,085,000
2,000,000 PA State Higher Ed. Assistance Agcy. IFB, Ser. B, MBIA,
10.941s, 3/1/20 (Graduate Hlth. Syst. Oblig.) Aaa 2,235,000
3,000,000 Philadelphia Gas Works Rev. Bonds, Ser. 13, 7.7s,
6/15/21 Aaa 3,378,750
6,000,000 Philadelphia Gas Works IFB, FSA, 6.039s, 8/1/21
(acquired 1/24/94, cost $5,621,520) [DBL. DAGGER] Aaa 4,935,000
3,250,000 Philadelphia, Wtr & Wastewater Rev. Bonds, FGIC,
11.02s, 6/15/12 Aaa 3,132,188
1,800,000 Washington Cnty., Indl. Dev. Auth. 1st Mtge. Rev.
Bonds (AHF/Central States Inc.), 10 1/4s, 11/1/19 B/P 1,793,250
Washington Cnty., Lease Auth. VRDN (Eye & Ear)
1,100,000 Ser. B-1, Subser. C, 3 1/2s, 12/15/18 VMIG1 1,100,000
1,400,000 Ser. B-1, Subser. D, 3 1/2s, 12/15/18 VMIG1 1,400,000
--------------
69,658,433
Puerto Rico (2.3%)
- ------------------------------------------------------------------------------------------------------------
8,500,000 Cmnwlth. of PR, VRDN, MBIA, 8.393s, 7/1/24
(acquired 6/12/95, cost $8,912,500) [DBL. DAGGER] Aaa 8,468,125
PR Elec. Pwr. Auth. Rev. Bonds
5,935,000 Ser. S, MBIA, 7s, 7/1/06 Aaa 6,795,575
5,400,000 6 3/8s, 7/1/24 A 5,562,000
10,000,000 Ser. Z, 5 1/4s, 7/1/21 A 9,025,000
--------------
29,850,700
South Carolina (2.5%)
- ------------------------------------------------------------------------------------------------------------
8,500,000 Charleston Cnty., Indl. Dev. Rev. Bonds
(Hoover Group Inc.), 8 1/2s, 11/1/02 Ba 8,606,250
6,150,000 Florence Cnty. Indl. Dev. Auth. Rev. Bonds
(Stone Container Corp.), 7 3/8s, 2/1/07 Ba/P 6,457,500
Piedmont, Muni. Elec. Pwr. Agcy. Rev. Bonds
3,775,000 Ser. A, FGIC, 6 1/2s, 1/1/16 Aaa 4,124,188
630,000 Ser. A, Prerefunded, FGIC, 6 1/2s, 1/1/16 Aaa 703,238
8,000,000 Piedmont, Muni. Pwr. Agcy. Rev. Bonds (Elec. Rev.),
FGIC, 5s, 1/1/22 Aaa 7,080,000
5,000,000 SC Econ. Dev. Auth. Rev. Bonds (St. Francis
Hosp.-Franciscan Sisters), 7s, 7/1/15 Baa 5,243,750
--------------
32,214,926
Tennessee (1.2%)
- ------------------------------------------------------------------------------------------------------------
8,500,000 IVRC-Bristol, Mem. Hosp. VRDN, FGIC, 13.783s,
2/28/14 (acquired 6/16/95, cost $9,366,660) [DBL. DAGGER] Aaa 8,245,000
7,000,000 Knox Cnty., Hlth. Edl. & Hsg. Fac. Board Rev. Bonds
(Ft. Sanders Alliance), Ser. C, MBIA, 6 1/4s, 1/1/13 Aaa 7,411,250
--------------
15,656,250
Texas (3.5%)
- ------------------------------------------------------------------------------------------------------------
7,500,000 Dallas-Fort Worth Intl. Arpt. Fac. Impt. Corp. Rev.
Bonds (American Airlines, Inc.), 7 1/4s, 11/1/30 Baa 7,903,125
6,000,000 Houston, Arpt. Syst. Special Fac. Rev. Bonds
(Continental Airlines), Ser. B, 6 1/8s, 7/15/17 Ba 5,782,500
Houston, Wtr. & Swr. Syst. Rev. Bonds
16,730,000 Ser. C, AMBAC, 6 3/8s, 12/1/17 Aaa 17,712,888
1,070,000 Ser. C, Prerefunded, AMBAC, 6 3/8s, 12/1/17 Aaa 1,158,275
1,000,000 Lubbock, Hlth. Fac.VRDN (Charter Plains Hosp.),
Charter Medical Corp. gtd., 3.2s, 10/1/13 Aa 1,000,000
836,587 Maverick Cnty. COP (Jail Facility), 9.1s, 6/15/10 CCC/P 501,952
North Central Hlth. Fac. Dev. Corp. IFB
4,000,000 (Presbyterian Hlth. Care Syst.), Ser. C, MBIA,
9.505s, 6/15/21 Aaa 4,675,000
3,000,000 (Baylor Hlth. Care Syst.), Ser. B, 8.1s, 5/15/08 Aa 3,198,750
3,500,000 Sam Rayburn, Muni. Pwr. Agcy. Rev. Bonds
(Pwr. Supply Syst.), Ser. A, 6 1/4s, 10/1/17 Ba 3,062,500
--------------
44,994,990
Utah (0.4%)
- ------------------------------------------------------------------------------------------------------------
4,750,000 Intermountain Pwr. Agcy. Rev. Bonds, Ser. D, 7 3/4s,
7/1/20 A 5,005,313
Virginia (0.4%)
- ------------------------------------------------------------------------------------------------------------
2,875,000 Chesapeake, Pub. Impt. G.O. Bonds, 5s, 5/1/14 Aa 2,688,125
2,000,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB, FGIC,
9.519s, 8/15/23 Aaa 2,347,500
--------------
5,035,625
Washington (2.4%)
- ------------------------------------------------------------------------------------------------------------
2,000,000 Grant Cnty., Pub. Hosp. Dist. No. 1 Rev. Bonds
(Samaritan Hosp.), 9 1/4s, 9/1/10 Baa/P 2,217,500
17,000,000 Port Walla Walla, Pub. Corp. Solid Waste Recycling
Rev. Bonds (Ponderosa Fibres), 9 1/8s, 1/1/26 B/P 14,960,000
2,600,000 WA State Hlth. Care Fac. VRDN (Sisters Providence),
Ser. E, 3.85s, 10/1/05 VMIG1 2,600,000
4,800,000 WA State Hlth. Care Fac. Auth. VRDN
(Sisters Providence), Ser. B, 3.85s, 10/1/05 VMIG1 4,800,000
5,000,000 WA State Pub. Pwr. Supply Syst. Rev. Bonds (Nuclear
Project No. 3), Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 5,612,500
--------------
30,190,000
West Virginia (1.2%)
- ------------------------------------------------------------------------------------------------------------
Marion Cnty., Cmnty. Solid Waste Disp. Fac.
Rev. Bonds (American Pwr. Paper Recycling)
3,000,000 9s, 12/1/11 (In default) + CCC/P 1,500,000
9,000,000 8 1/4s, 12/1/11 (In default) + CCC/P 4,500,000
3,600,000 WV State G.O. Bonds, Ser. D, FGIC, 6 1/2s, 11/1/26 Aaa 3,933,000
5,000,000 WV State Pkwy. Economic Dev. & Tourism Auth.
IFB, FGIC, 7.555s, 5/16/19 Aaa 4,793,750
--------------
14,726,750
Wisconsin (0.3%)
- ------------------------------------------------------------------------------------------------------------
3,145,000 WI Hsg. & Econ. Dev. Auth. IFB Home Ownership,
10.006s, 10/25/22 Aa 3,408,394
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,253,058,237) *** $ 1,261,433,587
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $1,279,921,812.
** The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at March 31, 1997 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 March 31, 1997 Securities rated by Putnam are indicated by
"P" and are not publicly rated.
The table below shows the percentage of the fund's investment on March
31, 1997 in securities assigned to various rating categories by Moody's
and Standard & Poor's and in unrated securities determined by Putnam
Management to be of comparable quality.
Unrated securities
Rated securities of comparable quality,
as a percentage of as a percentage of
Rating fund's net assets fund's net assets
AAA/Aaa 29.99% 0.28%
AA/Aa 9.04 --
A/A 5.28 0.25
BBB/Baa 21.06 2.52
BB/Ba 4.27 10.14
B/B 0.34 10.32
Caa/CCC -- 0.62
Ca/CC -- --
C -- --
D 0.09 0.74
A-1/VMIG1 3.60 --
Ratings are not covered by the Report of independent accountants.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public resale.
The total market value of restricted securities held at March
31, 1997 was $36,685,000 or 2.9% of net assets.
+ Non-income-producing security.
*** The aggregate identified cost on a tax basis is $1,253,076,624,
resulting in gross unrealized appreciation and depreciation of
$42,306,350 and $33,949,387, respectively, or net unrealized
appreciation of $8,356,963.
The rates shown on IFB, 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 March 31,
1997.
The fund had the following industry group concentrations greater than
10% at March 31, 1997 (as a percentage of net assets):
Hospitals/health care 17.8%
Transportation 15.2
Utilities 14.2
The fund had the following insurance concentration greater than 10% at
March 31, 1997 (as a percentage of net assets):
MBIA 13.3%
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
March 31, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,253,058,237) (Note 1) $1,261,433,587
- ---------------------------------------------------------------------------------------------------
Cash 83,424
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 23,817,575
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,638,151
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 19,195,228
- ---------------------------------------------------------------------------------------------------
Total assets 1,306,167,965
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 3,406,003
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 17,995,670
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,732,187
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,849,569
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 114,379
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 5,216
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 857,203
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 285,926
- ---------------------------------------------------------------------------------------------------
Total liabilities 26,246,153
- ---------------------------------------------------------------------------------------------------
Net assets $1,279,921,812
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,296,999,598
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 768,055
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investment (Note 1) (26,221,191)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 8,375,350
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,279,921,812
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($794,330,305 divided by 89,578,555 shares) $8.87
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.87)* $9.31
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($473,818,244 divided by 53,486,441 shares)*** $8.86
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($11,773,263 divided by 1,328,362 shares) $8.86
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.86)** $9.16
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more and on group sales the
offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the
offering price is reduced.
*** Redemption price per share is equal to net asset value less any applicable contingent deferred
sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended March 31, 1997
<S> <C>
Tax exempt interest income: $ 87,662,771
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 7,521,080
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,026,629
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 39,379
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 21,336
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,039,750
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 4,044,680
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 48,940
- --------------------------------------------------------------------------------------------------
Reports to shareholders 146,597
- --------------------------------------------------------------------------------------------------
Registration fees 7,258
- --------------------------------------------------------------------------------------------------
Auditing 45,311
- --------------------------------------------------------------------------------------------------
Legal 51,867
- --------------------------------------------------------------------------------------------------
Postage 316,775
- --------------------------------------------------------------------------------------------------
Other 69,529
- --------------------------------------------------------------------------------------------------
Total expenses 15,379,131
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (423,357)
- --------------------------------------------------------------------------------------------------
Net expenses 14,955,774
- --------------------------------------------------------------------------------------------------
Net investment income 72,706,997
- --------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (1,817,163)
- --------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 3,387,242
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (9,991,065)
- --------------------------------------------------------------------------------------------------
Net loss on investments (8,420,986)
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 64,286,011
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended March 31
--------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 72,706,997 $ 73,148,238
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 1,570,079 11,533,386
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments (9,991,065) 14,888,511
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 64,286,011 99,570,135
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (47,379,439) (48,694,201)
- ----------------------------------------------------------------------------------------------------------------------
Class B (24,747,071) (23,969,020)
- ----------------------------------------------------------------------------------------------------------------------
Class M (540,669) (276,752)
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions
(Note 4) (15,964,060) 20,779,045
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (24,345,228) 47,409,207
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 1,304,267,040 1,256,857,833
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net
investment income of $768,055 and
$721,349, respectively) $1,279,921,812 $1,304,267,040
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- -------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended March 31
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.93 $8.74 $8.73 $9.12 $8.65
- -------------------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income .52 .52 .54 .55 .63
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.06) .19 -- (.34) .51
- -------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities .46 .71 .54 .21 1.14
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.52) (.52) (.53) (.54) (.62)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- (.01) (.05)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- (.05) --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (.52) (.52) (.53) (.60) (.67)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.87 $8.93 $8.74 $8.73 $9.12
- -------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 5.24 8.31 6.55 2.15 13.67
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $794,330 $821,500 $828,548 $852,281 $638,971
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) .96 .95 .95 .97 1.05
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.80 5.86 6.28 5.73 6.83
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 55.08 75.89 62.84 47.08 31.05
- -------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended March 31, 1996 and thereafter
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts (Note 2).
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- --------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share January 4, 1993+
operating performance Year ended March 31 to March 31
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.92 $8.74 $8.73 $9.12 $8.95
- --------------------------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income .46 .47 .48 .44 .10
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.06) .18 .01 (.32) .17
- --------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities .40 .65 .49 .12 .27
- --------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.46) (.47) (.48) (.44) (.10)
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (.01) --
- --------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- (.06) --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (.46) (.47) (.48) (.51) (.10)
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.86 $8.92 $8.74 $8.73 $9.12
- --------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.61 7.55 5.94 1.52 3.05*
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $473,818 $474,374 $427,086 $369,006 $95,175
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) 1.56 1.54 1.55 1.54 .30*
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.19 5.25 5.66 5.02 1.21*
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 55.08 75.89 62.84 47.08 31.05
- --------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended March 31, 1996 and thereafter
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts (Note 2).
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- -------------------------------------------------------------------------------------------------------------------------------
For the Period
Per-share Dec. 1, 1994+
operating performance Year ended March 31 to March 31
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.92 $8.75 $8.21
- -------------------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income .49 .50 .16
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.06) .17 .54
- -------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities .43 .67 .70
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.49) (.50) (.16)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (.49) (.50) (.16)
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.86 $8.92 $8.75
- -------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.97 7.77 8.58*
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $11,773 $8,394 $1,224
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) 1.21 1.18 .41*
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.51 5.45 1.78*
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 55.08 75.89 62.84
- -------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended March 31, 1996 and thereafter
includes amounts paid through expense offset arrangements. Prior period ratios exclude
these amounts (Note 2).
</TABLE>
Notes to financial statements
March 31, 1997
Note 1
Significant accounting policies
Putnam Municipal Income Fund (the "fund") is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The fund seeks as high a level of current income exempt
from federal income tax as Putnam Investment Management, Inc. ("Putnam
Management"), the fund's manager, a wholly-owned subsidiary of Putnam
Investments, Inc., believes is consistent with the preservation of capital.
The fund offers class A, class B and class M shares. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares, which convert
to class A shares after approximately eight years, do not pay a front-end
sales charge, but pay a higher ongoing distribution fee than class A shares,
and are subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class M shares are sold with a maximum
front-end sales charge of 3.25% and pay an ongoing distribution fee that is
lower than class B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund, if the
fund were liquidated. In addition, the Trustees declare separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with 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. Short-term investments
having remaining maturities of 60 days or less are stated at amortized cost,
which approximates market value, and other investments, including restricted
securities, are stated at fair value following procedures approved by the
Trustees.
B) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
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.
D) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986. 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 March 31, 1997, the fund had a capital loss carryover of approximately
$23,134,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
- ------------------------------------------------
$ 11,844,000 March 31, 2003
11,290,000 March 31, 2004
E) Distributions to shareholders Income dividends are recorded daily by the
fund and are distributed monthly. Capital gain distributions if any, are
recorded on the ex-dividend date and paid at least annually. The amount and
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences include treatment of losses on wash
sale transactions, realized gains and losses on certain futures contracts,
market discount, and defaulted bond interest. 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 March 31, 1997, the fund reclassified $6,888
to increase undistributed net investment income and $653,029 to increase
paid-in-capital, with an increase to accumulated net realized loss on
investments of $659,917. The calculation of net investment income per share in
the financial highlights table excludes these adjustments.
F) 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 zero coupon bonds and
original issue discounts are accreted according to the effective yield method.
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: 0.65% of the first $500 million of
the fund's average net assets, 0.55% of the next $500 million, 0.50% of the
next $500 million and 0.45% of the next $5 billion, 0.425% of the next $5
billion, 0.405% of the next $5 billion, 0.39% of the next $5 billion, and
0.38% thereafter. Prior to July 22, 1996 the management fee payable to Putnam
Management was paid at the annual rate of 0.70% of the first $100 of average
net assets, 0.60% of the next $100 million, 0.50% of next $300 million, 0.45%
of the next $500 million and 0.425% of any amount over $1 billion.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended March 31, 1997, fund expenses were reduced by $423,357
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.
Trustees of the fund receive an annual Trustees fee of $1,360 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 "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 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.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing shares
of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees have approved payment by the fund at an annual rate of 0.25%, 0.85%
and 0.50% of the average net assets attributable to class A, class B and class
M shares respectively.
For the year ended March 31, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $132,203 and $5,408 from the sale of
class A and class M shares, respectively and $1,008,697 in contingent deferred
sales charges from redemptions of class B shares. A deferred sales charge of
up to 1% is assessed on certain redemptions of class A shares. For the year
ended March 31, 1997, Putnam Mutual Funds Corp., acting as underwriter
received $3,697 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended March 31, 1997, purchases and sales of investment
securities other than U.S. government obligations and short-term investments
aggregated $696,338,162 and $743,062,535, 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
Capital shares
At March 31, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
March 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 29,553,613 $ 262,293,616
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,814,944 25,040,900
- ------------------------------------------------------------
32,368,557 287,334,516
Shares
repurchased (34,810,212) (309,150,139)
- ------------------------------------------------------------
Net decrease (2,441,655) $ (21,815,623)
- ------------------------------------------------------------
Year ended
March 31, 1996
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 22,972,217 $ 206,082,849
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,848,087 25,521,274
- ------------------------------------------------------------
25,820,304 231,604,123
Shares
repurchased (28,546,381) (256,375,731)
- ------------------------------------------------------------
Net decrease (2,726,077) $ (24,771,608)
- ------------------------------------------------------------
Year ended
March 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 13,127,756 $ 116,315,353
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,569,930 13,950,500
- ------------------------------------------------------------
14,697,686 130,265,853
Shares
repurchased (14,405,728) (127,862,355)
- ------------------------------------------------------------
Net increase 291,958 $ 2,403,498
- ------------------------------------------------------------
Year ended
March 31, 1996
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 15,231,262 $ 136,480,171
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,519,823 13,611,548
- ------------------------------------------------------------
16,751,085 150,091,719
Shares
repurchased (12,440,215) (111,692,879)
- ------------------------------------------------------------
Net increase 4,310,870 $ 38,398,840
- ------------------------------------------------------------
Year ended
March 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 648,726 $ 5,771,764
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 49,736 442,780
- ------------------------------------------------------------
698,462 6,214,544
Shares
repurchased (310,641) (2,766,479)
- ------------------------------------------------------------
Net increase 387,821 $ 3,448,065
- ------------------------------------------------------------
Year ended
March 31, 1996
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 1,010,198 $ 9,040,052
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 24,528 221,006
- ------------------------------------------------------------
1,034,726 9,261,058
Shares
repurchased (234,113) (2,109,245)
- ------------------------------------------------------------
Net increase 800,613 $ 7,151,813
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 98.99% 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 1998 will show the tax status
of all distributions paid to your account in calendar 1997.
Results of December 5, 1996 shareholder meeting
(Unaudited)
A meeting of shareholders of the fund was held on December 5, 1996. At the
meeting, each of the nominees for Trustees was elected, as follows:
Votes
Votes for withheld
Jameson Adkins Baxter 81,341,673 1,286,304
Hans H. Estin 81,337,972 1,290,005
John A. Hill 81,344,573 1,283,404
R.J. Jackson 81,284,745 1,343,232
Elizabeth T. Kennan 81,303,302 1,324,675
Lawrence J. Lasser 81,333,090 1,294,887
Robert E. Patterson 81,326,444 1,301,533
Donald S. Perkins 81,329,564 1,298,413
William F. Pounds 81,328,513 1,299,464
George Putnam 81,301,683 1,326,294
George Putnam, III 81,229,432 1,398,545
Eli Shapiro 81,194,123 1,433,854
A.J.C. Smith 81,335,077 1,292,900
W. Nicholas Thorndike 81,344,246 1,283,731
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as auditors for
the fund was approved as follows: 79,435,822 votes for, and 585,557 votes
against, with 2,606,598 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with respect
to investments in the voting securities of a single issuer was approved as
follows: 74,300,604 votes for, and 3,071,968 votes against, with 5,255,405
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with respect
to making loans through purchases of debt obligations, repurchase agreements
and securities loans was approved as follows: 72,538,368 votes for, and
4,886,279 votes against, with 5,203,330 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with respect
to investments in real estate was approved as follows: 73,396,613 votes for,
and 4,089,664 votes against, with 5,141,700 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with respect
to concentration of its assets was approved as follows: 74,260,501 votes for,
and 3,237,342 votes against, with 5,130,134 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with respect
to investments in senior securities was approved as follows: 74,460,010 votes
for, and 2,978,150 votes against, with 5,189,817 abstentions and broker
non-votes.
A proposal to amend the fund's fundamental investment restriction with respect
to investments in commodities or commodity contracts was approved as follows:
72,340,473 votes for, and 5,105,235 votes against, with 5,182,269 abstentions
and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction with
respect to investments in securities of issuers in which management of the
fund or Putnam Investment Management, Inc. owns securities was approved as
follows: 72,594,485 votes for, and 4,711,799 votes against, with 5,321,693
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction with
respect to margin transactions was approved as follows: 71,278,789 votes for,
and 5,912,079 votes against, with 5,437,109 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction with
respect to short sales was approved as follows: 71,690,785 votes for, and
5,459,690 votes against, with 5,477,502 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction which
limits the fund's ability to pledge assets was approved as follows: 71,397,162
votes for, and 5,733,578 votes against, with 5,497,237 abstentions and broker
non-votes.
A proposal to eliminate the fund's fundamental investment restriction with
respect to investments in restricted securities was approved as follows:
72,174,911 votes for, and 5,041,237 votes against, with 5,411,829 abstentions
and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction with
respect to investments in certain oil, gas and mineral interests was approved
as follows: 72,650,893 votes for, and 4,679,906 votes against, with 5,297,178
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction with
respect to investing to gain control of a company's management was approved as
follows: 72,025,390 votes for, and 5,018,816 votes against, with 5,583,771
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
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
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
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Blake E. Anderson
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Municipal Income
Fund. It may also be used as sales literature when preceded or accompanied by
the current prospectus, which gives details of sales charges, investment
objectives, and operating policies of the fund, and the most recent copy of
Putnam's Quarterly Performance Summary. For more information, or to request a
prospectus, call toll free: 1-800-225-1581.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board or any other agency,
and involve risk, including the possible loss of principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
32906-051/353/560 5/97
