Putnam
Municipal
Income
Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "It is worth noting that we expect the supply of municipal bonds to slow
down. Normally, when interest rates fall, refundings boost the bond
supply. But rates have been low for some time and most issuers have
already completed their refundings."
-- Blake E. Anderson, manager
Putnam Municipal Income Fund
* "There is one type of staid, secure bond fund that has been overlooked
amid the global scramble for safety, and that is now emerging as the best
bargain in the bond market: municipal bond funds."
-- The Wall Street Journal, October 5, 1998
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
24 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Thanks in part to the rush of foreign investors to the safety of the U.S.
bond market, yields on long-term municipal bonds have moved remarkably
close to yields on taxable 30-year Treasury bonds. The sustained demand
for tax-exempt bonds fed by this unusual environment has not been matched
by new supply; most issuers have already refinanced outstanding bonds at
lower rates and the flow of refunding has fallen off markedly.
One of the greatest challenges for Putnam Municipal Income Fund's
management has become finding securities that meet Putnam's strict
selection criteria. Fund Manager Blake Anderson has also adjusted the
fund's credit and sector strategies in response to the changing
environment and emerging trends he sees developing.
You will find details of these developments and other aspects of the
fund's performance during the first half of fiscal 1998 in the following
report from Blake. He also offers his view of prospects for the remainder
of the fiscal year.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 18, 1998
Report from the Fund Manager
Blake E. Anderson
Throughout the dramatic market shifts of August 1998, the municipal market
stood its ground. Yields on long-term municipal bonds fell slightly
compared with yields on Treasury bonds, which declined sharply as their
prices rose in response to demand fanned by global equity investors'
flight to quality. By September, municipal bond yields were approximately
97% of those on 30-year Treasuries, a remarkably close relationship.
Within this environment, Putnam Municipal Income Fund has continued to
provide shareholders with high tax-exempt income. For the six months ended
September 30, 1998, the fund delivered total returns of 3.94% at net asset
value and -0.97% at public offering price. For complete performance
information, please see pages 8 and 9.
* DEMAND FOR BONDS TIED TO TURBULENT EQUITY MARKETS
The municipal bond market's performance tends to reflect trends in the
taxable bond market, which in turn is influenced by events in worldwide
equity markets. Therefore, in reviewing your fund's performance for the
past six months, we must consider the effects of the stock market's
volatility. The turbulence was set off by an unprecedented string of
international events: the unabated financial chaos in the Pacific Rim,
currency devaluations and defaults in Russia, and most recently, plunging
stock markets in Latin America. As foreign investors panicked about
plummeting stock markets, they began a flight to quality -- selling hedge
funds and emerging-markets funds in favor of the safety of U.S. Treasury
bonds. This buying of Treasuries drove up their prices and pushed down
their yields. Since foreign investors do not benefit from the tax
advantages of municipal bonds, prices in this market were not driven up by
the increase in demand that drove Treasury bond prices higher. This factor
has made municipal bonds an exceptional investment choice for U.S.
investors.
* CREDIT, SECTOR STRATEGIES HELP MAINTAIN INCOME
Since last spring, one of our challenges has been to increase the fund's
income in a market in which yields have fallen and credit ratings have
risen. We have met this challenge by looking for a few opportunities in
the upper tier of the noninvestment-grade market, where there is slightly
more supply and where we believe the additional income potential justifies
the additional risk.
Within our sector strategy, we remain attracted to issues in the
hospital/health-care sector, where we have found many attractive credits
in the past. This entire sector has gone through many evolutions since the
scrutiny of health care began with the Clinton administration in 1992.
Nonprofit hospitals throughout the country have experienced a significant
amount of merger activity in recent months but this trend seems to be
slowing. On the other hand, for-profit hospital companies are beginning to
sell off some units. Within this sector, we rely heavily on Putnam's
credit research to identify the most promising securities.
Transportation issues also fared well over the past year, particularly
industrial revenue bonds backed by major airlines. Passenger volume has
been up, while capacity remains steady and fuel costs are low. This
combination of factors has enabled airlines to increase prices and help
support airport revenues. Denver (Colorado) city and county airport bonds
remain among the fund's strongest performers. However, as oil prices inch
up and the economy slows, this sector may need closer scrutiny. While
these holdings and others described in this report were viewed favorably
as of September 30, 1998, all holdings are subject to review in accordance
with the fund's investment strategy and may vary in the future.
[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals/health care 22.2%
Transportation 17.5%
Utilities 16.7%
Water/sewer 4.1%
Education 3.7%
Footnote reads:
*Based on net assets as of 9/30/98. Holdings will vary over time.
* WASHINGTON, DC, BONDS PREREFUNDED
Because of the economy's recent strength, many cities and towns have
experienced large budget surpluses from healthy levels of tax revenue.
Given this background, it makes sense that other high-performing bonds
come from the general obligation sector, in which the bond issues are
backed directly by taxes, not revenues or fees. One example of this trend
is Washington, DC, general obligation bonds, which had experienced
negative publicity and carried the relatively low Ba1 rating from Moody's.
Our perseverance was rewarded when the bonds were prerefunded during the
period.
In a prerefunding, the municipality issues new bonds to pay off the
original bond issue at the first call date or maturity. Proceeds from the
new issue in an amount sufficient to pay off the entire original bond
issue are invested in an escrow fund made up of U.S. Treasury securities.
Because of the safety of principal represented by these Treasuries, the
original bonds are considered more creditworthy and an upgrade generally
follows -- along with higher prices.
It is also worth noting that we expect the supply of municipal bonds to
slow down. Normally, when interest rates fall, prerefundings boost the
bond supply. But rates have been low for some time and most issuers have
already completed their prerefundings. Perpetuating the slowdown in
refunding activity is the currently close relationship of Treasury yields
to municipal yields. Given the narrow spread between these yields, it is
possible that the Treasury escrows used in prerefundings may not be
adequate enough to pay off the municipal issues.
[GRAPHIC OMITTED: worm chart BOND RETURNS: MUNICIPALS VERSUS TREASURIES]
BOND RETURNS: MUNICIPALS VERSUS TREASURIES
Lehman Bros.
Lehman Bros. Lehman Bros. Treasury Bond
Date Municipal Bond Index Bond Index (pretax) Index (after tax)
9/30/93 10,000 10,000 10,000
3/31/94 9,584 9,664 9,542
9/30/94 9,758 9,595 9,348
3/31/95 10,298 10,079 9,685
9/30/95 10,850 10,894 10,330
3/31/96 11,161 11,135 10,423
9/30/96 11,506 11,373 10,506
3/31/97 11,772 10,602 10,579
9/30/97 12,546 12,407 11,168
3/31/98 13,034 13,016 11,569
9/30/98 $13,638 $14,129 $12,405
Footnote reads:
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. Sources:
Lehman Brothers Municipal Bond Index; Lehman Brothers Treasury Bond Index.
* LONG-TERM PERSPECTIVE REMAINS ESSENTIAL
This unusual bond market has been more focused on what the equity markets
will do than on what interest rates will do. Despite this atypical
behavior, today's troubles are being met by sound monetary and economic
policies in the United States. However, it is not unusual in times like
these that comparisons are made with other turbulent eras. We do not
believe the current conditions resemble those that prevailed in the 1930s
or in the 1970s. Inflation is at the lowest level in 40 years, interest
rates are the lowest since the 1960s, and we expect the eight-year
economic expansion to continue, albeit at a slower pace.
Although we expect bouts of market volatility to continue, these factors
provide reason for optimism about prospects for municipal bonds, and the
relative stability of the municipal bond market in comparison to other
capital markets may well begin to draw nervous investors in larger
numbers. Should this occur, the increased demand could well have a
favorable effect on bond prices and on your fund's performance.
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 9/30/98, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
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 9/30/98
Class A Class B Class M
(inception date) (5/22/89) (1/4/93) (12/1/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 3.94% -0.97% 3.52% -1.48% 3.81% 0.45%
- ------------------------------------------------------------------------------
1 year 8.08 2.91 7.44 2.44 7.81 4.28
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5 years 33.46 27.13 29.55 27.57 31.52 27.22
Annual average 5.94 4.92 5.31 4.99 5.63 4.93
- ------------------------------------------------------------------------------
Life of fund 107.08 97.31 93.36 93.36 100.32 93.86
Annual average 8.09 7.53 7.30 7.30 7.70 7.33
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/98
Lehman
Bros. Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------------
6 months 4.64% 0.74%
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1 year 8.72 1.36
- ------------------------------------------------------------------------------
5 years 36.38 12.61
Annual average 6.40 2.40
- ------------------------------------------------------------------------------
Life of fund 108.23 31.99
Annual average 8.18 3.02
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. Returns for class A
and class M shares reflect the current maximum initial sales charges of
4.75% and 3.25% respectively. Class B share returns for the 1-, 5-, and
10-year (where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. Returns
shown for class B and class M shares for periods prior to their inception
are derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M shares,
the higher operating expenses applicable to such shares. All returns
assume reinvestment of distributions at NAV. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 9/30/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.250343 $0.222190 $0.238501
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Capital gains -- -- --
- ------------------------------------------------------------------------------
Total $0.250343 $0.222190 $0.238501
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
3/31/98 $9.28 $9.74 $9.28 $9.28 $9.59
- ------------------------------------------------------------------------------
9/30/98 9.39 9.86 9.38 9.39 9.71
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 5.28% 5.03% 4.69% 5.03% 4.87%
- ------------------------------------------------------------------------------
Taxable equivalent2 8.74 8.33 7.76 8.33 8.06
- ------------------------------------------------------------------------------
Current 30-day SEC yield3 4.16 3.96 3.57 3.92 3.79
- ------------------------------------------------------------------------------
Taxable equivalent2 6.89 6.56 5.91 6.49 6.27
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2 Assumes maximum 39.6% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
3 Based 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 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B 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. The index does 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.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1998 (Unaudited)
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
FRB -- Floating Rate Bonds
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
U.S. Govt. Coll. -- U.S. Government Collateralized
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (98.7%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
Alabama (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 4,640,000 Jackson Cnty., Hlth. Care Auth. Hosp. Rev. Bonds,
5.7s, 5/1/19 BBB- $ 4,709,600
Alaska (0.9%)
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AK State Hsg. Fin. Corp. Rev. Bonds
3,560,000 7.7s, 12/1/35 (acquired 10/22/97,
cost $3,787,840) (RES) AA/P 3,871,500
7,500,000 Ser. A, 5.55s, 6/1/34 (acquired 11/26/97,
cost $7,593,750) (RES) Aaa 7,800,000
--------------
11,671,500
Arizona (2.9%)
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910,000 AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
(St. Luke's Hlth. Syst.), 7 1/4s, 11/1/14 Aaa 1,037,400
Cochise Cnty., Indl. Dev. Auth. Rev. Bonds
(Sierra Vista Cmnty. Hosp.)
4,505,000 Ser. A, 6 3/4s, 12/1/26 BBB-/P 4,887,925
6,500,000 6.2s, 12/1/17 BBB-/P 6,955,000
7,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/8s, 7/1/11 Aaa 8,942,500
2,000,000 Mohave Cnty., Indl. Dev. Auth. Hosp. Syst. Rev.
Bonds (Env. Inc. & Phoenix Hosp. & Med. Ctr.),
7s, 7/1/16 Aaa 2,307,500
Navajo Cnty., Indl. Dev. Rev. Bonds
(Stone Container Corp.)
6,800,000 7.4s, 4/1/26 B+/P 7,658,500
2,500,000 7.2s, 6/1/27 B+/P 2,812,500
4,000,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds
(Casa Grande Regl. Med. Ctr.),
Ser. A, 8 1/8s, 12/1/22 B/P 4,305,000
--------------
38,906,325
Arkansas (1.3%)
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7,575,000 AR Hsg. Dev. Agcy. Res. Single Fam. Mtge.
Rev. Bonds, Ser. 84A, zero %, 7/1/15 Aa 1,287,750
200,000 AR State Hosp. Equip. Fin. Auth. VRDN
(Baptist Hlth.), 4.1s, 11/1/10 VMIG1 200,000
14,000,000 Northwest Regl. Apt. Auth. Rev. Bonds, 7 5/8s,
2/1/27 B+/P 16,100,000
--------------
17,587,750
California (10.5%)
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5,000,000 Anaheim, Pub. Fin. Auth. Lease Rev. Bonds
(Public Improvements), Ser. A, FSA, 6s, 9/1/24 Aaa 5,925,000
CA State G.O. Bonds
18,465,000 6.6s, 2/1/09 A1 22,250,325
11,300,000 6 1/2s, 2/1/07 A1 13,362,250
Corona, COP
4,500,000 (Vista Hosp. Syst.), Ser. B, 9 1/2s, 7/1/20 B-/P 5,422,500
5,800,000 (Hosp. Syst. Inc.), Ser. C, 8 3/8s, 7/1/11 B-/P 6,626,500
2,400,000 Los Angeles, Regl. Arpt. Impt. Corp. Lease Rev.
Bonds (United Airlines, Inc.), 6 7/8s, 11/15/12 Baa3 2,658,000
3,615,000 Monrovia, Redev. Agcy. Tax Alloc. Rev. Bonds
(Central Redevelopment Project Area-1),
Ser. B, AMBAC, 6.7s, 5/1/21 Aaa 4,039,763
Northern CA Pwr. Agcy. Multi. Cap. Fac. Rev.
Bonds IFB, MBIA
3,480,000 9.877s, 8/1/17 Aaa 4,210,800
2,630,000 Prerefunded 9.877s, 8/1/17 Aaa 3,280,925
5,600,000 Orange Cnty., Local Trans. Auth. Sales Tax IFB,
8.161s, 2/14/11 AA+ 7,735,000
4,000,000 Orange Cnty., Local Trans. Auth. Sales Tax Rev.
Bonds, AMBAC, 6.2s, 2/14/11 Aaa 4,700,000
6,500,000 Orange Cnty., Rev. Bonds, Ser. A, MBIA, 6s, 6/1/10 Aaa 7,540,000
10,000,000 San Joaquin Hills, Trans. Corridor Agcy. Rev. Bonds
(Toll Rd.), 7.55s, 1/1/10 Aaa 10,462,500
3,600,000 San Luis Obispo, COP (Vista Hosp. Sys. Inc.),
8 3/8s, 7/1/29 B-/P 3,906,000
3,000,000 Santa Clara Cnty., Hsg. Auth. Rev. Bonds
(Blossom River Apts), Ser. A, 6 1/2s, 9/1/39 B+/P 3,030,000
Southern CA Pub. Pwr. Auth. Rev. Bonds
8,000,000 (Palo Verde), Ser. A, AMBAC, 6s, 7/1/07 AAA 9,250,000
7,250,000 (San Juan Unit 3), Ser. A, MBIA, 5s, 1/1/20 Aaa 7,277,188
11,840,000 Vallejo, COP (Marine World Foundation), 7s, 2/1/17 BB+/P 13,024,000
Valley Hlth. Syst. Hosp. Rev. Bonds
(Refunding & Impt.), Ser. A
6,000,000 6 1/2s, 5/15/25 BBB- 6,525,000
1,000,000 6 1/8s, 5/15/05 BBB- 1,061,250
--------------
142,287,001
Colorado (4.3%)
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6,000,000 Arapahoe Cnty., Cap. Impt. Trust Fund Hwy. Rev.
Bonds, Ser. E-470, 7s, 8/31/26 Aaa 7,252,500
10,000,000 CO Edl. Fac. Auth. Rev. Bonds
(Ocean Journey, Inc.), 8 3/8s, 12/1/26 B/P 11,712,500
Denver, City & Cnty. Arpt. Rev. Bonds
4,410,000 Ser. A, 8 3/4s, 11/15/23 Baa1 5,049,450
1,590,000 Prerefunded, Ser. A, 8 3/4s, 11/15/23 Aaa 1,844,400
1,470,000 Ser. A, 8s, 11/15/25 Baa1 1,626,188
530,000 Prerefunded, Ser. A, 8s, 11/15/25 Aaa 593,600
5,000,000 Ser. D, 7 3/4s, 11/15/13 Baa1 6,412,500
3,310,000 Ser. A, 7 1/2s, 11/15/23 Baa1 3,818,913
690,000 Prerefunded, Ser. A, 7 1/2s, 11/15/23 Aaa 830,588
1,075,000 Ser. A, 7 1/4s, 11/15/25 AAA 1,234,906
425,000 Prerefunded, Ser. A, 7 1/4s, 11/15/25 AAA 488,219
9,550,000 Ser. B, 7 1/4s, 11/15/23 Baa1 10,636,313
2,450,000 Prerefunded Ser. B, 7 1/4s, 11/15/23 Aaa 2,799,125
3,000,000 Larimer Cnty., School Dist. No. 1 Rev. Bonds
(Poudre Impt.), 7s, 12/15/16 Aa3 3,795,000
--------------
58,094,202
Connecticut (1.2%)
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1,335,000 CT State Dev. Auth. 1st Mtge. Rev. Bonds
(Gladeview Hlth. Care), 9 3/4s, 12/15/16 AAA/P 1,488,525
2,450,000 CT State Dev. Auth. Hlth. Care Rev. Bonds
(Alzheimers Resource Ctr.), Ser. A, 10s,
8/15/21 AAA/P 2,924,688
6,000,000 CT State Dev. Auth. Poll. Control Rev. Bonds
(Western MA), Ser. A, 5.85s, 9/1/28 Ba3 6,067,500
CT State Dev. Auth. Rev. Bonds (East Hills Woods)
1,624,000 Ser. A, 7 3/4s, 11/1/17 CCC/P 1,624,341
147,494 Ser. B, zero %, 3/1/21 CCC/P 26,869
4,000,000 CT. State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Edgehill), Ser. A, 6 7/8s, 7/1/27 BB-/P 4,235,000
--------------
16,366,923
District of Columbia (3.6%)
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31,750,000 DC G.O. Bonds, Ser. A, 6 3/8s, 6/1/26 AAA 36,671,250
DC Rev. Bonds (American Geophysical Union)
4,200,000 5 7/8s, 9/1/23 BBB- 4,252,500
3,350,000 5 3/4s, 9/1/13 BBB- 3,387,688
4,125,000 DC Redev. Land Agcy. Rev. Bonds
(Wash. D. C. Sports Arena), 5 5/8s, 11/1/10 Baa 4,331,250
--------------
48,642,688
Florida (4.5%)
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9,225,000 Broward Cnty., Resource Recvy. Rev. Bonds
(SES Broward Cnty. LP South), 7.95s, 12/1/08 A 9,882,281
5,885,000 Dade Cnty., Rev. Bonds (School Dist.), MBIA,
6 1/2s, 2/15/05 Aaa 6,730,969
22,900,000 Hernando Cnty., Indl. Dev. Rev. Bonds
(FL Crushed Stone Co.), 8 1/2s, 12/1/14 B+/P 26,649,875
4,750,000 Orange Cnty., Hlth. Fac. Auth. IFB, 9.685s, 10/1/14
(acquired 4/19/95, cost $6,129,272) (RES) B-/P 7,742,500
Palm Beach Cnty., Student Hsg. Rev. Bonds
(Palm Beach Cmnty. College)
5,123,000 Ser. A, 8s, 3/1/23 B-/P 5,167,826
25,000 Ser. B, zero %, 3/1/23 B-/P 23,594
905,000 Palm Beach Cnty., Hlth. Fac. Auth. Rev. Bonds
(JFK Med. Ctr. Inc.), 8 7/8s, 12/1/18 AAA/P 930,820
Sanford, Arpt. Auth. Indl. Dev. Rev. Bonds
(FL Terminals, Inc.), Ser. A
2,000,000 7 1/2s, 5/1/10 BB/P 2,202,500
1,000,000 7.3s, 5/1/04 BB/P 1,073,750
--------------
60,404,115
Georgia (1.7%)
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5,000,000 Atlanta Metro. Rapid Tran. Auth. Sales Tax Rev.
Ser. O, 6.55s, 7/1/20 A1 5,450,000
4,200,000 Atlanta, Special Purpose Fac. Rev. Bonds
(Delta Air Lines, Inc.), Ser. B, 7.9s, 12/1/18 Baa3 4,441,500
De Kalb Cnty., Hsg. Auth. Muni. Rev. Bonds
(Briarcliff Park Apts.)
1,500,000 Ser. B, 10s, 4/1/17 B+/P 1,695,000
3,700,000 Ser. A, 7 1/2s, 4/1/17 BBB+/P 4,019,125
2,000,000 Gwinnett Cnty., Indl. Dev. Auth. Rev. Bonds
(Kawneer Co. Inc.), Ser. 84, 9 1/2s, 6/1/15 A1 2,240,000
4,815,000 Rockdale Cnty., Dev. Auth. Solid Waste Disp.
Rev. Bonds (Visay Paper Inc.), 7.4s, 1/1/16 BB/P 5,218,256
--------------
23,063,881
Hawaii (0.4%)
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4,355,000 HI State G.O. Bonds, Ser. CN, FGIC, 6 1/4s, 3/1/08 Aaa 5,040,913
Illinois (4.5%)
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Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
3,629,000 (United Air Lines, Inc.), Ser. B, 8.95s, 5/1/18 Baa2 4,050,871
1,755,000 (United Air Lines, Inc.), Ser. 84A, 8.85s, 5/1/18 Baa2 1,954,631
6,955,000 (United Air Lines, Inc.), Ser. 84B, 8.85s, 5/1/18 Baa2 7,746,131
5,300,000 (American Airlines, Inc.), 8.2s, 12/1/24 Baa2 6,426,250
10,150,000 Cook Cnty., Cmnty. College Dist. No. 508 Rev.
Bonds, Ser. C, MBIA, 7.7s, 12/1/07 Aaa 12,903,188
IL Dev. Fin. Auth. Retirement Hsg. Rev. Bonds
2,500,000 (Regency Park-Lincolnwood), Ser. A, 10 1/4s,
4/15/19 (In default) (acquired 5/10/90,
cost $2,338,850) (NON)(RES) D/P 1,925,000
1,885,000 (Mercy Hsg. Corp.), 7s, 8/1/24 Baa1 2,210,163
IL Dev. Fin. Auth. Rev. Bonds
(Cmnty. Rehab. Providers Fac.)
1,225,000 8 3/4s, 7/1/11 BB/P 1,349,031
630,000 Prerefunded, 8 3/4s, 7/1/11 AAA/P 713,475
1,400,000 8 1/4s, 8/1/12 (acquired 8/4/92,
cost $1,400,000) (RES) BB/P 1,389,500
1,710,000 Ser. A, 7 7/8s, 7/1/20 BB/P 1,957,950
2,855,000 Prerefunded, Ser. A, 7 7/8s, 7/1/20 AAA/P 3,547,338
IL Hlth. Fac. Auth. Rev. Bonds
7,540,000 (Glen Oaks Medical Ctr.), Ser. B, 6.95s, 11/15/13 Baa1 9,245,925
5,000,000 (Hinsdale Hosp.), Ser. A, 6.95s, 11/15/13 AAA/P 6,131,250
--------------
61,550,703
Indiana (3.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,821,510 Hammond, Indl. Port Auth. COP, 9.65s, 6/1/14 BB+/P 1,952,822
Indianapolis Indl. Arpt. Auth. Special Fac. Rev. Bonds
21,000,000 (Federal Express Corp.), 7.1s, 1/15/17 Baa2 23,677,500
13,510,000 (United Airlines), Ser. A, 6 1/2s, 11/15/31 Baa2 14,725,900
--------------
40,356,222
Iowa (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
6,500,000 IA Fin. Auth. Hlth. Care Fac. Rev. Bonds
(Care Initiatives), 9 1/4s, 7/1/25 BB/P 8,775,000
Louisiana (3.9%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 Beauregard, Parish Rev. Bonds
(Boise Cascade Corp.), 7 3/4s, 6/1/21 Baa3 4,415,000
4,500,000 Hodge, Combined Util. Rev. Bonds
(Stone Container Corp.), 9s, 3/1/10 B/P 4,809,375
5,000,000 Lake Charles, Harbor & Term. Dist. Port Fac.
Rev. Bonds (Trunkline Co.), 7 3/4s, 8/15/22 A3 5,725,000
2,000,000 Port of New Orleans, Indl. Dev. Rev. Bonds
(Continental Grain Co.), 7 1/2s, 7/1/13 BB 2,215,000
St. Charles Parish, Poll. Control Rev. Bonds
8,005,000 (LA Pwr. & Lt.), 8 1/4s, 6/1/14 Baa3 8,436,790
6,995,000 (Union Carbide), 7.35s, 11/1/22 Baa2 7,764,450
W. Feliciana, Parish Poll. Control Rev. Bonds
(Gulf States Util. Co.)
5,000,000 9s, 5/1/15 BB+/P 5,481,250
4,000,000 Ser. II, 7.7s, 12/1/14 Ba1 4,485,000
8,000,000 Ser. C, 7s, 11/1/15 Ba1 8,890,000
--------------
52,221,865
Maryland (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,650,000 Denton, 1st Mtge. Rev. Bonds
(Shore Nursing Rehab. Ctr.), 9s, 4/1/20 B/P 1,911,938
Massachusetts (9.7%)
- --------------------------------------------------------------------------------------------------------------------------
2,390,000 Boston, Nursing Home Rev. Bonds
(St. Joseph Nursing Care Ctr. Inc.), 10s, 1/1/20 BB-/P 2,590,163
MA Bay Trans. Auth. Rev. Bonds (Gen. Trans. Syst.)
11,940,000 Ser. B, 5.9s, 3/1/24 AA3 13,283,250
10,605,000 Ser. C, 5s, 3/1/24 AA3 10,711,050
5,000,000 MA Muni. Whsl. Elec. Co. Pwr. Supply Syst. Rev.
Bonds, AMBAC, 7.07s, 7/1/18 Aaa 5,468,750
MA State G. O. Bonds
7,730,000 Ser. 25, 8.22s, 11/1/11 (acquired 8/13/98,
cost $9,592,157) (RES) Aa3 10,261,575
7,850,000 Ser. A, AMBAC, 5 3/4s, 8/1/09 Aaa 8,909,750
5,285,000 Ser. C, FGIC, 5 3/4s, 8/1/11 Aaa 6,018,294
7,600,000 MA State Hlth. & Edl. Fac. Auth. G.O. Bonds,
Ser. C, FGIC, 6s, 8/1/09 Aaa 8,797,000
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,970,000 (Norwood Hosp.), Ser. E, 8s, 7/1/05 Ba2 3,047,755
2,860,000 (MA Eye & Ear Infirmary), Ser. A, 7.3s, 7/1/04 Baa3 3,174,600
3,775,000 (Rev. Cooley Dickinson Hosp.), 7 1/8s, 11/15/18 AAA/P 4,355,406
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA)
3,000,000 Ser. B, 9 1/4s, 7/1/15 BB-/P 3,375,000
13,000,000 Ser. A, 9s, 7/1/15 BB-/P 14,592,500
MA State Indl. Fin. Agcy. Rev. Bonds
3,900,000 (Atlanticare Med. Ctr.), Ser. A, 10 1/8s, 11/1/14 B/P 4,199,091
1,000,000 (Atlanticare Med. Ctr.), Ser. B, 10 1/8s, 11/1/14 B/P 1,076,690
2,295,000 (MA Tpk.), U.S. Govt. Coll., 9s, 10/1/20 AAA/P 2,567,531
1,540,000 (1st Mtge. Pioneer Valley Living Ctr.), 7s,
10/1/20 B/P 1,552,474
1,019,314 (1st Mtge. Pioneer Valley Living Ctr.), zero %,
10/1/20 B/P 1,274
MA State Wtr. Resources Auth. Rev. Bonds, Ser. A
3,000,000 6 1/2s, 7/15/21 Aaa 3,341,250
24,540,000 FSA, 4 3/4s, 8/1/37 Aaa 23,773,125
--------------
131,096,528
Michigan (4.5%)
- --------------------------------------------------------------------------------------------------------------------------
333,000 Ann Arbor, Econ. Dev. Corp. Ltd. Oblig. Rev. Bonds
(Glacier Hills Inc.), 8 3/8s, 1/15/19 B+/P 340,922
Detroit, G.O. Bonds
2,500,000 Ser. A, 6.7s, 4/1/10 Aaa 2,918,750
3,000,000 Ser. B, AMBAC, 6 1/4s, 4/1/10 AAA 3,337,500
4,000,000 Ser. B, AMBAC, 6 1/4s, 4/1/08 AAA 4,500,000
5,575,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment Rev.
Bonds, Ser. A, 9 1/2s, 5/1/21 BBB+/P 6,892,094
10,000,000 MI State Strategic Fund Solid Waste Disp. Rev.
Bonds (Genesee Pwr. Station), 7 1/2s, 1/1/21 BB/P 10,862,500
MI State Hosp. Fin. Auth. Rev. Bonds
(Garden City Hosp.)
1,330,000 8 1/2s, 9/1/17 BB 1,526,175
670,000 Prerefunded, 8 1/2s, 9/1/17 BB 768,825
4,500,000 MI State Hsg. Dev. Auth. Rental Hsg. Rev. Bonds,
Ser. A, FSA, 7.55s, 4/1/23 Aaa 4,899,375
MI State Strategic Fund Ltd. Rev. Bonds
5,000,000 (Detroit Edison Co.), Ser. A, MBIA, 5.55s, 9/1/29 Aaa 5,131,250
7,500,000 (Mercy Svcs. for Aging), 9.4s, 5/15/20 Aaa 8,240,625
11,000,000 Midland Cnty., Econ. Dev. Corp. Rev. Bonds
(Poll. Ctrl.), Ser. B, 9 1/2s, 7/23/09 B+/P 11,976,250
--------------
61,394,266
Minnesota (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Intl. Falls, Env. Fac. Rev. Bonds
(Boise Cascade Corp.), 7.2s, 10/1/24 Baa3 5,693,750
5,000,000 St. Paul, Hsg. & Hosp. Redev. Auth. Rev. Bonds
(Healtheast), Ser. A, 6 5/8s, 11/1/17 Baa3 5,406,250
5,000,000 Western MN Muni. Pwr. Agcy. Rev. Bonds,
Ser. A, AMBAC, 6 1/4s, 1/1/05 Aaa 5,631,250
--------------
16,731,250
Mississippi (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
Claiborne Cnty., Poll. Control Rev. Bonds
(Middle South Energy, Inc.)
10,455,000 Ser. C, 9 7/8s, 12/1/14 Ba1 10,857,204
2,400,000 Ser. A, 9 1/2s, 12/1/13 Ba1 2,490,960
--------------
13,348,164
Missouri (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
MO State Env. Impt. & Energy Poll.
Control Rev. Bonds
1,170,000 (Great Lakes Carbon Control), 6 3/4s, 9/1/02 B+/P 1,200,713
8,705,000 (Associated Electrical Coop Thomas Hill),
5 1/4s, 12/1/08 AA 9,314,350
6,775,000 MO State Hlth. & Edl. Fac. Auth. Rev. Bonds
(BJC Hlth. Syst.), Ser. A, 6 1/2s, 5/15/20 Aa2 7,782,781
--------------
18,297,844
Nebraska (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
NE Investment Fin. Auth. Single Fam. Mtge. IFB
3,100,000 Ser. 2, GNMA Coll., 11.459s, 9/10/30 Aaa 3,479,750
800,000 Ser. B, GNMA Coll., 11.247s, 3/15/22 Aaa 884,000
--------------
4,363,750
Nevada (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
8,500,000 Clark Cnty., Indl. Dev. Rev. Bonds
(Southwest Gas Corp.), Ser. A, 7.3s, 9/1/27 Baa2 9,456,250
3,000,000 Clark Cnty., Passenger Fac. Arpt. Rev. Bonds
(Las Vegas-McCarran Intl. Arpt.), Ser. A,
AMBAC, 6s, 7/1/22 Aaa 3,281,250
--------------
12,737,500
New Hampshire (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
2,830,000 (Havenwood-Heritage Heights), U.S. Govt. Coll.,
9 3/4s, 12/1/19 AAA/P 3,113,000
4,000,000 (1st Mtge.- Rivermead Peterborough),
8 1/2s, 7/1/24 AAA/P 4,950,000
2,675,000 (Havenwood-Heritage Heights), 7.1s, 1/1/06 BB/P 2,969,250
5,600,000 (Lakes Region Hosp. Assn.), 6 1/4s, 1/1/18 A-/P 5,943,000
3,000,000 (Rivermead at Peterborough), 5 3/4s, 7/1/28 BB/P 3,015,000
7,000,000 NH State Bus. Fin. Auth. Poll. Control Rev. Bonds
(Pub. Svc. Co.), Ser. D, 6s, 5/1/21 Ba3 7,192,500
--------------
27,182,750
New Jersey (3.1%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 NJ Econ. Dev. Auth. Indl. Dev. Rev. Bonds
(1st mtge.-Cranes Hill), Ser. A, 7s, 2/1/10 B+/P 3,367,500
5,000,000 NJ Econ. Dev. Auth. Rev. Bonds
(Newark Arpt. Marriot Hotel), 7s, 10/1/14 B+/P 5,462,500
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
3,000,000 (St. Elizabeth Hosp.), Ser. B, 8 1/4s, 7/1/20 Aaa 3,288,750
6,550,000 (Kimball Med. Ctr.), Ser. C, 8s, 7/1/13 Baa3 7,155,875
6,000,000 (Gen. Hosp. Ctr.-Passaic Inc.), FSA, 6 3/4s,
7/1/19 Aaa 7,290,000
4,000,000 NJ State Hsg. & Mtge. Fin. Agcy. Rev. IFB,
Ser. I, 8.278s, 11/1/07 (acquired 2/11/93,
cost $4,113,112) (RES) A+/P 4,440,000
9,000,000 NJ State Tpk. Auth. Rev. Bonds, Ser. C, MBIA,
6 1/2s, 1/1/16 Aaa 11,092,500
--------------
42,097,125
New Mexico (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
6,160,000 Farmington, Poll. Control Rev. Bonds
(Tucson Elec. Pwr Co. San Juan), Ser. A,
6.95s, 10/1/20 B2 6,945,400
New York (7.4%)
- --------------------------------------------------------------------------------------------------------------------------
8,750,000 Long Island, Pwr. Auth. NY Elec. Syst. IFB, 7.25s,
12/1/24 (acquired 5/19/98, cost $9,511,250) (RES) A-/P 10,150,000
5,000,000 Long Island, Pwr. Auth. NY Elec. Syst. VRDN,
Ser. A, 3.6s, 5/1/33 VMIG1 5,000,000
11,000,000 Metropolitan Trans. Auth. NY Commuter Facs.
Rev. Bonds, Ser. B, FGIC, 4 3/4s, 7/1/26 Aaa 10,752,500
1,100,000 Monroe Cnty., Indl. Dev. Auth. VRDN
(Canal Ponds), Ser. D, 4s, 6/15/16 VMIG1 1,100,000
NY City, G.O. Bonds
2,760,000 Ser. F, 8 1/4s, 11/15/16 Aaa 3,163,650
12,405,000 Ser. C, 5 1/4s, 8/15/10 A3 13,149,300
3,000,000 Ser. H, 5s, 8/1/22 A3 2,977,500
3,000,000 NY City, Indl. Dev. Agcy. Rev. Bonds
(Visy Paper Inc.), 7.95s, 1/1/28 BB-/P 3,438,750
NY City, Muni. Assistance Corp. Rev Bonds
5,000,000 (PA 337A), 8.2s, 7/1/07 (acquired 3/19/98,
cost $6,169,900) (RES) AA/P 6,487,500
10,000,000 Ser. L, 6s, 7/1/06 Aa2 11,337,500
5,000,000 NY State Env. Fac. Corp. Poll. Control Rev.
Bonds (PA 198), 7.95s, 6/15/10
(acquired 10/22/97, cost $6,012,500) (RES) Aaa 6,687,500
1,800,000 NY State Local Govt. Assistance Corp. Rev.
Bonds, Ser. D, 7s, 4/1/18 Aaa 2,020,500
11,125,000 NY State Med. Care Fac. Fin. Agcy. Rev. Bonds,
Ser. A, AMBAC, FHA Insd., 6 1/2s, 8/15/29 Aaa 12,918,906
3,000,000 NY State Urban Dev. Corp. Rev. Bonds
(Correctional Fac.), Ser. A, FSA, 6 1/2s, 1/1/10 Aaa 3,581,250
7,000,000 Port Auth. NY & NJ Rev. Bonds
(Delta Airlines, Inc.), Ser. 1R, 6.95s, 6/1/08 Baa3 7,700,000
--------------
100,464,856
North Carolina (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,250,000 Intermountain Pwr. Agcy Rev. Bonds, MBIA,
6s, 1/1/18 Aaa 6,109,688
3,000,000 NC Eastern Muni. Pwr. Agcy. Syst. IFB, FGIC,
7.85s, 1/1/25 (acquired 3/3/93,
cost $3,112,315) (RES) Aaa 4,140,000
NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds
10,000,000 Ser. B, MBIA, 6s, 1/1/22 Aaa 11,750,000
6,000,000 (No. 1, Catawba Elec.), MBIA, 5.6s, 1/1/20 Aaa 6,547,500
--------------
28,547,188
Ohio (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
865,000 OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds,
Ser. B, GNMA Coll., 8 1/4s, 12/15/19 AA+ 893,381
2,750,000 OH Hsg. Finl. Agcy. Rev. Bonds, Ser. B-1,
GNMA Coll., 5.85s, 9/1/16 AAA 2,952,813
--------------
3,846,194
Oklahoma (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
4,505,000 Tulsa Muni. Arpt. Trust Rev. Bonds
(American Airlines, Inc.), 7 3/8s, 12/1/20 Baa2 4,854,138
Oregon (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
Washington Cnty., G.O. Bonds
(Criminal Justice Fac.)
5,870,000 6s, 12/1/11 Aa1 6,552,388
5,535,000 6s, 12/1/10 Aa1 6,178,444
--------------
12,730,832
Pennsylvania (5.0%)
- --------------------------------------------------------------------------------------------------------------------------
Dauphin Cnty., Gen. Auth. Hosp. Rev. Bonds
3,990,000 (Northwest Med. Ctr.), 8 5/8s, 10/15/13 BBB- 4,812,938
7,500,000 (Forum Place), Ser. A, 6s, 1/15/25 BB-/P 7,537,500
1,180,000 Doylestown, Hosp. Auth. Rev. Bonds
(Doylestown Hosp. Pine Run), Ser. A,
7.2s, 7/1/23 AAA/P 1,365,850
2,340,000 Greene Cnty., Hosp. Auth. Rev. Bonds (Greene
Cnty. Memorial Hosp.), 6 1/2s, 1/1/02 BBB/P 2,353,081
1,500,000 Lehigh Cnty., Indl. Dev. Auth. Poll. Control IFB
(PA Pwr. & Lt. Co.), 9.022s, 9/1/29
(acquired 6/20/95, cost $1,651,825) (RES) AAA/P 1,899,375
6,565,000 McKeesport, Hosp. Auth. Rev. Bonds, 6 1/4s,
7/1/03 Baa2 6,991,725
Montgomery Cnty., Higher Ed. & Hlth. Auth.
Hosp. Rev. Bonds (UTD Hosp.), Ser. B
3,500,000 8 3/8s, 11/1/11 AAA 3,753,050
2,230,000 7 1/2s, 11/1/12 AAA 2,327,786
4,000,000 PA State COP, Ser. A, AMBAC, 5s, 7/1/15 Aaa 4,035,000
PA State Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds
4,000,000 (Colver), Ser. E, 8.05s, 12/1/15 BB-/P 4,610,000
2,000,000 (Colver), Ser. D, 7.15s, 12/1/18 BBB- 2,232,500
PA State Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds
4,250,000 (Northhampton), Ser. B, 6 3/4s, 1/1/07 BB+/P 4,664,375
3,000,000 (Northhampton Generating), Ser. A, 6 1/2s,
1/1/13 BBB- 3,198,750
2,000,000 PA State Higher Ed. Assistance Agcy. IFB, Ser. B,
MBIA, 10.929s, 3/1/20 Aaa 2,270,000
6,000,000 Philadelphia Gas Works IFB, FSA, 6.192s, 8/1/21
(acquired 1/24/94, cost $5,621,520) (RES) Aaa 6,255,000
3,000,000 Philadelphia, Gas Works Rev. Bonds, Ser. 13,
7.7s, 6/15/21 Aaa 3,360,000
3,250,000 Philadelphia, Wtr. & Wastewtr. IFB, FGIC,
7.23s, 6/15/12 Aaa 3,668,438
895,000 Vanango, Indl. Dev. Auth. VRDN (Penzoil Co.),
4.1s, 12/1/12 A-1 895,000
1,800,000 Washington Cnty., Indl. Dev. Auth. 1st Mtge.
Rev. Bonds (AHF/Central States Inc.),
10 1/4s, 11/1/19 B-/P 1,845,000
--------------
68,075,368
Puerto Rico (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
4,180,000 Cmnwlth of PR, Muni. Fin. Agcy. Rev. Bonds,
Ser. A, FSA, 6s, 7/1/11 Aaa 4,843,575
8,500,000 Cmnwlth. of PR, FRB, 7.949s, 7/1/24
(acquired 6/12/95, cost $8,912,590) (RES) A 9,817,500
PR Elec. Pwr. Auth. Rev. Bonds
5,935,000 Ser. S, MBIA, 7s, 7/1/06 (SEG) Aaa 7,129,419
5,400,000 Ser. T, 6 3/8s, 7/1/24 Baa1 6,196,500
--------------
27,986,994
South Carolina (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
8,500,000 Charleston Cnty., Indl. Dev. FRB
(Hoover Group Inc.), 7.384s, 11/1/02 B/P 9,456,250
5,705,000 Florence Cnty., Indl. Dev. Auth. Rev. Bonds
(Stone Container Corp.), 7 3/8s, 2/1/07 B+/P 6,197,056
Piedmont, Muni. Elec. Pwr. Agcy. Rev. Bonds
3,775,000 Ser. A, FGIC, 6 1/2s, 1/1/16 Aaa 4,563,031
630,000 Prerefunded, Ser. A, FGIC, 6 1/2s, 1/1/16 Aaa 768,600
8,000,000 FGIC, 5s, 1/1/22 Aaa 8,020,000
5,000,000 SC Jobs Econ. Dev. Auth. Rev. Bonds (St. Francis
Hosp.-Franciscan Sisters), 7s, 7/1/15 Baa1 5,487,500
--------------
34,492,437
Tennessee (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
8,500,000 IVRC-Bristol TN Mem. Hosp. Rev. Bonds, FGIC,
14.1s, 2/28/14 (acquired 6/16/95,
cost $9,366,660) (RES) Aaa 9,148,125
7,000,000 Knox Cnty., Hlth. Edl. & Hsg. Fac. Board Rev. Bonds
(Ft. Sanders Alliance), MBIA, 6 1/4s, 1/1/13 Aaa 8,190,000
4,930,000 Metropolitan Nashville & Davidson Cnty.,
Wtr. & Swr. Rev. Bonds, FGIC, 6 1/2s, 1/1/09 Aaa 5,854,375
--------------
23,192,500
Texas (5.0%)
- --------------------------------------------------------------------------------------------------------------------------
7,500,000 Dallas-Fort Worth, Intl. Arpt. Fac. Impt. Corp.
Rev. Bonds (American Airlines, Inc.), 7 1/4s,
11/1/30 Baa2 8,306,250
Harris Cnty., Hlth. Fac. Rev. Bonds
(Hermann Mem. Hosp.), FSA
10,325,000 5 1/2s, 6/1/15 Aaa 11,228,438
8,335,000 5 1/2s, 6/1/11 Aaa 9,147,663
Houston, Wtr. & Swr. Syst. Rev. Bonds, AMBAC
16,730,000 Ser. C, 6 3/8s, 12/1/17 Aaa 18,110,225
1,070,000 Prerefunded, Ser. C, 6 3/8s, 12/1/17 Aaa 1,171,650
4,000,000 North Central Hlth. Fac. Dev. Corp. IFB
(Presbyterian Hlth. Care Syst.), Ser. C,
MBIA, 9.346s, 6/22/21 Aaa 4,740,000
North Central Hlth. Fac. Dev. Corp. FRB,
2,710,000 Ser. B, 7.861s, 5/15/08 Aa2 2,994,550
290,000 Prerefunded, Ser. B, 7.861s, 5/15/08 AA 325,525
Port Arthur Dist., Rev. Bonds
(Great Lakes Carbon Corp.)
940,000 Ser. A, 6 3/4s, 9/1/02 B+/P 942,463
285,000 Ser. B, 6 3/4s, 9/1/02 B+/P 285,821
Tarrant Cnty., Hlth. Fac. Dev. Corp. Hlth. Syst., Ser. A,
4,000,000 (TX Hlth. Res. Sys.), MBIA, 5 3/4s, 2/15/12 Aaa 4,490,000
5,500,000 5s, 2/15/26 Aaa 5,500,000
--------------
67,242,585
Utah (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
4,750,000 Intermountain Pwr. Agcy. Rev. Bonds, Ser. D,
AMBAC, 7 3/4s, 7/1/20 A1 4,845,000
Virginia (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB,
FGIC, 9.418s, 8/15/23 Aaa 2,387,500
5,000,000 Suffolk, Redev. & Hsg. Auth. Multi-Fam. Hsg. Rev.
Bonds (Beach/Oxford Apts.), 6.1s, 4/1/26 B+/P 5,037,500
--------------
7,425,000
Washington (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,895,000 Grant Cnty., Pub. Hosp. Dist. No. 1 Rev. Bonds
(Samaritan Hosp.), 9 1/4s, 9/1/10 BBB/P 2,110,544
WA State Pub. Pwr. Supply Syst. Rev. Bonds
(Nuclear No. 3)
5,000,000 Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 6,400,000
5,000,000 Ser. A, FSA, 6s, 7/1/08 Aaa 5,687,500
--------------
14,198,044
West Virginia (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
3,600,000 WV State G.O. Bonds, Ser. D, FGIC, 6 1/2s, 11/1/26 Aaa 4,338,000
5,000,000 WV State Pkwy. Econ. Dev. & Tourism Auth. IFB,
FGIC, 7.673s, 5/16/19 Aaa 5,712,500
--------------
10,050,500
Wisconsin (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,100,000 WI Hsg. & Econ. Dev. Auth. IFB
(Home Ownership Dev.), 10.077s, 10/25/22 Aa3 2,378,250
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,228,202,243) (b) $1,336,115,089
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,353,282,351.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
September 30, 1998 for the securities listed. Ratings are generally ascribed to securities at the time of issuance.
While the agencies may from time to time revise such ratings, they undertake no obligation to do so, and the ratings
do not necessarily represent what the agencies would ascribe to these securities at September 30, 1998. Securities
rated by Putnam are indicated by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $1,228,225,198, resulting in gross unrealized appreciation and
depreciation of $113,785,532 and $5,895,641, respectively, or net unrealized appreciation of $107,889,891.
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at September 30, 1998 was $92,015,075 or 6.8% of net assets.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at September 30, 1998.
The rates shown on FRB are the current interest rates shown at September 30, 1998, which are subject to change
based on the terms of the security.
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 September 30, 1998.
The fund had the following industry group concentrations greater than 10% at September 30, 1998 (as a
percentage of net assets):
Hospitals/Health care 22.2%
Transportation 17.5
Utilities 16.7
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at September 30, 1998 (Unaudited)
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
Muni Bond Index (long) $43,647,500 $ 42,830,741 12/21/98 $ 816,759
U.S. Treasury Bond (short) 97,681,281 93,747,185 12/21/98 (3,934,096)
- -------------------------------------------------------------------------------
$(3,117,337)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1998 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,228,202,243) (Note 1) $1,336,115,089
- -----------------------------------------------------------------------------------------------
Cash 3,572,375
- -----------------------------------------------------------------------------------------------
Interest and other receivables 22,957,629
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,524,918
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 5,410,896
- -----------------------------------------------------------------------------------------------
Total assets 1,369,580,907
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for variation margin 704,844
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 569,777
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 11,000,000
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 971,507
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,934,022
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 131,336
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 25,520
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,564
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 885,988
- -----------------------------------------------------------------------------------------------
Other accrued expenses 70,998
- -----------------------------------------------------------------------------------------------
Total liabilities 16,298,556
- -----------------------------------------------------------------------------------------------
Net assets $1,353,282,351
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,294,499,495
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 63,254
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investment (Note 1) (46,075,907)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 104,795,509
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,353,282,351
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($835,711,302 divided by 88,978,109 shares) $9.39
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.39)* $9.86
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($502,257,487 divided by 53,530,295 shares)*** $9.38
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($15,313,562 divided by 1,631,248 shares) $9.39
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.39)** $9.71
- -----------------------------------------------------------------------------------------------
* 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
Six months ended September 30, 1998 (Unaudited)
<S> <C>
Tax exempt interest income: $42,410,083
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 3,837,475
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 797,861
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 13,346
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 9,052
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,026,967
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 2,116,551
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 37,065
- -----------------------------------------------------------------------------------------------
Reports to shareholders 40,408
- -----------------------------------------------------------------------------------------------
Registration fees 75
- -----------------------------------------------------------------------------------------------
Auditing 20,425
- -----------------------------------------------------------------------------------------------
Legal 42,684
- -----------------------------------------------------------------------------------------------
Postage 73,890
- -----------------------------------------------------------------------------------------------
Other 68,154
- -----------------------------------------------------------------------------------------------
Total expenses 8,083,953
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (116,906)
- -----------------------------------------------------------------------------------------------
Net expenses 7,967,047
- -----------------------------------------------------------------------------------------------
Net investment income 34,443,036
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 2,916,619
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (2,203,648)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the period 14,718,038
- -----------------------------------------------------------------------------------------------
Net gain on investments 15,431,009
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $49,874,045
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
September 30 March 31
1998* 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 34,443,036 $ 68,484,854
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 712,971 (20,513,372)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 14,718,038 81,702,121
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 49,874,045 129,673,603
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (22,048,608) (45,766,249)
- ---------------------------------------------------------------------------------------------------------------
Class B (11,869,711) (23,212,036)
- ---------------------------------------------------------------------------------------------------------------
Class M (378,051) (690,043)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share
transactions (Note 4) 6,548,299 (8,770,710)
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 22,125,974 51,234,565
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 1,331,156,377 1,279,921,812
- ---------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income and distributions in excess of net investment
income of $63,254 and $83,412, respectively) $1,353,282,351 $1,331,156,377
- ---------------------------------------------------------------------------------------------------------------
* Unaudited
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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share September 30
operating performance (Unaudited) Year ended March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.28 $8.87 $8.93 $8.74 $8.73 $9.12
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .25(c) .50(c) .52 .52 .54 .55
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .11 .42 (.06) .19 -- (.34)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities .36 .92 .46 .71 .54 .21
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.25) (.51) (.52) (.52) (.53) (.54)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- -- (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.25) (.51) (.52) (.52) (.53) (.60)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.39 $9.28 $8.87 $8.93 $8.74 $8.73
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.94* 10.54 5.24 8.31 6.55 2.15
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $835,711 $816,444 $794,330 $821,500 $828,548 $852,281
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) .49* .95 .96 .95 .95 .97
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.70* 5.43 5.80 5.86 6.28 5.73
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 13.55* 33.13 55.08 75.89 62.84 47.08
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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).
(c) Per share net investment income has been determined on the basis of the weighted
average number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share September 30
operating performance (Unaudited) Year ended March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.28 $8.86 $8.92 $8.74 $8.73 $9.12
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .22(c) .44(c) .46 .47 .48 .44
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .10 .43 (.06) .18 .01 (.32)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities .32 .87 .40 .65 .49 .12
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.22) (.45) (.46) (.47) (.48) (.44)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- -- (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.45) (.46) (.47) (.48) (.51)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.38 $9.28 $8.86 $8.92 $8.74 $8.73
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.52* 10.00 4.61 7.55 5.94 1.52
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $502,257 $499,594 $473,818 $474,374 $427,086 $369,006
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) .79* 1.55 1.56 1.54 1.55 1.54
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.40* 4.83 5.19 5.25 5.66 5.02
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 13.55* 33.13 55.08 75.89 62.84 47.08
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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).
(c) Per share net investment income has been determined on the basis of the weighted
average number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share September 30 Dec. 1, 1994+
operating performance (Unaudited) Year ended March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.28 $8.86 $8.92 $8.75 $8.21
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .24 (c) .47(c) .49 .50 .16
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .11 .43 (.06) .17 .54
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities .35 .90 .43 .67 .70
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.24) (.48) (.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 (.24) (.48) (.49) (.50) (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.39 $9.28 $8.86 $8.92 $8.75
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.81* 10.39 4.97 7.77 8.58*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $15,314 $15,118 $11,773 $8,394 $1,224
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) .62* 1.20 1.21 1.18 .41*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.58* 5.16 5.51 5.45 1.78*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 13.55* 33.13 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).
(c) Per share net investment income has been determined on the basis of the weighted
average number of shares outstanding during the period.
</TABLE>
Notes to financial statements
September 30, 1998 (Unaudited)
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. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
D) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the six months
ended September 30, 1998, the fund had no borrowings against the line of
credit.
E) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the provisions
of the Internal Revenue Code applicable to regulated investment companies.
It is also the intention of the fund to distribute an amount sufficient to
avoid imposition of any excise tax under Section 4982 of the Internal
Revenue Code of 1986, as amended. Therefore, no provision has been made
for federal taxes on income, capital gains or unrealized appreciation on
securities held nor for excise tax on income and capital gains.
At March 31, 1998, the fund had a capital loss carryover of approximately
$31,622,000 available to offset future capital gains, if any. The amount
of the carryover and the expiration dates are:
Loss Carryover Expiration
- ----------------- ------------------
$11,838,000 September 30, 2003
11,290,000 September 30, 2004
8,494,000 September 30, 2006
F) 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. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on zero coupon bonds are
accreted according to the yield to maturity basis.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.65% 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, 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, 0.38% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended September 30, 1998, fund expenses were reduced by
$116,906 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $1,040
has been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
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 to 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 six months ended September 30, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $78,229 and $1,476 from
the sale of class A and class M shares, respectively and $381,450 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 six months ended September 30, 1998, Putnam Mutual
Funds Corp., acting as underwriter received $25,962 on class A
redemptions.
Note 3
Purchases and sales of securities
During the six months ended September 30, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$177,664,247 and $180,351,078, 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 September 30, 1998, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended
September 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 10,991,141 $ 102,215,975
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,259,775 11,719,235
- -----------------------------------------------------------------------------
12,250,916 113,935,210
Shares
repurchased (11,218,448) (104,348,447)
- -----------------------------------------------------------------------------
Net increase 1,032,468 $ 9,586,763
- -----------------------------------------------------------------------------
Year ended
March 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 17,898,236 $162,889,715
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,585,700 23,695,620
- -----------------------------------------------------------------------------
20,483,936 186,585,335
Shares
repurchased (22,116,850) (201,679,949)
- -----------------------------------------------------------------------------
Net decrease (1,632,914) $(15,094,614)
- -----------------------------------------------------------------------------
Six months ended
September 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,039,378 $28,251,777
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 723,550 6,724,631
- -----------------------------------------------------------------------------
3,762,928 34,976,408
Shares
repurchased (4,095,034) (38,034,925)
- -----------------------------------------------------------------------------
Net decrease (332,106) $(3,058,517)
- -----------------------------------------------------------------------------
Year ended
March 31, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 9,153,987 $ 83,612,618
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,469,260 13,450,939
- -----------------------------------------------------------------------------
10,623,247 97,063,557
Shares
repurchased (10,247,287) (93,501,298)
- -----------------------------------------------------------------------------
Net increase 375,960 $ 3,562,259
- -----------------------------------------------------------------------------
Six months ended
September 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 213,784 $ 1,986,323
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 31,971 297,217
- -----------------------------------------------------------------------------
245,755 2,283,540
Shares
repurchased (243,791) (2,263,487)
- -----------------------------------------------------------------------------
Net increase 1,964 $ 20,053
- -----------------------------------------------------------------------------
Year ended
March 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 617,335 $ 5,661,569
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 60,078 550,866
- -----------------------------------------------------------------------------
677,413 6,212,435
Shares
repurchased (376,491) (3,450,790)
- -----------------------------------------------------------------------------
Net increase 300,922 $ 2,761,645
- -----------------------------------------------------------------------------
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jerome J. Jacobs
Vice President
Blake E. Anderson
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
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.
You can also learn more at Putnam Investments' website:
http://www.putnaminv.com.
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 the
principal amount invested.
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PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
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PUTNAM
INVESTMENTS
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