Putnam
Municipal
Income Fund
ANNUAL REPORT
March 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Careful security selection and in-depth credit analysis are
fundamental to the fund's investment strategy, particularly as we attempt
to uncover better value in bonds that carry ratings below investment
grade."
-- Blake E. Anderson, fund manager
Putnam Municipal Income Fund
* "Municipal bond credit quality is the strongest in more than a
decade, according to Moody's Investors Service Inc. Credit-rating upgrades
totaled 2,718 in 1997, compared with 161 downgrades. Moody's attributes
the ratings to the healthy economy and greater fiscal discipline."
-- The Wall Street Journal, February 5, 1998
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
24 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The financial troubles in Asia continued to dominate the capital markets
during Putnam Municipal Income Fund's fiscal year, pushing aside worries that
the continued strength in the U.S. economy would have inflationary
implications. The rush of funds to the safety of the U.S. bond market did
drive yields on most bonds, including municipals, lower -- and their prices
higher.
The Federal Reserve Board kept close watch on these events as you might
expect. But in the end, the Fed remained on the sidelines, apparently content
that the economic engine was still sufficiently under control.
In this environment, Fund Manager Blake Anderson continued to focus on the
fund's objective: maintaining a high level of current tax-free income,
consistent with preservation of capital. In the following report, Blake
discusses his strategy during the 12 months ended March 31, 1998, and looks at
prospects for the new fiscal year.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
May 20, 1998
Report from the Fund Manager
Blake E. Anderson
With inflation practically nonexistent over the past year, the Federal Reserve
Board sat on the sidelines and took no action on interest rates -- much to the
joy of fixed-income investors. Although the market experienced a brief setback
in October, when the reality of Asia's turmoil washed ashore, municipal bonds
generally basked in the glow of a strong economy and a vigilant but relatively
sanguine monetary policy.
Putnam Municipal Income Fund participated to a significant degree in this
rally, providing a total return of 10.54% for class A shares during the 12
months ended March 31, 1998, approximately in line with the 10.72% posted by
the Lehman Brothers Municipal Bond Index. Class A share's total return at
public offering price was 5.32%. Complete performance details, including
results for other share classes, are shown starting on page 8.
* MUNICIPAL MARKET OVERVIEW
Interest rates trended down during the year with the bellwether 30-year
Treasury bond falling more than a full percentage point to below 6%. While
this event was largely the result of rising municipal bond prices, it did
encourage a number of budget-minded issuers to call in their higher-yielding
bonds -- many of which were issued during the late 1980s and early 1990s --
and they reissued new bonds at the lower rates. Consequently, limiting the
fund's call risk was a top priority. Investing in noncallable bonds or bonds
with distant call dates tends to improve the fund's prospects of maintaining a
reliable level of income.
The municipal bond market has become attractively priced relative to the
Treasury market -- a state of affairs that hasn't occurred since the flat-tax
worry of 1996. Municipal bonds (as represented by 30-year insured municipals)
are now offering almost 90% of the yield of long-term Treasury bonds.
The first quarter of calendar 1998 was most notable for its huge incremental
supply -- an increase of approximately 70% over year-earlier levels. Demand
for municipal bonds also rose, fueled primarily by the bargain prices, which
explained the relative balance in this market. Also noteworthy was the
unusually flat tax-exempt yield curve. With the 30-year bond paying only a
modest 30 to 40 basis points over a 10-year bond, investors did not believe
they were being compensated for taking on higher risk. For this reason, we
found the best combination of yield and relative stability in bonds from the
intermediate range of the yield curve -- those with maturities ranging from 8
to 15 years.
* AIRLINE AND GENERAL OBLIGATION BONDS FLOURISH IN STRONG ECONOMY
At the end of the fiscal year, your portfolio was diversified among 239 issues
from 40 states and had an average quality rating of A. The fund maintained its
barbell structure with regard to credit quality with 35.2% of its assets
invested in the highest-rated Aaa issues and 48.6% invested in issues rated
Baa or below. We have reduced our holdings of issues rated Aa and A, since we
believe the Aaa-rated bonds are more fairly priced.
With the economic fundamentals so favorable, fund management shifted a portion
of the fund's assets into sectors that we considered likely to benefit most
from a stronger economy. One example is state general obligation (GO) bonds,
which have the ability to appreciate dramatically if the state's credit
quality improves. These bonds experienced steady price increases throughout
the period, as rising tax receipts, surplus state budgets, and favorable
credit fundamentals made them more attractive than they had been in years.
California and Massachusetts bonds, in particular, were heavily favored.
However, the most interesting of these regional strategies -- and among the
best-performing bonds for the year -- was the GOs from Washington, DC, which
represented the fund's largest position at fiscal year's end. These bonds
appreciated dramatically in anticipation of refunding -- an event that took
place just after the close of the fiscal year.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Utilities 14.4%
Transportation 13.4%
Hospital/health care 13.1%
Water and sewer 4.2%
Housing 3.5%
Footnote reads:
*Based on net assets as of 3/31/98. Holdings will vary over time.
Eager to refinance their high-coupon debt at lower rates of interest,
municipalities will issue refunding bonds to pay off the original issue at the
first call date or maturity. The proceeds of the new issue are invested in an
escrow fund made up of U.S. government obligations. Because of the relative
safety of principal represented by the government securities, the older bonds
generally are considered to have a credit rating of Aaa. Upgrades by the
rating services will typically follow.
The ongoing strength of the economy coupled with weak petroleum prices has
been a boon to the airline and transportation sector. Having survived
deregulation and effectively priced themselves in their respective hub
markets, airlines represent some of the best opportunities in the lower-rated
end of the municipal bond market. During the year, we added a significant
position in Northwest Arkansas Airport bonds, which are currently nonrated,
but American Airlines recently signed on to provide jet service into this
airport -- providing a valuable vote of confidence in the future of this
enterprise.
Health-care issues, at nearly 13% of total assets, also performed well during
the period. Going forward, however, we expect to be adding selectively to the
fund's position as spreads tighten. In anticipation of a supply bubble in New
York, we reduced holdings in the state's utility sector and shifted assets
into Massachusetts GOs, believing that those bonds were more fairly priced. If
the New York municipal market stabilizes and prices become more reasonable, as
we expect, we will likely resume buying.
[GRAPHIC OMITTED: worm chart BOND RETURNS: MUNICIPALS VERSUS TREASURIES]
BOND RETURNS: MUNICIPALS VERSUS TREASURIES
Lehman Bros. Lehman Bros. Lehman Bros.
Municipal Bond Treasury Bond Treasury Bond
Index Index (pretax) Index (after tax)
3/31/93 10000 10000 10000
9/30/93 10676 10624 10487
3/31/94 10232 10267 10007
9/30/94 10418 10195 9804
3/31/95 10994 10709 10156
9/30/95 11584 11576 10833
3/31/96 11916 11832 10931
9/30/96 12284 12085 11019
3/31/97 12568 12328 11096
9/30/97 13394 13185 11714
3/31/98 13915 13830 12134
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.
* APPROACHING NEW FISCAL YEAR WITH PRUDENCE
Careful security selection and in-depth credit analysis are fundamental to the
fund's investment strategy, particularly as we attempt to uncover better value
in bonds that carry ratings below investment grade. These typically are bonds
that can add tremendously to the fund's income level, but they also represent
greater credit risk and therefore require the most meticulous research
efforts.
The Asian crisis has had a dramatic impact on interest rates everywhere in the
world, except the United States. We have been predicting that interest rates
will rise slightly, but as of this writing, such has not been the case.
Nevertheless, we consider a rate increase more likely than a decline because
of the delayed, yet inevitable consequences of the troubles in Asia. In our
opinion, this is not a good time to expose the portfolio to bonds with longer
maturities and higher interest-rate risk. We believe our cautious strategy
will serve your fund better in the months ahead.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 3/31/98, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
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 3/31/98
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 10.54% 5.32% 10.00% 5.00% 10.39% 6.77%
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5 years 37.07 30.63 33.05 31.05 35.11 30.68
Annual average 6.51 5.49 5.88 5.56 6.20 5.50
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Life of fund 99.23 89.83 86.79 86.79 92.97 86.74
Annual average 8.09 7.50 7.31 7.31 7.70 7.30
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 3/31/98
Lehman Bros. Municipal Consumer
Bond Index Price Index
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1 year 10.72% 1.38%
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5 years 39.15 12.95
Annual average 6.83 2.47
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Life of fund 98.99 31.02
Annual average 8.10 3.11
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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 and represent past
performance; they do not guarantee future results. 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.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 5/22/89
GROWTH OF A $10,000 INVESTMENT
Fund's Lehman Bros. Consumer
class A shares Municipal Bond Price
at POP Index Index
5/22/89 9525 10532 10186
12/31/90 10685 11300 10808
12/31/91 12004 12673 11140
12/31/92 13359 13788 11462
12/31/93 14962 15482 11777
12/31/94 14007 14685 12093
12/31/95 16628 17252 12400
12/31/96 17162 18016 12812
12/31/97 18795 19676 13032
3/31/98 18983 19899 13102
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have been
valued at $18,679 and no contingent deferred sales charges would apply; a
$10,000 investment in the fund's class M shares would have been valued at
$19,297 ($18,674 at public offering price). See first page of performance
section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 3/31/98
Class A Class B Class M
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Distributions (number) 12 12 12
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Income $0.51 $0.45 $0.48
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Capital gains1
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Long-term -- -- --
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Short-term -- -- --
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Total $0.51 $0.45 $0.48
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Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
3/31/97 $8.87 $9.31 $8.86 $8.86 $9.16
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3/31/98 9.28 9.74 9.28 9.28 9.59
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Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 5.24% 4.99% 4.64% 4.99% 4.83%
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Taxable equivalent3 8.68 8.26 7.68 8.26 8.00
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Current 30-day SEC yield4 4.85 4.61 4.24 4.57 4.42
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Taxable equivalent3 8.03 7.63 7.02 7.57 7.32
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1Capital gains, if any, are taxable for federal and, in most cases, state
tax purposes. For some investors, investment income may also be subject to
the federal alternative minimum tax. Investment income may be subject to
state and local taxes.
2Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
3Assumes maximum 39.6% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
4Based 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. 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.
Report of independent accountants
For the fiscal year ended March 31, 1998
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, 1998, 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, 1998, 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, 1998, 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 14, 1998
Portfolio of investments owned
March 31, 1998
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
FNMA Coll. -- Federal National Mortgage Association Collateralized
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (99.1%) *
PRINCIPAL AMOUNT RATINGS** VALUE
Alaska (0.9%)
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<S> <C> <C> <C>
AK State Hsg. Fin. Corp. Rev. Bonds
$ 3,730,000 7.7s, 12/1/35 (acquired 10/22/97,
cost $3,968,720) [DBL. DAGGER] Aaa $ 4,009,750
7,500,000 Ser. A, 5.55s, 6/1/34 Aaa 7,640,625
--------------
11,650,375
Arizona (3.7%)
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11,000,000 Apache Cnty., Indl. Dev. Auth. Poll. Control
Rev. Bonds (Tucson Elec. Pwr. Co.), Ser. B,
5 7/8s, 3/1/33 B2 11,055,000
910,000 AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
(St. Luke's Hlth. Syst.), 7 1/4s, 11/1/14 Aaa 1,038,538
Cochise Cnty., Indl. Dev. Auth. Rev. Bonds
(Sierra Vista Cmnty. Hosp.)
4,505,000 Ser. A, 6 3/4s, 12/1/26 BBB-/P 4,859,769
6,500,000 6.2s, 12/1/17 BB+/P 6,857,500
7,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/8s, 7/1/11 Aaa 8,627,500
2,000,000 Mohave Cnty., Indl. Dev. Auth. Hosp. Syst.
Rev. Bonds (Env. Inc. & Phoenix
Hosp. & Med. Ctr.), 7s, 7/1/16 Aaa 2,292,500
Navajo Cnty., Indl. Dev. Rev. Bonds
(Stone Container Corp.)
6,800,000 7.4s, 4/1/26 B+/P 7,633,000
2,500,000 7.2s, 6/1/27 B+/P 2,800,000
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 4,290,000
--------------
49,453,807
Arkansas (0.9%)
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9,350,000 AR Hsg. Dev. Agcy. Res. Single Fam. Mtge.
Rev. Bonds, Ser. 84A, zero %, 7/1/15 Aa 1,507,688
9,500,000 Northwest Regl. Apt. Auth. Rev. Bonds,
7 5/8s, 2/1/27 B/P 10,889,375
--------------
12,397,063
California (11.3%)
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5,000,000 Anaheim, Pub. Fin. Auth. Lease Rev. Bonds
(Public Improvements), Ser. A, FSA, 6s, 9/1/24 Aaa 5,650,000
CA State G.O. Bonds
18,465,000 6.6s, 2/1/09 A1 21,650,213
11,300,000 6 1/2s, 2/1/07 A1 13,051,500
5,500,000 AMBAC, 6 1/2s, 9/1/06 Aaa 6,359,375
Corona, COP
4,500,000 (Vista Hosp. Syst.), Ser. B, 9 1/2s, 7/1/20 B/P 5,388,750
5,800,000 (Hosp. Syst. Inc.), Ser. C, 8 3/8s, 7/1/11 B/P 6,575,750
2,400,000 Los Angeles, Regl. Arpt. Impt. Corp. Lease Rev.
Bonds (United Airlines, Inc.), 6 7/8s, 11/15/12 Baa3 2,646,000
5,000,000 Metropolitan Wtr. Dist. Rev. Bonds
(Southern CA Waterwks.), Ser. C, 5s, 7/1/27 Aa2 4,843,750
3,615,000 Monrovia, Redev. Agcy. Tax Alloc. Rev. Bonds
(Central Redevelopment Area-1), Ser. B,
AMBAC, 6.7s, 5/1/21 Aaa 3,953,906
6,150,000 Northern CA Pwr. Agcy. Multi. Cap. Fac. IFB, MBIA,
9.116s, 8/15/17 Aaa 7,380,000
5,600,000 Orange Cnty., Local Trans. Auth. Sales Tax IFB,
8.161s, 2/14/11 Aa3 7,105,000
4,000,000 Orange Cnty., Local Trans. Auth. Sales Tax
Rev. Bonds, AMBAC, 6.2s, 2/14/11 Aaa 4,545,000
6,500,000 Orange Cnty., Rev. Bonds, Ser. A, MBIA, 6s, 6/1/10 Aaa 7,296,250
10,000,000 San Joaquin Hills, Trans. Corridor Agcy.
Rev. Bonds (Toll Rd.), stepped-coupon
zero %, (7.55s, 1/1/02), 1/1/10 Aaa 9,862,500
3,600,000 San Luis Obispo, COP (Vista Hosp. Syst., Inc.),
8 3/8s, 7/1/29 B/P 3,879,000
3,000,000 Santa Clara Cnty., Hsg. Auth. Rev. Bonds
(Blossom River Apts), Ser. A, 6 1/2s, 9/1/39 B+/P 3,003,750
Southern CA Pub. Pwr. Auth. Rev. Bonds, Ser. A
8,000,000 (Palo Verde), AMBAC, 6s, 7/1/07 Aaa 9,000,000
7,250,000 (San Juan Unit 3), MBIA, 5s, 1/1/20 Aaa 7,059,688
11,840,000 Vallejo, COP (Marine World Foundation), 7s, 2/1/17 BB+/P 12,831,600
Valley Hlth Syst. Hosp. Rev. Bonds
(Refunding & Impt.), Ser. A
6,000,000 6 1/2s, 5/15/25 BBB- 6,487,500
1,000,000 6 1/8s, 5/15/05 BBB- 1,056,250
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149,625,782
Colorado (4.4%)
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6,000,000 Arapahoe Cnty., Cap. Impt. Trust Fund Hwy.
Rev. Bonds, Ser. E-470, 7s, 8/31/26 Aaa 7,147,500
10,000,000 CO Edl. Fac. Auth. Rev. Bonds
(Ocean Journey, Inc.), 8 3/8s, 12/1/26 B+/P 11,700,000
Denver, City & Cnty. Arpt. Rev. Bonds
4,410,000 Ser. A, 8 3/4s, 11/15/23 Baa1 5,143,163
1,590,000 Prerefunded, Ser. A, 8 3/4s, 11/15/23 Aaa 1,854,338
1,470,000 Ser. A, 8s, 11/15/25 Baa1 1,633,538
530,000 Prerefunded, Ser. A, 8s, 11/15/25 Aaa 596,250
5,000,000 Ser. D, 7 3/4s, 11/15/13 Baa1 6,306,250
3,310,000 Ser. A, 7 1/2s, 11/15/23 Baa1 3,806,500
690,000 Prerefunded, Ser. A, 7 1/2s, 11/15/23 Aaa 821,963
1,075,000 Ser. A, 7 1/4s, 11/15/25 Baa1 1,230,875
425,000 Prerefunded, Ser. A, 7 1/4s, 11/15/25 Baa1 486,625
9,550,001 Ser. B, 7 1/4s, 11/15/23 Baa1 10,636,314
2,450,000 Prerefunded, Ser. B, 7 1/4s, 11/15/23 Aaa 2,789,938
3,000,000 Larimer Cnty., School Dist. No. 1 Rev. Bonds
(Poudre Impt.), 7s, 12/15/16 A1 3,738,750
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57,892,004
Connecticut (0.8%)
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1,335,000 CT State Dev. Auth. 1st Mtge. Rev. Bonds
(Gladeview Hlth. Care), 9 3/4s, 12/15/16 BB+/P 1,455,150
2,475,000 CT State Dev. Auth. Hlth. Care Rev. Bonds
(Alzheimers Resource Ctr.), Ser. A, 10s, 8/15/21 AAA/P 2,985,469
CT State Dev. Auth. Rev. Bonds (East Hills Woods)
1,624,000 Ser. A, 7 3/4s, 10/1/17 (In default) + D/P 1,621,970
147,495 Ser. B, zero %, 3/1/21 (In default) + D/P 26,549
4,000,000 CT. State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Edgehill), Ser. A, 6 7/8s, 7/1/27 BB-/P 4,250,000
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10,339,138
District of Columbia (3.5%)
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31,750,000 DC G.O. Bonds, Ser. A, 6 3/8s, 6/1/26 Ba1 34,369,375
DC Rev. Bonds (American Geophysical Union)
4,200,000 5 7/8s, 9/1/23 BBB- 4,226,250
3,350,000 5 3/4s, 9/1/13 BBB- 3,366,750
4,730,000 DC Redev. Land Agcy. Rev. Bonds
(Wash. DC Sports Arena), 5 5/8s, 11/1/10 Baa 4,860,075
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46,822,450
Florida (5.4%)
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9,225,000 Broward Cnty., Resource Recvy. Rev. Bonds
(SES Broward Cnty. LP South), 7.95s, 12/1/08 A 9,986,063
5,885,000 Dade Cnty., Rev. Bonds (School Dist.), MBIA,
6 1/2s, 2/15/05 Aaa 6,650,050
10,000,000 FL State Gen. Svcs. Rev. Bonds
(Env. Protection-Preservation), FSA,
Ser. A, 6s, 7/1/12 Aaa 11,262,500
22,900,000 Hernando Cnty., Indl. Dev. Rev. Bonds
(FL Crushed Stone Co.), 8 1/2s, 12/1/14 B+/P 26,764,375
4,750,000 Orange Cnty., Hlth. Fac. Auth. IFB, 9.939s,
10/1/14 (acquired 4/19/95, cost $6,261,830) [DBL. DAGGER] B-/P 7,077,500
Palm Beach Cnty., Student Hsg. Rev. Bonds
(Palm Beach Cmnty. College)
5,123,000 Ser. A, 8s, 3/1/23 B-/P 5,110,193
200,000 Ser. B, zero %, 3/1/23 B-/P 183,250
905,000 Palm Beach Cnty., Hlth. Fac. Auth. Rev. Bonds
(JFK Med. Ctr. Inc.), 8 7/8s, 12/1/18 AAA/P 953,200
Sanford, Arpt. Auth. Indl. Dev. Rev. Bonds
(FL Terminals, Inc.), Ser. A
2,000,000 7 1/2s, 5/1/10 BB/P 2,195,000
1,000,000 7.3s, 5/1/04 BB/P 1,073,750
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71,255,881
Georgia (1.7%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 Atlanta Metro. Rapid Tran. Auth. Sales Tax
Rev. Bonds, 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 Ba2 4,488,750
De Kalb Cnty., Hsg. Auth. Muni. Rev. Bonds
(Briarcliff Park Apts.)
1,500,000 Ser. B, 10s, 4/1/17 B+/P 1,704,375
3,700,000 Ser. A, 7 1/2s, 4/1/17 BBB+/P 4,033,000
2,000,000 Gwinnett Cnty., Indl. Dev. Auth. Rev. Bonds
(Kawneer Co. Inc.), Ser. 84, 9 1/2s, 6/1/15 A1 2,170,000
4,880,000 Rockdale Cnty., Dev. Auth. Solid Waste Disp.
Rev. Bonds (Visay Paper, Inc.), 7.4s, 1/1/16 BB/P 5,337,500
--------------
23,183,625
Hawaii (0.4%)
- ------------------------------------------------------------------------------------------------------------
4,355,000 HI State G.O. Bonds, Ser. CN, FGIC, 6 1/4s, 3/1/08 Aaa 4,953,813
Illinois (5.1%)
- ------------------------------------------------------------------------------------------------------------
Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
3,629,000 (United Air Lines, Inc.), Ser. B, 8.95s, 5/1/18 Baa2 4,082,625
1,755,000 (United Air Lines, Inc.), Ser. 84A, 8.85s, 5/1/18 Baa2 1,972,181
6,955,000 (United Air Lines, Inc.), Ser. 84B, 8.85s, 5/1/18 Baa2 7,815,681
5,300,000 (American Airlines Inc.), 8.2s, 12/1/24 Baa2 6,386,500
10,150,000 Cook Cnty., Cmnty. College Dist. No. 508
Rev. Bonds, Ser. C, MBIA, 7.7s, 12/1/07 Aaa 12,598,688
IL Dev. Fin. Auth. Retirement Hsg. Rev. Bonds
2,500,000 (Regency Park-Lincolnwood), Ser. A,
10 1/4s, 4/15/19 (In default) + D/P 1,800,000
1,905,000 (Mercy Hsg. Corp.), 7s, 8/1/24 Baa1 2,109,788
IL Dev. Fin. Auth. Rev. Bonds (Cmnty. Rehab.
Providers Fac.)
1,265,000 8 3/4s, 7/1/11 BB/P 1,404,150
650,000 Prerefunded, 8 3/4s, 7/1/11 AAA/P 745,063
1,400,000 8 1/4s, 8/1/12 BB/P 1,373,750
1,750,000 Ser. A, 7 7/8s, 7/1/20 BB/P 2,001,563
2,900,000 Prerefunded, Ser. A, 7 7/8s, 7/1/20 BB/P 3,559,750
6,000,000 IL Edl. Fac. Auth. Rev. Bonds
(Northwestern U.), 5 1/2s, 12/1/13 Aa1 6,292,500
IL Hlth. Fac. Auth. Rev. Bonds
7,540,000 (Glen Oaks Medical Ctr.), Ser. B, 6.95s, 11/15/13 Baa1 9,179,950
5,000,000 (Hinsdale Hosp.), Ser. A, 6.95s, 11/15/13 Baa1 6,087,500
--------------
67,409,689
Indiana (3.0%)
- ------------------------------------------------------------------------------------------------------------
1,845,324 Hammond, Indl. Port Auth. COP, 9.65s, 6/1/14 BB+/P 2,006,790
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, Inc.), Ser. A, 6 1/2s, 11/15/31 Baa2 14,658,350
--------------
40,342,640
Iowa (0.7%)
- ------------------------------------------------------------------------------------------------------------
6,500,000 IA Fin. Auth. Hlth. Care Fac. Rev. Bonds
(Care Initiatives), 9 1/4s, 7/1/25 BB/P 8,742,500
Louisiana (3.9%)
- ------------------------------------------------------------------------------------------------------------
4,000,000 Beauregard, Parish Rev. Bonds (Boise Cascade Corp.),
7 3/4s, 6/1/21 Baa3 4,435,000
4,500,000 Hodge, Combined Util. Rev. Bonds
(Stone Container Corp.), 9s, 3/1/10 B/P 4,876,875
5,000,000 Lake Charles, Harbor & Term. Dist. Port Fac.
Rev. Bonds (Trunkline LNG Co.), 7 3/4s, 8/15/22 A3 5,762,500
2,000,000 Port of New Orleans, Indl. Dev. Rev. Bonds
(Continental Grain Co.), 7 1/2s, 7/1/13 BB 2,217,500
St. Charles Parish, Poll. Control Rev. Bonds
8,005,000 (LA Pwr. & Lt.), 8 1/4s, 6/1/14 Baa3 8,545,338
6,995,000 (Union Carbide), 7.35s, 11/1/22 Baa2 7,755,706
W. Feliciana, Parish Poll. Control Rev. Bonds
(Gulf States Util. Co.)
5,000,000 9s, 5/1/15 BB+/P 5,562,500
4,000,000 Ser. II, 7.7s, 12/1/14 Ba1 4,505,000
8,000,000 Ser. C, 7s, 11/1/15 Ba1 8,870,000
--------------
52,530,419
Maryland (0.1%)
- ------------------------------------------------------------------------------------------------------------
1,650,000 Denton, 1st Mtge. Rev. Bonds
(Shore Nursing Rehab. Ctr.), 9s, 4/1/20 B/P 1,751,063
Massachusetts (10.7%)
- ------------------------------------------------------------------------------------------------------------
2,390,000 Boston, Nursing Home Rev. Bonds
(St. Joseph Nursing Care Ctr. Inc.), 10s, 1/1/20 BB-/P 2,587,175
MA Bay Trans. Auth. Rev. Bonds (Gen. Trans. Syst.)
11,940,000 Ser. B, 5.9s, 6/1/24 A1 13,119,075
10,605,000 Ser. C, 5s, 3/1/24 A1 10,207,313
5,000,000 MA Muni. Whsl. Elec. Co. Pwr. Supply Syst.
Rev. Bonds, AMBAC, 6.87s, 7/1/18 Aaa 5,106,250
MA State G.O. Bonds
15,460,000 Ser.A, 6s, 11/1/11 A 17,334,525
7,850,000 Ser. A, AMBAC, 5 3/4s, 8/1/09 Aaa 8,654,625
5,285,000 Ser. C, FGIC, 5 3/4s, 8/1/11 Aaa 5,780,469
7,600,000 MA State Hlth. & Edl. Fac. Auth. G.O. Bonds,
Ser. C, FGIC, 6s, 8/1/09 Aaa 8,540,500
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,970,000 (Norwood Hosp.), Ser. E, 8s, 7/1/05 Ba2 3,047,190
2,860,000 (MA Eye & Ear Infirmary), Ser. A, 7.3s, 7/1/04 Ba1 3,045,900
3,775,000 (Cooley Dickinson Hosp.), Ser. A, 7 1/8s, 11/15/18 AAA/P 4,331,813
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA)
3,000,000 Ser. B, 9 1/4s, 7/1/15 BB-/P 3,412,500
13,000,000 Ser. A, 9s, 7/1/15 BB-/P 14,738,750
MA State Indl. Fin. Agcy. Rev. Bonds
3,900,000 (Atlanticare Med. Ctr.), Ser. A, 10 1/8s, 11/1/14 B/P 4,290,000
1,000,000 (Atlanticare Med. Ctr.), Ser. B, 10 1/8s, 11/1/14 B/P 1,100,000
1,540,000 (1st Mtge. Pioneer Valley Living Ctr.), 7s, 10/1/20 B/P 1,545,421
1,019,314 (1st Mtge. Pioneer Valley Living Ctr.), zero %, 10/1/20 B/P 1,274
2,325,000 MA State Indl. Fin. Agcy. Tunnel Rev. Bonds
(Mass Tpk.,), 9s, 10/1/20 AAA/P 2,630,156
5,140,000 MA State Tpk. Auth. Rev. Bonds, Ser. A,
MBIA, 5s, 1/1/27 Aaa 4,947,250
MA State Wtr. Resources Auth. Rev. Bonds
3,000,000 Ser. A, 6 1/2s, 7/15/21 Aaa 3,322,500
25,000,000 Ser. D, MBIA, 5s, 8/1/24 Aaa 24,187,500
--------------
141,930,186
Michigan (4.9%)
- ------------------------------------------------------------------------------------------------------------
333,000 Ann Arbor, Econ. Dev. Corp. Ltd. Oblig. Rev. Bonds
(Glacier Hills Inc.), 8 3/8s, 1/15/19 B+/P 344,072
Detroit, G.O. Bonds
2,500,000 Ser. A, 6.7s, 4/1/10 Aaa 2,878,125
3,000,000 Ser. B, AMBAC, 6 1/4s, 4/1/10 AAA 3,307,500
4,000,000 Ser. B, AMBAC, 6 1/4s, 4/1/08 AAA 4,425,000
5,640,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment
Rev. Bonds, Ser. A, 9 1/2s, 5/1/21 BBB+/P 7,050,000
10,000,000 MI State Strategic Fund Solid Waste Disp.
Rev. Bonds (Genesee Pwr. Station), 7 1/2s, 1/1/21 BB/P 10,850,000
7,795,000 MI State Hosp. Fin. Auth. Rev. Bonds
(Detroit-Macomb Hosp. Corp.), Ser. A, 7.4s, 6/1/13 BB+/P 7,841,302
MI State Hosp. Fin. Auth. Rev. Bonds
(Garden City Hosp.)
1,330,000 8 1/2s, 9/1/17 Ba3 1,534,488
670,000 Prerefunded, 8 1/2s, 9/1/17 Ba3 773,013
4,500,000 MI State Hsg. Dev. Auth. Rental Rev. Bonds,
Ser. A, FSA, 7.55s, 4/1/23 Aaa 4,927,500
7,600,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds
(Mercy Svcs. for Aging), 9.4s, 5/15/20 Aaa 8,502,500
11,000,000 Midland Cnty., Econ. Dev. Corp. Poll. Control
Rev. Bonds, Ser. B, 9 1/2s, 7/23/09 B/P 12,155,000
--------------
64,588,500
Minnesota (1.3%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 Intl. Falls, Env. Fac. Rev. Bonds (Boise Cascade Corp.),
7.2s, 10/1/24 Baa3 5,687,500
5,000,000 St. Paul, Hsg. & Hosp. Redev. Auth. Hosp. Rev. Bonds
(Healtheast), Ser. A, 6 5/8s, 11/1/17 Baa3 5,400,000
5,000,000 Western MN Muni. Pwr. Agcy. Rev. Bonds, Ser. A,
AMBAC, 6 1/4s, 1/1/05 Aaa 5,612,500
--------------
16,700,000
Mississippi (1.3%)
- ------------------------------------------------------------------------------------------------------------
Claiborne Cnty., Poll. Control Rev. Bonds
(Middle South Energy, Inc.)
10,455,000 Ser. C, 9 7/8s, 12/1/14 Ba1 11,114,606
2,400,000 Ser. A, 9 1/2s, 12/1/13 Ba1 2,545,632
4,200,000 Perry Cnty., Poll. Control VRDN (Leaf River Forest),
3.7s, 10/1/12 P-1 4,200,000
--------------
17,860,238
Missouri (1.4%)
- ------------------------------------------------------------------------------------------------------------
1,540,000 MO State Env. Impt. & Energy & Poll. Rev. Bonds
(Great Lakes Carbon Control), 6 3/4s, 9/1/02 B+/P 1,576,575
8,705,000 MO State Env. Impt. & Energy Resource Auth.
Poll. Control Rev. Bonds, 5 1/4s, 12/1/08 A1 9,194,656
6,775,000 MO State Hlth. & Edl. Fac. Auth. Rev. Bonds
(BJC Hlth. Syst.), Ser. A, 6 1/2s, 5/15/20 Aa 7,621,875
--------------
18,393,106
Nebraska (0.3%)
- ------------------------------------------------------------------------------------------------------------
NE Investment Fin. Auth. Single Fam. Mtge. IFB
900,000 Ser. B, GNMA Coll., 11.318s, 3/15/22 Aaa 1,006,875
3,100,000 Ser. 2, GNMA Coll., 11.302s, 9/10/30 Aaa 3,510,750
--------------
4,517,625
Nevada (0.9%)
- ------------------------------------------------------------------------------------------------------------
8,500,000 Clark Cnty., Indl. Dev. Rev. Bonds
(Southwest Gas Corp.), Ser. A, 7.3s, 9/1/27 Baa2 9,435,000
3,000,000 Clark Cnty., Passenger Fac. Arpt. Rev. Bonds
(Las Vegas-McCarran Intl. Arpt.), Ser. A,
AMBAC, 6s, 7/1/22 Aaa 3,195,000
--------------
12,630,000
New Hampshire (0.8%)
- ------------------------------------------------------------------------------------------------------------
NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
2,830,000 (Havenwood-Heritage Heights), 9 3/4s, 12/1/19 AAA/P 3,169,600
4,000,000 (1st Mtge.- Rivermead Peterborough),
8 1/2s, 7/1/24 B+/P 4,625,000
555,000 (Riverwoods 1st. Mtge.-Exeter), 8s, 3/1/01 BB/P 567,893
2,675,000 (Havenwood-Heritage Heights), 7.1s, 1/1/06 BB/P 2,852,219
--------------
11,214,712
New Jersey (3.2%)
- ------------------------------------------------------------------------------------------------------------
3,000,000 NJ Econ. Dev. Auth. Indl. Dev. Rev. Bonds
(1st mtge.-Cranes Hill), Ser. A, 7s, 2/1/10 BB-/P 3,285,000
5,000,000 NJ Econ. Dev. Auth. Rev. Bonds (Newark Arpt.
Marriott Hotel), 7s, 10/1/14 B+/P 5,437,500
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
3,000,000 (St. Elizabeth Hosp.), Ser. B, 8 1/4s, 7/1/20 Aaa 3,326,250
6,550,000 (Kimball Med. Ctr.), Ser. C, 8s, 7/1/13 Baa3 7,229,563
6,000,000 (Gen. Hosp. Ctr.-Passaic Inc.), FSA, 6 3/4s, 7/1/19 Aaa 7,125,000
4,000,000 NJ State Hsg. & Mtge. Fin. Agcy. IFB, Ser. I, 8.309s,
11/1/07 (acquired 2/11/93, cost $4,416,240) [DBL. DAGGER] A+/P 4,365,000
9,000,000 NJ State Tpk. Auth. Rev. Bonds, Ser. C, MBIA,
6 1/2s, 1/1/16 Aaa 10,642,500
1,000,000 NJ State Tpk. Auth. VRDN, MBIA, Ser. C, 2.9s, 1/1/18 Aaa 1,000,000
--------------
42,410,813
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 6,968,500
New York (4.7%)
- ------------------------------------------------------------------------------------------------------------
NY City, G.O. Bonds
2,760,000 Ser. F, 8 1/4s, 11/15/16 Aaa 3,177,450
6,500,000 Ser. H, 5s, 8/1/22 A3 6,199,375
3,000,000 NY City, Indl. Dev. Agcy. Rev. Bonds (Visay Paper Inc.),
7.95s, 1/1/28 BB-/P 3,517,500
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) [DBL. DAGGER] Aa 6,150,000
10,000,000 Ser. L, 6s, 7/1/06 Aa2 11,075,000
5,000,000 NY State Env. Fac. Corp. Poll. Control Rev. Bonds
(PA 198), 7.95s, 7/1/13 (acquired 10/22/97,
cost $6,012,500) [DBL. DAGGER] A-1+ 6,250,000
1,800,000 NY State Local Govt. Assistance Corp.
Rev. Bonds, Ser. D, 7s, 4/1/18 Aaa 2,018,250
11,125,000 NY State Med. Care Fac. Fin. Agcy. Rev. Bonds,
Ser. A, AMBAC, FHA Insd., 6 1/2s, 8/15/29 Aaa 12,738,125
3,000,000 NY State Urban Dev. Corp. Rev. Bonds
(Correctional Cap. Fac.), FSA, 6 1/2s, 1/1/10 Aaa 3,506,250
7,000,000 Port Auth. NY & NJ Rev. Bonds (Delta Airlines, Inc.),
Ser. 1R, 6.95s, 6/1/08 Baa3 7,682,500
--------------
62,314,450
North Carolina (2.0%)
- ------------------------------------------------------------------------------------------------------------
3,000,000 NC Eastern Muni. Pwr. Agcy. Syst. IFB, FGIC, 7.987s,
1/1/25 (acquired 3/3/93, cost $3,116,820) [DBL. DAGGER] Aaa 3,727,500
NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds
5,250,000 AMBAC, 6s, 1/1/18 Aaa 5,860,313
10,000,000 Ser. B, MBIA, 6s, 1/1/22 Aaa 11,212,500
6,000,000 NC Muni. Pwr. Agcy. IFB (No. 1, Catawba Elec.),
MBIA, 6.92s, 1/1/20 Aaa 6,330,000
--------------
27,130,313
Ohio (0.7%)
- ------------------------------------------------------------------------------------------------------------
4,500,000 Dayton, Special Fac. Rev. Bonds
(Emery Air Freight Corp.), 12 1/2s, 10/1/09 BBB-/P 4,823,595
1,025,000 OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds,
Ser. B, GNMA Coll., 8 1/4s, 12/15/19 AAA 1,065,313
2,955,000 OH Hsg. Finl. Agcy. Rev. Bonds, Ser. B-1, GNMA
Coll., 5.85s, 9/1/16 AAA 3,124,913
--------------
9,013,821
Oklahoma (0.4%)
- ------------------------------------------------------------------------------------------------------------
4,505,000 Tulsa Muni. Arpt. Trust Rev. Bonds
(American Airlines, Inc.), 7 3/8s, 12/1/20 Baa2 4,887,925
Oregon (0.9%)
- ------------------------------------------------------------------------------------------------------------
Washington Cnty., G.O. Bonds (Criminal Justice Fac.)
5,870,000 6s, 12/1/11 Aa1 6,457,000
5,535,000 6s, 12/1/10 Aa1 6,088,500
--------------
12,545,500
Pennsylvania (4.6%)
- ------------------------------------------------------------------------------------------------------------
4,115,000 Dauphin Cnty., Gen. Auth. Hosp. Rev. Bonds
(Northwest Med. Ctr.), 8 5/8s, 10/15/13 BBB- 4,974,006
1,180,000 Doylestown, Hosp. Auth. Rev. Bonds
(Doylestown Hosp. Pine Run), Ser. A, 7.2s, 7/1/23 AAA/P 1,358,475
2,340,000 Greene Cnty., Hosp. Auth. Rev. Bonds
(Greene Cnty. Memorial Hosp.), 6 1/2s, 1/1/02 BBB-/P 2,352,613
1,500,000 Lehigh Cnty., Indl. Dev. Auth. Poll. Control IFB
(Pennsylvania Pwr. & Light Co.), MBIA, 8.924s,
9/1/29 (acquired 6/20/95, cost $1,655,190) [DBL. DAGGER] AAA/P 1,820,625
7,815,000 McKeesport, Hosp. Auth. Rev. Bonds
(McKeesport Hosp.), 6 1/4s, 7/1/03 Baa2 8,313,206
Montgomery Cnty., Higher Ed. & Hlth. Auth. Hosp.
Rev. Bonds (UTD Hosp.), Ser. B
3,500,000 8 3/8s, 11/1/11 AAA 3,801,875
2,230,000 7 1/2s, 11/1/12 AAA 2,349,863
800,000 Montgomery Cnty., Higher Ed. & Hlth. Auth. VRDN
(Philadelphia Presbyterian Hosp.), 3.8s, 7/1/25 VMIG1 800,000
3,000,000 PA Econ. Dev. Fin. Auth. Rev. Bonds
(Northampton Generating), Ser. A, 6 1/2s, 1/1/13 BBB- 3,183,750
4,000,000 PA State COP, Ser. A, AMBAC, 5s, 7/1/15 Aaa 3,930,000
PA State Econ. Dev. Fin. Auth. Resource
Recvy. Rev. Bonds
4,000,000 (Clover), Ser. E, 8.05s, 12/1/15 BB/P 4,615,000
2,000,000 (Clover), Ser. D, 7.15s, 12/1/18 BBB- 2,230,000
4,250,000 (Northampton), Ser. B, 6 3/4s, 1/1/07 BB+/P 4,653,750
2,000,000 PA State Higher Ed. Assistance Agcy. IFB (Graduate
Hlth. Syst. Oblig.), Ser. B, MBIA, 11.092s, 3/1/20 Aaa 2,280,000
3,000,000 Philadelphia, Gas Works Rev. Bonds, Ser.
13, 7.7s, 6/15/21 Aaa 3,367,500
6,000,000 Philadelphia, Gas Works IFB, FSA, 6.482s, 8/1/21
(acquired 1/24/94, cost $5,621,520) [DBL. DAGGER] Aaa 5,947,500
3,250,000 Philadelphia, Wtr. & Wastewtr. IFB, FGIC,
7.12s, 6/15/12 Aaa 3,534,375
1,800,000 Washington Cnty., Indl. Dev. Auth. 1st Mtge.
Rev. Bonds (AHF/Central States, Inc.),
10 1/4s, 11/1/19 B-/P 1,842,750
--------------
61,355,288
Puerto Rico (2.1%)
- ------------------------------------------------------------------------------------------------------------
4,180,000 Cmnwlth. of PR, Muni. Fin. Agcy. Rev. Bonds,
Ser. A, FSA, 6s, 7/1/11 Aaa 4,712,950
8,500,000 Cmnwlth. of PR, IFB, MBIA, 7.9197s, 7/1/24
(acquired 6/12/95, cost $8,912,500) [DBL. DAGGER] Baa1 9,583,750
PR Elec. Pwr. Auth. Rev. Bonds
5,935,000 Ser. S, MBIA, 7s, 7/1/06 # Aaa 6,995,881
5,400,000 Ser. T, 6 3/8s, 7/1/24 Baa1 6,108,750
--------------
27,401,331
South Carolina (2.5%)
- ------------------------------------------------------------------------------------------------------------
8,500,000 Charleston Cnty., Indl. Dev. Rev. Bonds
(Hoover Group, Inc.), 8 1/2s, 11/1/02 B/P 8,925,000
5,705,000 Florence Cnty., Indl. Dev. Auth. Rev. Bonds
(Stone Container Corp.), 7 3/8s, 2/1/07 B+/P 6,211,319
Piedmont, Muni. Elec. Pwr. Agcy. Rev. Bonds, Ser. A
3,775,000 FGIC, 6 1/2s, 1/1/16 Aaa 4,421,469
630,000 Refunded, FGIC, 6 1/2s, 1/1/16 Aaa 747,338
8,000,000 Piedmont, Muni. Pwr. Agcy. Rev. Bonds
(Elec. Rev.), FGIC, 5s, 1/1/22 Aaa 7,740,000
5,000,000 SC Jobs Econ. Dev. Auth. Rev. Bonds
(St. Francis Hosp.-Franciscan Sisters), 7s, 7/1/15 Baa1 5,475,000
--------------
33,520,126
Tennessee (1.7%)
- ------------------------------------------------------------------------------------------------------------
8,500,000 IVRC-Bristol TN Mem. Hosp. IFB, FGIC,
13.7298s, 2/28/14 (acquired 6/16/95,
cost $9,366,660) [DBL. DAGGER] Aaa 9,010,000
7,000,000 Knox Cnty., Hlth. Edl. & Hsg. Fac. Board Rev. Bonds
(Ft. Sanders Alliance), MBIA, 6 1/4s, 1/1/13 Aaa 8,058,750
4,930,000 Metropolitan Nashville & Davidson Cnty.,
Wtr. & Swr. Rev. Bonds, FGIC, 6 1/2s, 1/1/09 Aaa 5,718,800
--------------
22,787,550
Texas (5.6%)
- ------------------------------------------------------------------------------------------------------------
10,000,000 Alliance, Arpt. Auth. Special Fac. Rev. Bonds
(American Airlines, Inc.), 7 1/2s, 12/1/29 Baa2 10,862,500
7,500,000 Dallas-Fort Worth, Intl. Arpt. Fac. Impt. Corp.
Rev. Bonds (American Airlines, Inc.),
7 1/4s, 11/1/30 Baa2 8,353,125
8,335,000 Harris Cnty., Hlth. Fac. Rev. Bonds
(Hermann Mem. Hosp.), FSA, 5 1/2s, 6/1/11 Aaa 8,824,681
Houston, Wtr. & Swr. Syst. Rev. Bonds, Ser. C
16,730,000 AMBAC, 6 3/8s, 12/1/17 Aaa 18,131,138
1,070,000 Prerefunded, AMBAC, 6 3/8s, 12/1/17 Aaa 1,168,975
2,900,000 Katy, Indpt. School Dist. VRDN, Ser. A, PSFG,
3 3/4s, 2/15/20 A-1+ 2,900,000
North Central Hlth. Fac. Dev. Corp. IFB
4,000,000 (Presbyterian Hlth. Care Syst.), Ser. C, MBIA,
9.425s, 6/15/21 Aaa 4,740,000
3,000,000 (Baylor Hlth. Care Syst.), Ser. B, 8.1s, 5/15/08 Aa2 3,243,750
10,000,000 Plano, Hlth. Fac. Dev. Rev. Bonds (TX Hlth.
Resources Syst..), Ser. C, MBIA, 5s, 2/15/22 Aaa 9,700,000
Port Arthur Dist., Rev. Bonds
(Great Lakes Carbon Corp.)
1,195,000 Ser. A, 6 3/4s, 9/1/02 B+/P 1,197,545
350,000 Ser. B, 6 3/4s, 9/1/02 B+/P 350,840
5,500,000 Tarrant Cnty., Hlth. Fac. Dev. Corp. Hlth. Syst.,
Ser. A, 5s, 2/15/26 Aaa 5,266,250
--------------
74,738,804
Utah (0.4%)
- ------------------------------------------------------------------------------------------------------------
4,750,000 Intermountain Pwr. Agcy. Rev. Bonds, Ser. B,
7 3/4s, 7/1/20 A1 4,888,178
Virginia (0.5%)
- ------------------------------------------------------------------------------------------------------------
3,900,000 Culpeper, Ind. Dev. Auth. Res. Care Fac. VRDN
(Baptist Homes), 3.7s, 11/1/17 A-1+ 3,900,000
2,000,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB,
FGIC, 9.418s, 8/15/23 Aaa 2,392,500
--------------
6,292,500
Washington (1.0%)
- ------------------------------------------------------------------------------------------------------------
1,895,000 Grant Cnty., Pub. Hosp. Dist. No. 1 Rev. Bonds
(Samaritan Hosp.), 9 1/4s, 9/1/10 BBB/P 2,148,456
WA State Pub. Pwr. Supply Syst. Rev. Bonds
(Nuclear No. 3)
5,000,000 Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 6,156,250
5,000,000 Ser. A, FSA, 6s, 7/1/08 Aaa 5,543,750
--------------
13,848,456
West Virginia (0.7%)
- ------------------------------------------------------------------------------------------------------------
3,600,000 WV State G.O. Bonds, Ser. D, FGIC, 6 1/2s, 11/1/26 Aaa 4,252,500
5,000,000 WV State Pkwy. Economic Dev. & Tourism Auth.
IFB, FGIC, 7.738s, 5/16/19 Aaa 5,543,750
--------------
9,796,250
Wisconsin (0.2%)
- ------------------------------------------------------------------------------------------------------------
2,700,000 WI Hsg. & Econ. Dev. Auth. IFB
(Home Ownership Dev.), 10.057s, 10/25/22 Aa3 3,074,613
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,229,514,407) *** $1,319,159,034
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $1,331,156,377.
** The Moody's or Standard & Poor's ratings indicated are believed
to be the most recent ratings available at March 31, 1998, for the
securities listed. Ratings are generally ascribed to securities at the
time of issuance. While the agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at March 31, 1998. 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, 1998 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 33.8% 1.4%
AA/Aa 4.8 --
A/A 10.2 0.3
BBB/Baa 18.6 1.9
BB/Ba 5.6 8.8
B/B 1.5 11.5
Caa/CCC -- --
Ca/CC -- --
C -- --
D -- 0.3
P-1/VMIGI 0.4 --
---- ----
74.9% 24.2%
Ratings are not covered by the Report of independent
accountants.
*** The aggregate identified cost on a tax basis is $1,229,537,362,
resulting in gross unrealized appreciation and depreciation of
$94,990,900 and $5,369,228, respectively, or net unrealized appreciation
of $89,621,672.
+ Non-income-producing security.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at March 31, 1998,
was $57,941,625 or 4.4% of net assets.
# A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at March
31, 1998.
The rates shown on IFB, which are securities paying interest rates
that vary inversely to changes in the market interest rates, and VRDNs
are the current interest rates at March 31, 1998.
The fund had the following industry group concentrations greater
than 10% at March 31, 1998 (as a percentage of net assets):
Utilities 14.4%
Transportation 13.4
Hospitals/Health Care 13.1
The fund had the following insurance concentrations greater than
10% at March 31, 1998 (as a percentage of net assets):
MBIA 11.2%
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Futures Contracts Outstanding at March 31, 1998
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bond
Index (long) $58,310,000 58,246,219 12/20/98 $ 63,781
U.S. Treasury
Bonds (short) 95,839,250 96,208,313 12/20/98 369,063
- -----------------------------------------------------------------------------------------
$432,844
- -----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
Statement of assets and liabilities
March 31, 1998
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,229,514,407) (Note 1) $1,319,159,034
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 22,816,983
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,267,023
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 330,413
- ---------------------------------------------------------------------------------------------------
Total assets 1,344,573,453
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 1,761,838
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 165,344
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,551,680
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 6,124,495
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 796,530
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,898,594
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 130,234
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 21,506
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,676
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 886,821
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 75,358
- ---------------------------------------------------------------------------------------------------
Total liabilities 13,417,076
- ---------------------------------------------------------------------------------------------------
Net assets $1,331,156,377
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,287,951,196
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (83,412)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investment (Note 1) (46,788,878)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 90,077,471
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,331,156,377
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($816,443,785 divided by 87,945,641 shares) $9.28
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.28)* $9.74
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($499,594,395 divided by 53,862,401 shares)*** $9.28
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($15,118,197 divided by 1,629,284 shares) $9.28
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.28)** $9.59
- ---------------------------------------------------------------------------------------------------
* 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, 1998
<S> <C>
Tax exempt interest income: $ 83,556,438
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 7,584,939
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,371,175
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 41,743
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 19,289
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,036,637
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 4,156,812
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 66,597
- --------------------------------------------------------------------------------------------------
Reports to shareholders 37,675
- --------------------------------------------------------------------------------------------------
Registration fees 75
- --------------------------------------------------------------------------------------------------
Auditing 49,865
- --------------------------------------------------------------------------------------------------
Legal 68,688
- --------------------------------------------------------------------------------------------------
Other 8,467
- --------------------------------------------------------------------------------------------------
Total expenses 15,441,962
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (370,378)
- --------------------------------------------------------------------------------------------------
Net expenses 15,071,584
- --------------------------------------------------------------------------------------------------
Net investment income 68,484,854
- --------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (16,490,642)
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (4,022,730)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
futures during the year 81,702,121
- --------------------------------------------------------------------------------------------------
Net gain on investments 61,188,749
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $129,673,603
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended March 31
------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 68,484,854 $ 72,706,997
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (20,513,372) 1,570,079
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 81,702,121 (9,991,065)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 129,673,603 64,286,011
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (45,766,249) (47,379,439)
- ----------------------------------------------------------------------------------------------------------------------
Class B (23,212,036) (24,747,071)
- ----------------------------------------------------------------------------------------------------------------------
Class M (690,043) (540,669)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (8,770,710) (15,964,060)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 51,234,565 (24,345,228)
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 1,279,921,812 1,304,267,040
- ----------------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess and
undistributed net investment income of $83,412
and $768,055, respectively) $1,331,156,377 $1,279,921,812
- ----------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.87 $8.93 $8.74 $8.73 $9.12
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .50 (c) .52 .52 .54 .55
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .42 (.06) .19 -- (.34)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities .92 .46 .71 .54 .21
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.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 (.51) (.52) (.52) (.53) (.60)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.28 $8.87 $8.93 $8.74 $8.73
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.54 5.24 8.31 6.55 2.15
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $816,444 $794,330 $821,500 $828,548 $852,281
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) .95 .96 .95 .95 .97
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.43 5.80 5.86 6.28 5.73
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share January 4, 1993+
operating performance Year ended March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.86 $8.92 $8.74 $8.73 $9.12 $8.95
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .44 (c) .46 .47 .48 .44 .10
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .43 (.06) .18 .01 (.32) .17
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities .87 .40 .65 .49 .12 .27
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.45) (.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 (.45) (.46) (.47) (.48) (.51) (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.28 $8.86 $8.92 $8.74 $8.73 $9.12
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.00 4.61 7.55 5.94 1.52 3.05 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $499,594 $473,818 $474,374 $427,086 $369,006 $95,175
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) 1.55 1.56 1.54 1.55 1.54 .30 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.83 5.19 5.25 5.66 5.02 1.21 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 33.13 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).
(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
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Dec. 1, 1994+
operating performance Year ended March 31 to March 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.86 $8.92 $8.75 $8.21
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .47 (c) .49 .50 .16
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .43 (.06) .17 .54
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment activities .90 .43 .67 .70
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.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 (.48) (.49) (.50) (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.28 $8.86 $8.92 $8.75
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.39 4.97 7.77 8.58 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $15,118 $11,773 $8,394 $1,224
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.20 1.21 1.18 .41 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.16 5.51 5.45 1.78 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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
March 31, 1998
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 year ended March 31, 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. 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. These differences include temporary and permanent
differences of realized and unrealized gains and losses on certain future
contracts, post October loss deferral, defaulted bond interest, capital loss
carryover and market discount. 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, 1998, the fund reclassified $332,007 to decrease distributions
in excess of net investment income and $277,692 to decrease paid-in-capital,
with an increase to accumulated net realized loss of $54,315. The calculation
of net investment income per share in the financial highlights table excludes
these adjustments.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on zero coupon bonds,
original issue discount bonds and stepped-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, and
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 wholly-owned subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
As part of the subcustodian contract between the subcustodian bank and PFTC,
the subcustodian bank has a lien on the securities of the fund to the extent
permitted by the fund's investment restrictions to cover any advances made by
the subcustodian bank for the settlement of securities purchased by the fund.
At March 31, 1998, the payable to the subcustodian bank represents the amount
due for cash advance for the settlement of a security purchased.
For the year ended March 31, 1998, fund expenses were reduced by $370,378
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 $1,060 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 currently limit 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 year ended March 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $108,675 and $2,534 from the sale of
class A and class M shares, respectively and $832,012 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, 1998, Putnam Mutual Funds Corp., acting as underwriter
received $25,088 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended March 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $476,359,926 and
$425,040,460, 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, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
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)
- ------------------------------------------------------------
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, 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
- ------------------------------------------------------------
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, 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
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net
investment income during the fiscal year as tax exempt for
Federal income tax purposes.
The Form 1099 you receive in January 1999 will show the tax status
of all distributions paid to your account in calendar 1998.
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
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
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
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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
AN040-42038 051/353/560 5/98
