Putnam
Managed
Municipal
Income Trust
SEMIANNUAL REPORT
April 30, 1995
[logo--scales]
B O S T O N (bullet) L O N D O N (bullet) T O K Y O
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Performance highlights
(triangle)"Over the long term, Putnam Managed Municipal Income Trust has one of
the best records in its objective: Its five-year trailing return beats those
of 97% of its peers', largely because of the fund's ability to fare well in
both rising- and falling-rate environments."
- -- Morningstar Mutual Funds, March 24, 1995*
(triangle)Performance should always be considered in light of a fund's
investment strategy. Putnam Managed Municipal Income Trust is designed for
investors seeking high current income exempt from federal income tax through
a diversified portfolio of tax-exempt municipal securities.
SEMIANNUAL RESULTS AT A GLANCE
Total return NAV Market price
(change in value
during period plus
reinvested
distributions)
6 months ended 4/30/95 7.52% 15.37%
Share value NAV Market price
(common shares)
10/31/94 $ 9.49 $ 9.25
4/30/95 9.80 10.25
Distributions No. Income Capital gains((1)) Total
Common shares 6 $ 0.381 -- $ 0.381
Preferred shares
Series A (550) $1997.70 -- $1997.70
Series B (550) 2045.85 -- 2045.85
Series C (650) 2003.24 -- 2003.24
Current return NAV Market price
End of period
Current dividend
rate((2)) 7.78% 7.43%
Taxable
equivalent((3)) 12.88 12.30
Performance data represent past results. For performance over longer periods,
see pages 8 and 9.
((1))Capital gains, if any, are taxable for federal and, in most cases, state
tax purposes.
((2))Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
((3))Assumes maximum 39.6% federal tax rate. Results for investors subject to
lower tax rates would not be as advantageous. For some investors, investment
income may also be subject to the federal alternative minimum tax. Investment
income may be subject to state and local taxes.
*Morningstar, Inc., an independent industry research organization, rates a
fund in relation to other funds with similar investment objectives, based on
the fund's 3- and 5-year average annual returns, adjusted for risk factors
and sales charges. For the 3- and 5-year periods ended 4/30/95, there were 95
and 44 funds, respectively, in the closed-end municipal category. The fund
received an overall rating of three stars. Ratings are updated monthly. Past
performance is not indicative of future results.
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From the Chairman
[photo of George Putnam]
(C)Karsh, Ottawa
Dear Shareholder:
Many of the gathering signs of hope that sustained municipal bond investors
during the darkest days of the 1994 market decline began manifesting
themselves in earnest over the early months of 1995. Although the market
exhibited volatility toward the end of Putnam Managed Municipal Income
Trust's semiannual period (the six months ended April 30, 1995), the mood was
appreciably more upbeat than it had been when the fiscal year began.
The economy continued to march at a brisk stride, though the pace since
January has slowed considerably from calendar 1994 levels. Investors took
this moderation as a sign that the economy was responding favorably to the
Federal Reserve Board's strategy of raising short-term rates to rein in
growth and thereby hold inflation in check. The consensus in the markets
seems to be that the Fed's series of interest-rate increases may be near an
end.
The sharp decline in new issues that market watchers foresaw as a spur to
higher prices added fuel to the recent rally. So did the attractiveness of
tax-free yields relative to taxable Treasuries. In the following report, Fund
Manager Howard Manning discusses the fund's performance so far in fiscal 1995
and prospects for the second half.
Respectfully yours,
/s/George Putnam
George Putnam
Chairman of the Trustees
June 21, 1995
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Report from the Fund Manager
Howard Manning
After weathering one of the most volatile bond markets in recent memory,
municipal bond investors were finally rewarded with strong gains during the
first four months of 1995. Although the six-month reporting period that ended
April 30, 1995, began in turbulence, a turnaround began in January as the
entire bond market staged a strong rally--with municipal bonds in the lead.
Behind the market's rise were signs that economic growth was beginning to
moderate, the Federal Reserve Board had taken a break from its anti-inflation
policy of raising short-term interest rates, and inflation was expected to
remain at a modest level.
For the semiannual period, Putnam Managed Municipal Income Trust produced a
total return of 7.52% at net asset value (NAV). With taxable-equivalent
yields now in double digits, your fund's current dividend rate at NAV would
translate into a yield of 12.88% for a taxable investment, assuming the
maximum 39.6% federal tax rate. Most investors in lower brackets would also
enjoy tax advantages, though not to the same extent.
(triangle) CAREFUL POSITIONING ANTICIPATED RALLY
Toward the end of calendar 1994, market sentiment was overwhelmingly
negative. In fact, we felt it was too negative. Our fundamental research
indicated that the market's pessimism had eroded prices to unprecedented
levels, and it appeared to us that the market was due for a correction. We
positioned the portfolio to take advantage of any eventual upturn in the
market, but we were careful to do so in a conservative manner.
Because we wanted the fund to generate as much income as possible while
benefiting from potentially higher bond prices, we employed a barbelled
formation in selecting bonds for the portfolio. About half of the portfolio
was invested in higher-yielding bonds with shorter maturities, which are less
sensitive to market movements. The higher income stream on these bonds
represents the greatest portion of their return.
We invested the other half of the portfolio in bonds that were likely to
perform closely in line with market trends, expecting a
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certain amount of volatility but also substantial potential benefits. Our
selection consisted mostly of discount bonds, which have relatively long
maturities and lower coupons (yields). Prices on discount bonds tend to
appreciate faster than other bonds as interest rates fall and decline faster
when they rise.
(triangle) CREDIT RESEARCH ESSENTIAL TO BOND SELECTION
During the period, our stringent credit analysis led us to a number of bond
issues we believed were undervalued--many in promising geographical and
market sectors. These included selected New York agency issues. During the
period, approximately 11% of the portfolio was held in New York state and New
York City bonds. We favored New York debt because we believed it was
undervalued in the marketplace and represented significant relative value.
As of this writing, New York City is facing a projected $3.1 billion revenue
shortfall in its fiscal 1996 budget. Mayor Giuliani has proposed about $500
million in additional spending cuts from existing programs and services to
help cover part of the shortfall. With the legislators in Albany struggling
to balance the state budget, it remains unclear at this time if they will
come through with additional funds--as requested by the mayor--to close the
city's budget gap.
This uncertainty has contributed to discussions of a modest downgrade of the
city's general obligation debt. By most accounts, municipal bond investors
have already factored in the likelihood of such an event. Additionally, the
fund's well-diversified portfolio has and should continue to play a
significant role in limiting price fluctuation.
[bar chart]
TOP FIVE INDUSTRY SECTORS*
Hospitals/health care 22.2%
Utilities 21.1%
Transportation 12.0%
Housing 5.0%
Energy 4.0%
*Based on net assets as of 4/30/95. Sectors may vary over time.
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We also added to our position in the airline industry through industrial
revenue bonds. These bonds are issued by municipalities which are secured by
a lease agreement with a corporation. We have significant exposure to what we
believe are the two strongest airlines, United Airlines and American
Airlines. Both companies have undergone major restructuring programs over the
past few years. They've streamlined their businesses, cut costs, and are
competitive within their industry. In addition, demand for these bonds is
strong and we believe this strength will enhance their value in the
portfolio.
(triangle) AIRPORT SECURITIES GAIN, HEALTH CARE IN THE DOLDRUMS
Over this period, we took profits in several bonds whose prices had risen
significantly. One example was Denver Airport bonds. Putnam Management's
credit research suggested that the airport would open in February and that
demand for these bonds would increase. These bonds had been solid performers,
and when the airport opened on February 28, their prices rose significantly.
To capture the capital appreciation, we reduced the fund's position in this
security.
Regarding the health care sector, after years of consolidation and cost
cutting and with the immediate prospect of health care legislation no longer
an issue, it seemed to us that the health care sector was poised for strong
performance. Ironically, the opposite occurred over this period. Hospital
bonds, in particular, were laggards.
What happened in the hospital segment was not a selloff. It was more of a
standoff. Investors were neither buying nor selling hospital bonds. As demand
deteriorated, prices declined. When the health care issues in the portfolio
experienced a modest rebound, we selectively reduced the fund's allocation in
hospital bonds and invested the proceeds in bonds in other sectors that
offered better relative value. We believe that the health care sector holds
promise over the long term and we will monitor this sector closely for buying
opportunities in the future.
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TOP 10 ISSUERS (4/30/95)
Metropolitan Water District, Southern California,
waterworks revenue bonds
Ohio State Air Quality Development Authority
pollution control revenue bonds
Washington State Public Power Supply System
revenue bonds
Chicago, O'Hare International Airport
special facility revenue bonds
North Carolina Eastern Municipal Power Agency
revenue bonds
Denver City and County Airport
revenue bonds
New York City
general obligation bonds
University of California
revenue bonds
Clark County, Nevada,
industrial development revenue bonds
New York State Dormitory Authority
revenue bonds
These holdings represent 31% of the fund's net assets. Portfolio holdings
will vary over time.
(triangle) OUTLOOK: PROCEEDING WITH CAUTION
We are cautiously optimistic about prospects for the municipal bond market
over the near term. We are looking for clearer signs that the Fed's objective
of controlled, sustained economic growth with moderate inflation has been
achieved. Until we are confident that these events have occurred, we will
continue to take a conservative approach in managing your fund; that is, we
will maintain a balance between bonds that are more sensitive to interest
rates and those that add stability to the portfolio.
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 April 30, 1995, there is no guarantee the fund will continue
to hold these securities in the future.
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Performance summary
This section provides, at a glance, information about your fund's
performance. 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 back into the fund. We show total return in two
ways: on a cumulative long-term basis and on average how the fund might have
grown each year over varying periods. For comparative purposes, we show how
the fund performed relative to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDED 4/30/95
Lehman Bros.
Municipal
NAV Market price Bond Index CPI
6 months 7.52% 15.37% 7.57% 1.61%
1 year 6.30 5.67 6.65 3.05
5 years 64.37 68.63 49.85 17.84
Annual average 10.45 11.02 8.43 3.34
Life of fund
(since 2/24/89) 73.58 68.84 64.07 24.92
Annual average 9.32 8.83 8.33 3.66
TOTAL RETURN FOR PERIODS ENDED 3/31/95
(most current calendar quarter)
Lehman Bros.
Municipal
NAV Market price Bond Index CPI
6 months 5.11% 8.89% 5.54% 1.34%
1 year 6.51 7.57 7.43 2.85
5 years 62.38 63.38 48.59 17.64
Annual average 10.18 10.32 8.24 3.30
Life of fund
(since 2/24/89) 73.52 64.69 63.88 24.51
Annual average 9.46 8.52 8.43 3.66
Performance data represent past results. Investment returns net asset value
and market price will fluctuate so an investor's shares, when sold, may be
worth more or less than their original cost. Fund performance data do not
take into account any adjustment for taxes payable on reinvested
distributions.
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TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, the liquidation preference and cumulative undeclared dividends
paid on the remarketed preferred shares, divided by the number of outstanding
common shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York
Stock Exchange.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the municipal
bond market. The index 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.
Consumer Price Index (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
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A Putnam perspective on risk and reward
You've probably been told how important it is to understand the relationship
between an investment's potential rewards and its accompanying risks. Given
the cautionary nature of such instructions, it may take most investors a
while to realize that risk has a positive side.
Every risk signals a potential reward. Selecting only those investments that
offer the greatest degree of security generally leads to only modest rewards.
Furthermore, even insured or guaranteed investments may be subject to changes
in their rates of return or, in some cases, in their principal values.
Experienced investors know that no investment is truly risk free and are
therefore willing to take on some measure of risk in order to increase their
potential gains.
The greater the risk, the greater the potential reward. Accepting an
appropriate level of investment risk can give you a better chance of
outpacing inflation over time and seeking to maximize your investment's
return. How much risk? Your financial
(triangle) A RUNDOWN OF RISK TYPES
MARKET RISK Most important for stock funds, but relevant to all funds, this
is a measure of how sensitive a fund's holdings are to changes in general
market conditions. Remember, though, that securities that lose value quickly
in market declines may also show the strongest gains in more favorable
environments.
INTEREST-RATE RISK Since bond prices fall as interest rates rise, this type
of risk is a particular concern for fixed-income investors. However,
interest-rate increases can also have a substantial negative effect on the
stock market.
INFLATION RISK If your investments cannot keep pace with inflation, your
money will begin to lose its purchasing power. Stock investments are
generally considered among the best ways of addressing inflation risk over
the long term.
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advisor's feedback and your time horizon can make all the difference in
determining how much risk is compatible with your investment goals and your
peace of mind.
FITTING YOUR FUND SELECTION TO YOUR
RISK TOLERANCE
How do you find the right balance between investment risks and their
potential rewards. It's helpful to understand the types of risks that can
apply to different types of investments, and to look at your own portfolio
with this perspective.
For short-term goals, your first priority may be managing market risk.
Longer-term investors may be more concerned with inflation risk. And all
income-oriented investors should consider interest rate, credit, and
prepayment risks carefully.
CREDIT AND PREPAYMENT RISK Credit risk is the concern that the security's
issuer will not be able to meet its payment, while prepayment risk involves
the premature payoff of a loan, with a resulting loss of interest income.
Professional management and in-depth research are invaluable in managing both
these risks.
LIQUIDITY RISK Not all investments can be readily converted into cash at
their perceived market values. Liquidity risk can affect the price of
securities held in the fund's portfolio and, thus, the fund's share prices.
This list covers only the most general types of risks; however, each
investment will also have its own specific risks.
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Portfolio of investments owned
April 30, 1995 (Unaudited)
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MUNICIPAL BONDS AND NOTES (98.0%)*
PRINCIPAL AMOUNT RATINGS** VALUE
Arizona (2.6%)
AZ Hlth. Fac. Auth. Hosp. Syst. Rev.
Bonds
$3,000,000 (St. Luke's Hosp. Syst.), Ser. A,
10-1/8s, 11/1/15 Ba $ 3,138,750
3,425,000 (St. Luke's Hlth. Syst.), 7-1/4s, 11/1/14 Ba 3,934,468
2,000,000 Gila Cnty., Indl. Dev. Auth. Poll. Control
Rev. Bonds, Ser. 85, 8.9s, 7/1/06 Baa 2,170,000
4,000,000 Payson, Indl. Dev. Auth. Hosp. Rev. Bonds
(Payson Regl. Med. Ctr. Inc. Project),
7.7s, 10/1/23 B/P 3,725,000
3,500,000 Salt River, Agricultural Impt. & Pwr.
Dist. Elec. Syst. Rev. Bonds (Salt River
Project), Ser. B, MBIA, 5-1/4s, 1/1/19 AAA 3,132,500
16,100,718
California (13.0%)
5,700,000 Berkeley, Hlth. Fac. Rev. Bonds (Alta
Bates Med. Ctr.), Ser. A, 6.55s, 12/1/22 Baa 5,308,125
7,430,000 CA Hlth. Facs. Fing. Rev. Bonds (Pac.
Presbyterian), Ser. B, III, 6-3/4s, 6/1/15 A 7,448,575
5,000,000 Contra Costa, Wtr. Dist. Wtr. Rev. Bonds,
Ser. G, MBIA, 5-1/2s, 10/1/19 AAA 4,581,250
2,775,000 Corona, COP (Vista Hosp. Syst.), Ser. B,
9-1/2s, 7/1/20 BB/P 2,892,937
5,000,000 Los Angeles, Dept. Wtr. & Pwr. Elec. Plant
Rev. Bonds 2nd Issue, MBIA, 5-1/4s,
11/15/26 AAA 4,362,500
22,800,000 Metro. Wtr. Dist. Southern CA Wtrwrks. Rev
Bonds, 6-3/4s, 7/1/18 AAA 25,108,500
5,000,000 Riverside, Redev. Agcy. Rev. Bonds
(Tax Alloc. Merged Redev. Project),
Ser. A, MBIA, 5-5/8s, 8/1/23 AAA 4,625,000
8,750,000 Santa Clara Cnty. Fing. Auth. Lease Rev.
Bonds (Vmc. Fac. Replacement Project),
Ser. A, AMBAC, 6-3/4s, 11/15/20 AAA 9,275,000
15,000,000 U. of CA Rev. Bonds (USCD Med. Ctr.
Satellite Med. Fac.), 7.9s, 12/1/19 BBB 15,918,750
79,520,637
Colorado (4.9%)
Denver CO City & Cnty. Arpt. Rev. Bonds
4,000,000 Ser. A, 8-3/4s, 11/15/23 Baa 4,435,000
7,435,000 Ser. A, 8-1/2s, 11/15/23 Baa 8,076,268
2,000,000 Ser. D, 7-3/4s, 11/15/21 Baa 2,072,500
1,050,000 Ser. D, 7-3/4s, 11/15/13 Baa 1,152,375
2,800,000 Ser. C, 6-3/4s, 11/15/13 Baa 2,779,000
11,970,000 Denver, City & Cnty. Special Fac. Arpt.
Rev. Bonds (United Air Lines, Inc.
Project),
Ser. A, 6-7/8s, 10/1/32 Baa 11,356,537
29,871,680
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MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Florida (4.8%)
$5,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds
(FL Crushed Stone Co.), 8-1/2s, 12/1/14 B/P $ 5,250,000
7,900,000 Lee Cnty., Hosp. Board of Directors Hosp.
IFB (Lee Memorial Hosp.), MBIA, 8.327s,
4/1/20 AAA 8,235,750
3,500,000 Orange Cnty., Hlth. Fac. Auth. 1st. Mtge.
Rev. Bonds (RHA/Princeton Hosp.), 9s,
7/1/21 B/P 2,839,375
1,225,000 Palm Beach Cnty., Hlth. Fac. Auth. Rev.
Rfdg. Bonds (JFK Med. Ctr. Inc. Project),
8-7/8s, 12/1/18 BBB 1,332,187
11,350,000 Tampa, Cap. Impt. Rev. Bonds,
Ser. B, 8-3/8s, 10/1/18 BBB 12,016,812
29,674,124
Georgia (0.8%)
1,505,000 Atlanta, Special Purpose Fac. Rev. Bonds
(Delta Air Lines, Inc. Project), Ser. B,
7.9s, 12/1/18 Ba 1,557,675
3,250,000 Gwinnett Cnty., Indl. Dev. Auth. Rev.
Bonds (Kawneer Co. Inc. Project), Ser.
1984, 9-1/2s, 6/1/15 BBB/P 3,485,625
5,043,300
Idaho (0.7%)
4,000,000 Owyhee Cnty., Indl. Dev. Corp. Rev. Bonds
(Envirosafe Svcs. of Idaho Inc.), 8-1/4s,
11/1/02 B/P 3,990,000
Illinois (4.7%)
Chicago, O'Hare Intl. Arpt. Special Fac.
Rev. Bonds (United Air Lines, Inc.)
5,528,000 Ser. B, 8.95s, 5/1/18 Baa 6,066,980
3,325,000 Ser. 84A, 8.85s, 5/1/18 Baa 3,682,437
1,895,000 Ser. 84B, 8.85s, 5/1/18 Baa 2,098,712
(American Airlines, Inc. Project),
5,000,000 Ser. A, 7-7/8s, 11/1/25 Baa 5,187,500
3,000,000 8.2s, 12/1/24 Baa 3,311,250
2,500,000 IL Dev. Fin. Auth. Retirement Hsg. Rev.
Bonds (Regency Park-Lincolnwood),
Ser. A, 10-1/4s, 4/15/19+ B/P 1,750,000
6,100,000 Robbins Res. Recvy. Rev. Bonds (Recov.
Partners), Ser. A, 9-1/4s, 10/15/14 B/P 6,588,000
28,684,879
Iowa (0.9%)
IA Fin. Auth. Hlth. Care Fac. Rev. Bonds
(Mercy Hlth. Initiatives Project),
3,000,000 9.95s, 7/1/19 B/P 2,940,000
2,350,000 9.85s, 7/1/09 BB/P 2,303,000
5,243,000
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MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Kansas (2.8%)
$7,500,000 Burlington, Poll. Control, IFB (KS Gas &
Electric), Ser. 91-4, MBIA, 9.168s,
6/1/31 (acquired 12/17/91, cost
$7,800,000)++ AAA $ 8,334,375
8,400,000 Witchita, Hosp. IFB Ser. 111-A, MBIA,
8.387s, 10/1/17# AAA 8,841,000
17,175,375
Kentucky (0.5%)
2,000,000 Kenton Cnty., KY Arpt. Brd. Arpt. Spl.
Facs. Rev. Bonds (Delta Airlines
Project), Ser. A, 7-1/2s, 2/1/20 Ba 2,037,500
1,000,000 Scott Cnty., Indl. Dev. VRDN (Hoover
Group Inc. Project), 8-1/2s, 11/1/14 VMIG1 1,025,000
3,062,500
Louisiana (3.1%)
5,000,000 Hodge, Combined Util. Rev. Bonds
(Stone Container Corp.), 9s, 3/1/10 B/P 5,281,250
Port of New Orleans, Indl. Dev. Rev.
Bonds
(Continental Grain Co. Project),
4,000,000 Ser. A, 14-1/2s, 2/1/02 BB 4,460,000
3,500,000 14-1/2s, 1/1/02 BB 3,885,000
5,050,000 West Feliciana Parish, Poll. Control Rev.
Bonds (Gulf States Utils. Co. Project),
8s, 12/1/24 Ba 5,258,312
18,884,562
Maryland (0.8%)
4,000,000 MD State Hlth. & Higher Edl. Facs. Auth.
Rev. Bonds (Doctors Cmnty. Hosp.),
8-3/4s, 7/1/12 AAA 4,740,000
Massachusetts (3.8%)
MA State Hlth. & Edl. Fac. Auth. Rev.
Bonds
3,000,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 Ba 2,868,750
4,000,000 (Rehab. Hosp. Cape & Islands), Ser. A,
7-7/8s, 8/15/24 BB/P 3,960,000
1,010,000 (MA Eye & Ear Infirmary),
Ser. A, 7-3/8s, 7/1/11 Baa 969,600
2,340,000 (MA Eye & Ear Infirmary), Ser. A, 7.2s,
7/1/02 Baa 2,287,350
1,000,000 (Norwood Hosp.), Ser. C, 7s, 7/1/14 Ba 820,000
MA State Indl. Fin. Agcy. 1st. Mtge. Rev.
Bonds
2,000,000 (Pioneer Valley Living Ctr.), 7s,
10/1/20 B/P 1,775,000
1,323,784 (Pioneer Valley Living Ctr.), zero% s,
10/1/20+ B/P 1,654
5,000,000 MA State Indl. Fin. Agcy. Resource Recvy.
Rev. Bonds (Southeastern MA Project),
Ser. B, 9-1/4s, 7/1/15 BB/P 5,475,000
2,000,000 MA State Indl. Fin. Agcy. Rev. Bonds
(Orchard Cove Inc.), 9s, 5/1/22 BB/P 2,235,000
2,900,000 MA State Indl. Fin. Agcy. Tunnel Rev.
Bonds (MA Tpk.), 9s, 10/1/20 BBB/P 3,124,750
23,517,104
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MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Michigan (9.1%)
$4,690,000 Detroit, Local Dev. Fin. Auth. Tax
Increment Rev. Bond (Chrysler Corp.),
Ser. A, 9-1/2s, 5/1/21 BBB/P $ 5,762,837
4,000,000 Detroit, Swr. Disp. Rev. Bonds, FGIC,
5.7s, 7/1/23 AAA 3,765,000
Greater Detroit, Resource Recvy. Auth.
Rev. Bonds
2,000,000 Ser. B, 9-1/4s, 12/13/08 BBB 2,087,500
1,300,000 Ser. C, 9-1/4s, 12/13/08 BBB 1,356,875
4,780,000 Highland Park, Hosp. Fin. Auth. Fac. Rev.
Bonds
(MI Hlth. Care Corp. Project), Ser. A,
9-7/8s, 12/1/19 B 1,912,000
7,125,000 MI Pub. Pwr. Agcy. Rev. Bonds
(Belle River Project), Ser. A, 5-1/4s,
1/1/18 AA 6,350,156
MI State Hosp. Fin. Auth. Rev. Bonds
(Detroit-Macomb Hosp. Corp.),
3,035,000 Ser. A, 7.4s, 6/1/13 B 2,818,756
4,300,000 Ser. A, 7.3s, 6/1/01 B 4,251,625
MI State Strategic Fund Ltd. Oblig. Rev.
Bonds
7,000,000 (Env. Research Project), 8-1/8s, 10/1/14 A/P 7,551,250
4,000,000 (Blue Wtr. Fiber Project), 8s, 1/1/12 B/P 3,735,000
7,000,000 Midland Cnty., Econ. Dev. Corp. Poll.
Control Rev. Bonds, Ser. B, 9-1/2s,
7/23/09 B/P 7,490,000
Pontiac Hosp. Fin. Auth. Rev. Bonds
4,890,000 6s, 8/1/23 Baa 4,040,362
1,050,000 6s, 8/1/18 Baa 884,625
1,495,000 6s, 8/1/13 Baa 1,289,437
2,150,000 Wayne Charter Cnty., Special Arpt. Fac.
Rev. Bonds (Republic Air Lines, Inc.
Project), 10-3/8s, 12/1/15 B/P 2,246,750
55,542,173
Minnesota (1.4%)
5,300,000 Bass Brook, Poll. Control Rfdg., Rev.
Bonds
(Pwr. & Lt. Co. Project), 6s, 7/1/22 A 5,088,000
1,985,000 Chaska, Indl. Dev. Rev. Bonds
(Lifecore Biomedical Inc. Project),
10-1/4s, 9/1/20 BB/P 2,277,787
1,000,000 Rochester, Hlth. Care Fac. IFB (Mayo
Foundation), Ser. H, 7.22s, 11/15/15 AA 960,000
8,325,787
Mississippi (0.8%)
4,100,000 Claiborne Cnty., Poll. Control Rev.
Bonds
(Middle South Energy, Inc.), Ser. A,
9-1/2s, 12/1/13 BBB/P 4,607,375
Missouri (0.7%)
4,000,000 Kansas City, Indl. Dev. Auth. Hlth. Fac.
Rev. Bonds (Park Lane Med. Ctr. Project),
8-3/4s, 1/1/15 BBB/P 4,315,000
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Nebraska (1.7%)
$2,000,000 Gage Cnty. Indl. Dev. VRDN
(Hoover Group Inc. Project), 8-1/2s,
12/1/07 VMIG3 $ 2,057,500
NE Investment Fin. Auth. Single Fam.
Mtge. IFB
1,400,000 Ser. B, GNMA, 10.557s, 3/15/22 AAA 1,552,250
6,465,000 Ser. 1, MBIA, GNMA, 8-1/8s, 8/15/38# AAA 6,764,006
10,373,756
Nevada (2.4%)
Clark Cnty., Indl. Dev. Rev. Bonds
4,000,000 (NV Pwr. Co. Project), 7.8s, 6/1/20 Baa 4,170,000
11,750,000 (Southwest Gas Corp.), Ser. A, 6-1/2s,
12/1/33 Baa 10,839,375
15,009,375
New Hampshire (0.9%)
2,240,000 NH Higher Edl. & Hlth. Fac. Auth. Rev.
Bonds (Alice Peck Day Memorial Hosp.
Project), 9-3/8s, 11/1/20 BB/P 2,419,200
2,800,000 NH State Indl. Dev. Auth. Poll. Control
Rev. Bonds (United Illuminating Co.),
Ser. B, 10-3/4s, 10/1/12 Baa 3,160,500
5,579,700
New Jersey (1.7%)
NJ Hlth. Care Fac. Fing. Auth. Rev.
Bonds
4,680,000 (Mountainside Hosp.), FHA Ser. A, 9s,
8/1/25 AAA 4,820,400
5,000,000 (St. Elizabeth Hosp.), Ser. B, 8-1/4s,
7/1/20 Baa 5,300,000
10,120,400
New York (10.9%)
NY City G.O. Bonds
3,635,000 8-1/4s, 11/15/10 A 3,980,325
3,365,000 Ser. F, Rfdg. 8-1/4s, 11/15/10 A 3,979,112
4,925,000 Ser. D, Group C, 8s, 8/1/18 AAA 5,756,094
11,400,000 Ser. A, 6-1/4s, 8/1/17 A 10,787,250
2,730,000 Ser E 5-5/8s, 8/1/14 A 2,395,575
3,975,000 NY City Hlth. & Hosp. Rev. Bonds,
Ser. A, 6.3s, 2/15/20 Baa 3,607,313
2,750,000 NY City. Hlth. & Hosp. Corp. Rev. Bonds
Ser. A, 6s, 2/15/07 Baa 2,550,625
NY State Dorm. Auth. Rev. Bonds
(Court Facs. Lease) Ser. A
6,000,000 5-3/8s, 5/15/16 Baa 5,235,000
3,000,000 5-1/2s, 5/15/23 Baa 2,610,000
8,000,000 5-1/4s, 5/15/21 Baa 6,730,000
NY State Energy R & D Auth. Elec. Facs.
Auth. Rev. Bonds (Long Island Ltg.),
5,000,000 Ser. A, 7.15s, 6/1/20 Ba 4,806,250
6,000,000 Ser. A, 7.15s, 12/1/20 Ba 5,767,500
2,000,000 Ser. D, 6.9s, 8/1/22 Ba 1,862,500
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
New York (continued)
$2,250,000 NY State Hsg. Fin. Agcy. Svcs. Contract
Oblig. Rev. Bonds, Ser. A, 5-1/2s,
9/15/22 Baa $ 1,963,125
5,000,000 NY State Med. Care Facs. Fin. Agcy. Rev.
Bonds, Ser. A, AMBAC 6-1/2s, 8/15/29 AAA 5,131,250
67,161,919
North Carolina (3.2%)
NC Eastern Muni. Pwr. Agcy. Pwr. Sys. Rev. Bonds
10,500,000 Ser. B, 6s, 1/1/22 A 9,699,375
10,890,000 (Pwr. Systs. Rev.), Ser. D, 5-7/8s,
1/1/13 A 10,114,087
19,813,462
Ohio (4.1%)
1,950,000 Dayton, Special Fac. Rev. Bonds
(Emery Air Freight Corp.), Ser. A,
12-1/2s, 10/1/09 B/P 2,288,812
20,000,000 OH State Air Quality Dev. Auth. Poll.
Control Rev. Bonds (Cleveland Co.
Project), FGIC, 8s, 12/1/13# AAA 23,175,000
25,463,812
Oklahoma (0.7%)
2,975,000 Oklahoma Cnty., Indl. Auth. Rev. Bonds
(Epworth Villa Project), Ser. A,
10-1/4s, 4/1/19 BB/P 3,224,156
1,500,000 Tulsa, Indl. Auth. Hosp. Rev. Bonds
(Tulsa Regl. Med. Ctr.), 7.2s, 6/1/17 BBB 1,428,750
4,652,906
Pennsylvania (3.7%)
4,000,000 Allegheny Cnty., Indl. Dev. Auth. Arpt.
Special Facs. Rev. Bonds (U.S. Air Inc.
Project), Ser. B, 8-1/2s, 3/1/21 B 4,020,000
2,250,000 Allentown Hosp. Auth. Rev. Bonds (Sacred
Heart Hosp.), Ser. A, 6-3/4s, 11/15/14 BBB 2,100,949
1,250,000 PA Econ. Dev. Fin. Auth. Rev. Bonds
(MacMillan Ltd. Partnership Project),
7.6s, 12/1/20 Baa 1,315,625
7,000,000 PA Econ. Dev. Fing. Auth. Recycling Rev.
Bonds (Ponderosa Fibres Project), Ser. A,
9-1/4s, 1/1/22 B/P 7,070,000
2,200,000 PA Economic Dev. Fing. Auth. Rev. Bonds
(Resource Recvy. Rev. Sub. Northampton
Generating), Ser. C, 6-7/8s, 1/1/11 BB/P 2,010,250
6,000,000 PA State Higher Edl. Assistance Agcy. IFB
Ser. B, MBIA, 10.438s, 3/1/20# AAA 6,592,500
23,109,324
South Carolina (0.9%)
5,000,000 SC State Hsg. Fin. & Dev. Auth.
Multi-Fam. Mtge. Rev. Bonds, 8-1/2s,
10/1/21 BBB 5,481,250
17
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Texas (6.2%)
$2,850,000 Amarillo, Hlth. Fac. Hosp. Corp. IFB
(High Plains Baptist Hosp.), FSA, 8.582s,
1/3/22# AAA $ 2,946,187
Bexar Cnty., Hlth. Fac. Dev. Corp. Rev.
Bonds
3,170,000 (Heartway Corp.), Ser. A-1, 10-1/4s,
3/1/19 B/P 3,170,000
500,000 (St. Luke's Lutheran Hosp. Project),
7.9s, 5/1/18 BBB 583,750
3,200,000 7.9s, 5/1/11 BBB 3,736,000
7,250,000 Brazos River, Poll. Control Auth. Rev.
Bonds (TX Utils. Elec. Co. Project), Ser.
A, 7-7/8s, 3/1/21 Baa 7,630,625
Houston, Hsg. Fin. Corp. Single Fam.
Mtge. Rev. Bonds
2,366,000 Ser. A, Verex Mtg. Ins., 10-7/8s,
2/15/16 Baa 2,419,235
1,965,000 (Lomas & Nettleton Administration Co.),
Ser. B, 10-3/8s, 12/15/13 Baa 1,989,562
2,000,000 Lone Star, TX Arpt. Impt. Auth. Inc. Rev.
Bonds (American Airlines Inc. Project),
9-1/8s, 12/1/15 Baa 2,072,500
3,000,000 Southeast TX Multi-Fam. Hsg. Fin. Corp.
Rev. Bonds
(Bayou Pk. Village Apt. Project),
Ser. B, 10.175s, 8/1/16 B/P 3,045,000
2,500,000 (Promenade Place Apts. Project),
Ser. B, 10.175s, 8/1/16 B/P 2,515,625
5,000,000 (Pavilion Place Apts. Project), Ser. A,
7.6s, 7/1/16 BBB/P 4,950,000
3,000,000 Tarrant Cnty., Hlth. Facs. Dev. Corp.
Hosp. Rev. Bonds (Cmnty. Hlth. Care
Fndtn. Inc. Project), 10-1/8s, 4/1/21 B/P 3,146,250
38,204,734
Utah (0.9%)
5,350,000 Intermountain Power Agcy. Power Supply
Rev. Bonds, Ser. D, AMBAC, 7-3/4s, 7/1/20 AAA 5,751,250
Virginia (1.8%)
5,400,000 Fredericksburg, Indl. Dev. Auth. Hosp.
Fac. IFB, FGIC, 8.607s, 8/15/23# AAA 5,710,500
Winchester, Indl. Dev. Auth. Hosp. Rev.
Bonds
3,200,000 stepped-coupon, 6.3s, (5-1/2s, 7/1/98),
CMT/SURF, AMBAC, 1/1/15+++ AAA 2,980,000
2,300,000 stepped-coupon, (5-1/2s, 7/1/98), 6.15s,
CMT/SURF, AMBAC, 1/1/15+++ AAA 2,124,625
10,815,125
Washington (3.5%)
WA State Pub. Pwr. Supply Syst. Rev.
Bonds
(Nuclear Project No. 1),
9,685,000 Ser. A, Rfdg. 7-1/2s, 7/1/15 AAA 10,762,456
6,315,000 Ser. A, 7-1/2s, 7/1/15 AA 6,772,837
4,000,000 Ser A, MBIA, 5.7s, 7/1/17 AAA 3,740,000
21,275,293
Total Municipal Bonds (cost $579,502,602) $601,110,520
</TABLE>
<PAGE>
PUT OPTIONS PURCHASED (FUTURE CONTRACTS) (--%) (cost $1,315,240)
EXPIRATION
CONTRACT DATE/
AMOUNT STRIKE PRICE VALUE
79,400,000 U.S. Treasury Bond Futures June 1995/102 $ 31,760
Total Investments
(cost $580,817,842)*** $601,142,280
Key to Abbreviation of Municipal Instruments
COP -- Certificate of Participation
IFB -- Inverse Floating Bonds
G.O. Bonds -- General Obligation Bonds
VRDN -- Variable Rate Demand Bonds
Key to Abbreviation of Insurers
AMBAC -- American Municipal Bond Assurance Corporation
FGIC -- Federal Guaranty Insurance Corporation
FHA -- Federal Housing Administration
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
III -- Industrial Indemnity Insurance
MBIA -- Municipal Bond Investors Assurance
* Percentages indicated are based on net assets of $613,298,559. Net assets
available to common shareholders are $438,022,195 which correspond to a net
asset value per common share of $9.80.
** The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at April 30, 1995 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 whould ascribe to these securities at April 30, 1995. Securities
rated by Putnam are indicated by "/P" and are not publicly rated.
+ Non-income-producing security.
+++ The interest rate and date shown parenthetically represents the new
interest rate to be paid and the date the fund will begin receiving interest
at this rate.
# A portion of this security was pledged to cover margin requirements for
future contracts and written options at April 30, 1995. The market value of
segregated securities with the custodian for transactions on future contracts
and written options is $48,954,881 or 8.0% of net assets.
++ Restricted as to public resale. At the date of acquistion these securities
were valued at cost. There were no outstanding securities of the same class
as those held. Total market value of restricted securities owned at April 30,
1995 was $8,334,375 or 1.4% of net assets.
*** The aggregate identified cost for federal income tax purposes is
$581,033,827, resulting in gross unrealized appreciation and depreciation of
$29,115,792, and $9,007,339, respectively, or net unrealized appreciation of
$20,108,453.
<PAGE>
The fund had the following industry group concentrations greater than 10% of
net assets on April 30, 1995 (based on net assets):
Hospitals/Healthcare 22.2%
Utilities 21.1
Transportation 12.0
The rates shown on Variable Rate Demand Notes (VRDN) and Inverse Floating
Bonds (IFB) are the current interest rates at April 30, 1995, which are
subject to change based on the terms of the security.
The table below shows the percentage of the fund's investments on April 30,
1995 in securities assigned to the 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 of
Rated securities comparable quality,
as a percentage of as a percentage of
Rating fund's net assets fund's net assets
"AAA"/"Aaa" 28.2% --
"AA"/"Aa" 2.3 --
"A"/"A" 8.7 1.2%
"BBB"/"Baa" 28.5 4.7
"BB"/"Ba" 6.6 4.0
"B"/"B" 2.1 11.2
"VMIG1" 0.2 --
"VMIG3" 0.3 --
76.9% 21.1%
WRITTEN CALL OPTIONS OUTSTANDING ON APRIL 30, 1995
(premium received $1,893,798)
Contract Expiration Date/
Amounts Strike Price Value
79,800,000 U.S. Treasury Bond Futures June 1995/102 $2,705,220
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of assets and liabilities
April 30, 1995 (Unaudited)
Assets
Investments in securities, at value (identified cost
$580,817,842) (Note 1) $601,142,280
Cash 284,283
Interest receivable 14,062,789
Receivable for securities sold 4,551,736
Total assets 620,041,088
Liabilities
Distributions payable to shareholders 2,838,220
Payable for compensation of Manager (Note 3) 1,009,302
Payable for compensation of Trustees (Note 3) 182
Payable for administrative services (Note 3) 1,265
Payable for investor servicing and custodian fees (Note 3) 116,845
Payable for options written (premium receivable $1,893,798) 2,705,220
Other accrued expenses 71,495
Total liabilities 6,742,529
Net assets $613,298,559
Represented by
Series A, B, and C remarketed preferred shares, without par
value; 8,000 shares authorized (1,750 shares issued at
$100,000 per share liquidation preference) (Note 2) $175,000,000
Common shares, without par value; unlimited shares
authorized; 44,696,374 shares outstanding 412,175,207
Undistributed net investment income 18,135,081
Accumulated net realized loss on investments, written
options and futures contracts (11,524,745)
Net unrealized appreciation of investments, options 19,513,016
Net assets $613,298,559
Computation of net asset value
Remarketed preferred shares at liquidation preference $175,000,000
Cumulative undeclared dividends on remarketed preferred
shares 276,364
Net assets allocated to remarketed preferred shares at
liquidation preference 175,276,364
Net assets available to common shares:
Net asset value per share $9.80 ($438,022,195 divided by
44,696,374 shares) 438,022,195
Net assets $613,298,559
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of operations
Six months ended April 30, 1995 (Unaudited)
Tax exempt income $23,026,453
Expenses:
Compensation of Manager (Note 3) 2,013,689
Investor servicing and custodian fees (Note 3) 247,903
Compensation of Trustees (Note 3) 9,560
Reports to shareholders 46,006
Auditing 16,678
Legal 16,596
Postage 39,996
Administrative services (Note 3) 7,487
Exchange listing fees 18,399
Registration fees 1,071
Preferred share remarketing agent fees 229,884
Other 8,570
Total expenses 2,655,839
Net investment income 20,370,614
Net realized loss on investments (Notes 1 and 4) (4,806,422)
Net realized loss on written options (Notes 1 and 4) (1,609,352)
Net realized loss on futures contracts (Notes 1 and 4) (729,188)
Net unrealized appreciation of investments, written options
and futures contracts during the period 21,203,646
Net gain on investments 14,058,684
Net increase in net assets resulting from operations $34,429,298
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of changes in net assets
Six months
ended Year ended
April 30, October 31,
1995* 1994
Increase (decrease) in net assets
Operations:
Net investment income $ 20,370,614 $ 41,590,495
Net realized loss on investments, written
options and futures contracts (7,144,962) (4,278,598)
Net unrealized appreciation (depreciation) of
investments, written options and futures
contracts 21,203,646 (56,090,200)
Net increase (decrease) in assets resulting
from operations 34,429,298 (18,778,303)
Distributions to remarketed preferred
shareholders from net investment income (3,486,801) (4,753,458)
Net increase (decrease) in assets resulting
from operations applicable to common
shareholders (excluding cumulative
undeclared dividends on remarketed
preferred shares of $276,364 and $237,109
respectively) 30,942,497 (23,531,761)
Distributions to common shareholders from:
Net investment income (16,987,102) (33,732,841)
Net realized gain on investments -- (4,069,833)
Issuance of common shares in connections with
reinvestment of distributions 2,351,608 5,504,121
Total increase (decrease) in net assets 16,307,003 (55,830,314)
Net assets
Beginning of period 596,991,556 652,821,870
End of period/year (including undistributed
net investment income of $18,135,081 and
$18,238,370 respectively) $613,298,559 $596,991,556
Number of fund shares
Common shares outstanding at beginning of
period 44,449,876 43,918,097
Common shares issued in connection with
reinvestment of distributions 246,498 531,779
Common shares outstanding at end of period 44,696,374 44,449,876
Remarketed preferred shares outstanding at
beginning and end of period 1,750 1,750
* Unaudited.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial Highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Six months
ended
April 30 Year ended October 31
1995* 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period
(common shares) $ 9.49 $ 10.88 $ 9.81 $ 9.44 $ 8.94 $ 9.31
Investment operations:
Net investment income .46 .94 .98 1.01 1.02 1.02
Net realized and unrealized gain
(loss) on investments .31 (1.37) 1.04 .26 .44 (.35)
Total from investment operations .77 (.43) 2.02 1.27 1.46 .67
Distributions to shareholders from:
Net investment income
To preferred shareholders (.08) (.11) (.11) (.14) (.20) (.25)
To common shareholders (.38) (.76) (.76) (.76) (.76) (.76)
Net realized gain on investments
To common shareholders -- (.09) (.08) -- -- (.02)
Total distributions (.46) (.96) (.95) (.90) (.96) (1.03)
Initial offering expenses -- -- -- -- -- (.01)
Net asset value, end of period
(common shares) $ 9.80 $ 9.49 $ 10.88 $ 9.81 $ 9.44 $ 8.94
Market value, end of period
(common shares) $ 10.25 $ 9.25 $ 11.38 $ 9.88 $ 10.00 $ 8.88
Total investment return
at market value
(common shares) (%) $ 15.37(b) (11.56) 24.84 6.72 22.33 1.72
Net assets, end of period
(total fund)(in thousands) $613,299 $596,992 $652,660 $600,849 $580,495 $555,583
Ratio of expenses to average net
assets (%)(a) .62(b) 1.23 1.22 1.24 1.33 1.29
Ratio of net investment income
to average net assets (%)(a) 3.97(b) 9.20 8.44 8.94 8.92 8.39
Portfolio turnover rate (%) 36.39(b) 48.40 35.16 67.72 49.62 41.48
</TABLE>
* Unaudited.
(a) Ratios reflect net assets available to common shares only; net investment
income ratio also reflects reduction for income dividend payments and
undeclared payments to preferred shareholders.
(b) Not annualized.
<PAGE>
Notes to financial statements
April 30, 1995 (Unaudited)
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as amended,
as a diversified, closed-end management investment company. The fund's
investment objective is to seek a high level of current income exempt from
federal income tax. The fund intends to achieve its objective by investing in
a diversified portfolio of tax-exempt municipal securities which Putnam
believes does not involve undue risk to income or principal. Up to 50% of the
fund's assets may consist of high-yield tax-exempt municipal securities that
are below investment grade and involve special risk considerations. The fund
also uses leverage by issuing preferred shares in an effort to increase the
income to the common shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A) Security valuation Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the Trustees, which
uses information with respect to transactions in bonds, quotations from bond
dealers, market transactions in comparable securities and various
relationships between securities in determining value. The fair value of
restricted securities is determined by the Manager following procedures
approved by the Trustees, and such valuations and procedures are reviewed
periodically by Trustees.
B) Determination of net asset value Net asset value of the common shares is
determined by dividing the value of all assets of the fund (including accrued
interest and dividends), less all liabilities (including accrued expenses),
and the liquidation value of any outstanding remarketed preferred shares, by
the total number of common shares outstanding.
C) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
D) Futures The fund may purchase and sell financial futures contracts to
hedge against changes in the values of tax-exempt municipal securities the
fund owns or expects to purchase.
A futures contract is an agreement between two parties to buy or sell units
of a particular index or a certain amount of a U.S. Government security at a
set price on a future date.
Upon entering into such a contract the fund is required to pledge to the
broker an amount of cash or securities equal to the minimum "initial margin"
requirements of the futures. Pursuant to the contract, the fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
"variation margin" and are recorded by the fund as unrealized gains or
losses. 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.
The potential risk to the fund is that the change in value of futures
contracts primarily corresponds with the value of underlying instruments
which may not correspond to the change in value of the
<PAGE>
hedged instruments. In addition, there is a risk that the fund may not be
able to close out its futures positions due to an illiquid secondary market.
E) Option accounting principles The fund may, to the extent consistent with
its investment objective and policies, seek to increase its current returns
by writing covered call and put options on securities it owns or in which it
may invest. When a fund writes a call or put option, an amount equal to the
premium received by the fund is included in the fund's "Statement of assets
and liabilities" as an asset and an equivalent liability. The amount of the
liability is subsequently "marked-to-market" to reflect the current market
value of an option written. The current market value of an option is the last
sale price or, in the absence of a sale, the last offering price. If an
option expires on its stipulated expiration date, or if the fund enters into
a closing purchase transaction, the fund realizes a gain (or loss if the
closing purchase transaction exceeds the premium received when the option was
written) without regard to and unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished. If a
written call option is exercised, the fund realizes a gain or loss from the
sale of the underlying security and the proceeds of the sale are increased by
the premium originally received. If a written put option is exercised, the
amount of the premium originally received reduces the cost of the security
that the fund purchases upon exercise of the option.
The risk in writing a call option is that the fund relinquishes the
opportunity to profit if the market price of the underlying security
increases and the option is exercised. In writing a put option, the fund
assumes the risk of incurring a loss if the market price of the underlying
security decreases and the option is exercised. In addition, there is the
risk the fund may not be able to enter into a closing transaction because of
an illiquid secondary market.
The fund may also, to the extent consistent with its investment objectives
and policies, buy put options to protect its portfolio holdings in an
underlying security against a decline in market value. The fund may buy call
options to hedge against an increase in the price of the securities that the
fund ultimately wants to buy. These funds may also buy and sell combinations
of put and call options on the same underlying security to earn additional
income. The premium paid by a fund for the purchase of a put or call option
is included in the fund's "Statement of assets and liabilities" as an
investment and is subsequently "marked-to-market" to reflect the current
market value of the option. If an option the fund has purchased expires on
the stipulated expiration date, the fund realizes a loss in the amount of the
cost of the option. If the fund enters into a closing sale transaction, the
fund realizes a gain or loss, depending on whether proceeds from the closing
sale transaction are greater or less than the cost of the option. If the fund
exercises a call option, the cost of securities acquired by exercising the
call is increased by the premium paid to buy the call. If the fund exercises
a put option, it realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are decreased by the premium
originally paid. The risk associated with purchasing options is limited to
the premium originally paid.
F) 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
<PAGE>
Code of 1986. Therefore, no provision has been made for federal taxes on
income, capital gains or unrealized appreciation of securities held and
excise tax on income and capital gains.
At October 31, 1994, the fund had capital loss carryovers of approximately
$3,958,000, available to offset future realized capital gains, if any. This
amount will expire October 31, 2002. To the extent that capital loss
carryovers are used to offset realized gains, it is unlikely that gains so
offset will be distributed to shareholders, since any such distribution might
be taxable as ordinary income.
G) Distributions to shareholders Distributions to common and preferred
shareholders are recorded by the fund on the ex-dividend date. Dividends on
each share of remarketed preferred shares will accumulate from its Date of
Original Issue and will be payable, when, as and if declared by the Board of
Trustees, on the applicable Dividend Payment Dates. The dividend period for
Series A and B is a 28-day period, and the dividend period for Series C is a
7-day period. The applicable dividend rates for the remarketed preferred
shares on April 30, 1995 were: Series A 4.15%; Series B 4.15%; Series C
4.35%.
The amount and character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution (or
available capital loss carryovers) under income tax regulations. For the
period ended April 30, 1995 there were no current adjustments as a result of
the AICPA Statement of Position (SOP) 93-2 "Determination, Disclosure and
Financial Statement Presentation of Income, Capital Gain and Return of
Capital Distributions, by Investment Companies."
H) Amortization of bond premium and discount Any premium resulting from the
purchase of securities in excess of maturity value is amortized on a yield-
to-maturity basis. Discount on zero-coupon bonds, original issued discount
bonds and step-up bonds is accreted according to the effective yield method.
Note 2
Remarketed Preferred Shares
On September 28, 1989 the fund issued 550 shares Series A Remarketed
Preferred (RP), 550 shares Series B RP and 650 shares Series C RP
(collectively, the "Original RP"). The Original RP Shares are redeemable at
the option of the fund on any dividend payment date at a redemption price of
$100,000 per share, plus an amount equal to any dividends accumulated on a
daily basis but unpaid through the redemption date (whether or not such
dividends have been declared) and, in certain circumstances, a call premium.
Undeclared dividends on preferred shares on April 30, 1995 amounted to
$276,364.
It is anticipated that dividends paid to holders of remarketed preferred
shares will be considered tax-exempt dividends under the Internal Revenue
Code of 1986, as amended. To the extent that the fund earns taxable income
and capital gains by the conclusion of a fiscal year, it will be required to
apportion to the holders of the remarketed preferred shares throughout that
year additional dividends as necessary to result in an after-tax yield
equivalent to the applicable dividend rate for the period. For the six months
ended April 30, 1995, the fund has earned no such taxable income or gains.
Under the Investment Company Act of 1940, the fund is required to maintain
asset coverage of at least 200% with respect to the remarketed preferred
shares as of the last business day of each month in which any such shares are
outstanding. Additionally, the fund is required to meet more stringent asset
coverage requirements under the terms of the remarketed preferred shares and
<PAGE>
the shares' rating agencies. Should these requirements not be met, or should
dividends accrued on the remarketed preferred shares not be paid, the fund
may be restricted in its ability to declare dividends to common shareholders
or may be required to redeem certain of the remarketed preferred shares. At
April 30, 1995, no such restrictions have been placed on the fund.
Note 3
Management fee, administrative services, and other transactions
Compensation of Putnam Investment Management, for management and investment
advisory services, is paid quarterly based on the average net assets of the
fund, including proceeds from the remarketed preferred offering. Such fee is
based on the annual rate of 0.70% of the first $500 million, 0.60% of the
next $500 million, 0.55% of the next $500 million and 0.50% of any amount
over $1.5 billion.
If dividends payable on remarketed preferred shares during any dividend
payment period plus any expenses attributable to remarketed preferred shares
for that period exceed the fund's net income attributable to the proceeds of
the remarketed preferred shares during that period, then the fee payable to
Putnam for that period will be reduced by the amount of the excess (but not
more than .70% of the liquidation preference of the remarketed preferred
shares outstanding during the period).
The fund also reimburses the Manager 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.
Trustees of the fund receive an annual Trustee's fee of $970 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
Custodial functions for the fund are provided by Putnam Fiduciary Trust
Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing
agent functions for the fund's common shares are currently provided by Putnam
Investor Services, Inc., a division of PFTC.
Investor servicing and custodian fees reported in the Statement of Operations
for the six months ended April 30, 1995, have been reduced by credits allowed
by PFTC.
Note 4
Purchases and sales of securities
During the six months ended April 30, 1995, purchases and sales of investment
securities other than short-term investments and pre-refundings aggregated
$211,465,612 and $215,308,853, respectively. Purchases and sales of
short-term obligations aggregated $110,340,000 and $110,340,000,
respectively. In determining the net gain or loss on securities sold, the
cost of securities has been determined on the identified cost basis.
Written option transactions during the period are summarized as follows:
<TABLE>
<CAPTION>
Contract Premiums
Amounts Received
<S> <C> <C>
Outstanding at beginning of period -- --
Options written 230,300,000 $ 3,635,974
Options closed (150,500,000) (1,742,176)
Written options
outstanding at
end of period 79,800,000 $ 1,893,798
</TABLE>
<PAGE>
Selected Quarterly Data
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
April 30 January 31 October 31 July 31 April 30
1995 1995 1994 1994 1994
<S> <C> <C> <C> <C> <C>
Total investment income
Total $ 11,456,026 $ 11,570,427 $ 11,693,577 $ 11,598,178 $ 11,884,996
Per Share+ $ .26 $ .26 $ .26 $ .26 $ .27
Net investment income available to
common shareholders
Total $ 8,411,515 $ 8,433,043 $ 8,924,821 $ 8,899,135 $ 9,602,081
Per Share+ $ .19 $ .19 $ .20 $ .20 $ .22
Net realized and unrealized gain (loss)
on investments, futures and written
options available to common
shareholders
Total $ 10,122,836 $ 3,935,848 $(22,814,166) $ (76,157) $(40,050,878)
Per Share+ $ .23 $ .08 $ (.51) $ -- $ (.92)
Net increase (decrease) in net assets
available to common shareholders
resulting from operations
Total $ 18,534,351 $ 12,368,891 $(13,889,345) $ 8,822,978 $(30,448,797)
Per Share+ $ .42 $ .27 $ (.31) $ .20 $ (.70)
Net assets available to common
shareholders at end of period
Total $438,022,195 $426,690,031 $421,754,447 $443,326,292 $441,574,763
Per Share+ $ 9.80 $ 9.57 $ 9.49 $ 9.99 $ 9.98
</TABLE>
<TABLE>
<CAPTION>
Three months ended
January 31 October 31 July 31 April 30 January 31
1994 1993 1993 1993 1993
<S> <C> <C> <C> <C> <C>
Total investment income
Total $ 11,953,487 $ 12,131,634 $ 12,114,324 $ 12,113,227 $ 12,176,829
Per Share+ $ .27 $ .28 $ .28 $ .28 $ .27
Net investment income available to
common shareholders
Total $ 9,411,000 $ 9,644,213 $ 9,601,179 $ 9,772,176 $ 9,469,930
Per Share+ $ .21 $ .21 $ .22 $ .23 $ .21
Net realized and unrealized gain (loss)
on investments, futures and written
options available to common
shareholders
Total $ 2,572,403 $ 12,792,002 $ 8,635,842 $ 7,911,957 $ 15,441,312
Per Share+ $ .06 $ .30 $ .20 $ .18 $ .36
Net increase (decrease) in net assets
available to common shareholders
resulting from operations
Total $ 11,983,403 $ 22,436,215 $ 18,237,021 $ 17,684,133 $ 24,938,242
Per Share+ $ .27 $ .51 $ .42 $ .41 $ .57
Net assets available to common
shareholders at end of period
Total $479,160,197 $477,660,049 $462,370,289 $451,177,789 $440,618,960
Per Share+ $ 10.87 $ 10.88 $ 10.56 $ 10.33 $ 10.11
</TABLE>
+Per common share
<PAGE>
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Blake E. Anderson
Vice President
Howard K. Manning
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
<PAGE>
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for
up-to-date information about the fund's NAV or to request Putnam's quarterly
Closed-End Fund Commentary.
<PAGE>
[logo] PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
18336-052
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS:
(1) Bold and italic typefaces are displayed in normal type.
(2) Headers (e.g., the name of the fund) are omitted.
(3) Certain tabular and columnar headings and symbols are displayed
differently in this filing.
(4) Bullet points and similar graphic signals are omitted.
(5) Page numbering is omitted.
(6) Trademark symbol replaced with (TM)
