Putnam
Managed
Municipal
Income Trust
ANNUAL REPORT
October 31, 1995
[LOGO]
B O S T O N (bullet) L O N D O N (bullet) T O K Y O
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Fund highlights
"One investor's worry is another's opportunity. That's the moral of the story
of the municipal bond market now, where fears of a flat tax have made munis
extremely attractive."
- -- "Fear Makes Munis Cheap," Fortune, September 4, 1995
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
21 Financial statements
2
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From the Chairman
[picture of G. Putnam]
(C)Karsh, Ottawa
Dear Shareholder:
The period encompassing Putnam Managed Municipal Income Trust's fiscal year
began near the end of one of the most severe bond market downturns on record
and ended in the midst of one of the market's strongest rallies.
The benefits of the market's upturn during the 12 months ended October 31,
1995, were dampened somewhat for tax-exempt bond investors. Talk of a flat
tax ignited concerns that the tax advantage long enjoyed by municipal
securities would be lost. As is so often the case, however, the market
overreacted, and by fiscal year's end it had recognized the fact.
Fund Manager Howard Manning believes that prospects of a flat tax being
enacted any time soon are slim. Furthermore, the Federal Reserve Board's
success in slowing the pace of the economy has contributed to a favorable
environment for bonds. Howard believes low inflation and relatively stable
bond yields point to a combination of these positive conditions through the
near term.
Respectfully yours,
/s/ George Putnam
- ----------------------
George Putnam
Chairman of the Trustees
December 20, 1995
3
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Report from the Fund Manager
Howard Manning
Fixed-income investors who kept the faith during 1994's trying market
conditions were richly rewarded during the first 10 months of calendar 1995.
During this period, municipal bonds recouped a significant amount of the
losses they incurred in 1994, but did not rally to the same extent as taxable
fixed-income investments. Nevertheless, Putnam Managed Municipal Income
Trust's ability to seize market opportunities is evidenced by its solid
performance for the fiscal year ended October 31, 1995. For the period, your
fund's shares at NAV and at market value returned 14.88% and 24.23%,
respectively.
PORTFOLIO STRUCTURE REFLECTS IMPROVED
INTEREST RATE OUTLOOK
Since spring, returns in the municipal market have been hampered by
discussions of tax-reform proposals in Washington that could jeopardize the
tax advantages enjoyed by these securities. We believe investors' concerns
about a major revision of the tax code are premature. Although further
instability cannot be ruled out as campaign rhetoric escalates, we do not
expect any changes to occur until well after the 1996 presidential elections,
if at all.
Flat-tax fears notwithstanding, your fund's barbell approach to bond
selection helped to generate an income stream while taking advantage of the
broader market rally that began in late calendar 1994. During the fund's
fiscal year, we maintained approximately half of the portfolio in less
price-sensitive higher-yielding municipals with comparatively short
maturities. The generous income of these holdings provides the bulk of their
return.
The remainder of the fund was invested in more price-sensitive issues that
derive most of their total return from capital appreciation if interest rates
fall. As we became confident that
4
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inflation would remain benign and the backdrop for interest rates would
improve, we increased the fund's exposure to discount municipals with
favorable call protection. As interest rates fall, prices on discount bonds
tend to appreciate faster than other bonds, although they will, of course,
decline more rapidly when rates rise.
RELATIVE VALUE OPPORTUNITIES ENHANCE
PERFORMANCE
We seek to boost your fund's return by continually taking advantage of supply
and demand imbalances as they occur in the municipal marketplace. One way we
do this is through the selective purchase of attractively priced municipal
bonds that we expect will appreciate.
For instance, demand for tax-exempt income in such high-tax states as
Arizona, California, Michigan, New Jersey, and New York is generally very
strong. We purchased such so-called "specialty-state" bonds for your fund
during certain times of the year when new-issue supply in these states was
greater than average and prices on such bonds became attractive relative to
bonds issued in other, lower-tax states. As supply eventually evaporated,
prices on these issues rose, causing their yields to fall. We were then able
to take profits on these holdings and reinvest the proceeds in
higher-yielding securities, thereby enhancing the total return of the fund.
[TOP INDUSTRY SECTORS* bar chart]
TOP INDUSTRY SECTORS*
Transportation 19.0%
Utilities/Water & Sewerage 18.0%
Hospitals/Health Care 17.1%
Housing 5.6%
Education 3.6%
*Based on net assets as of 10/31/95. Holdings may vary in the future.
5
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ATTENTIVE RESEARCH PRODUCES FAVORABLE RESULTS
Many of the sectors that suffered the most during the poor market conditions
of 1994 recovered dramatically during calendar 1995. Through intensive credit
research, your fund was able to benefit from a sharp rebound in the airline
and airport sectors as well as several carefully chosen holdings in the
health-care sector.
Contrary to popular opinion at the time, our analysis indicated that by late
1994, years of cost-cutting and industry consolidation had sown the seeds for
improved stability and healthier financial conditions among airline
companies. Consequently, despite less than favorable market perception of the
sector, we selectively added to holdings of municipal bonds issued on behalf
of airlines.
This strategy proved worthwhile: as investors recognized the improving
fundamentals of the airline business, demand for these high-yielding,
relatively liquid issues soared. Prices on airline-backed bonds have
appreciated dramatically since the beginning of calendar 1995, producing
double-digit returns for the fund.
The generous income and favorable call protection offered by the bonds of
Denver International Airport explain why it remains a core holding for your
fund. After realizing gains when the facility opened last February, we were
able to repurchase the bonds at more attractive yields periodically
throughout the year. As an added bonus, these bonds were recently upgraded by
Standard & Poor's, a nationally recognized rating agency.
The hospital sector continues to compensate those who do their credit
homework with generous tax-free income. As the entrance of efficient,
for-profit systems changes the face of the health care market, astute credit
selection and monitoring remain key to achieving attractive returns.
During the fund's fiscal year, investor uncertainty surrounding the industry
caused prices on hospital bonds to be marked down despite very little actual
selling activity. On occasion, we were able to make advantageous purchases of
attractive names at bargain levels. In addition, your fund experienced gains
as some of its hospital holdings were merged into financially stronger health
care systems over the past twelve months.
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TOP 10 HOLDINGS (10/31/95)
Ohio State Air Quality Development Authority
revenue bonds
...........................................................
Metropolitan Water District, Southern California
Waterworks revenue bonds
...........................................................
University of California
revenue bonds
...........................................................
Lake Charles, Louisiana, Harbor & Terminal District
port facilities revenue bones
...........................................................
Metropolitan Nashville and Davidson County, Tennessee,
revenue bonds
...........................................................
Tampa, Florida
capital improvement revenue bonds
...........................................................
New York State Research and Development
Authority pollution control variable rate demand notes
...........................................................
New York City
general obligation bonds
...........................................................
North Carolina Eastern Municipal Power Agency
power systems revenue bonds
...........................................................
Metropolitan Water District (California)
revenue bonds
These holdings represent 22.2% of the fund's net assets. Portfolio holdings
will vary over time.
OUTLOOK FOR MUNICIPALS CONSTRUCTIVE
Fundamentals augur well for the bond markets in general. Moderate but stable
economic growth and relatively low inflation provide a friendly environment
for fixed-income investing. Your fund's balance of higher-income holdings,
along with bonds offering the greatest opportunity for price appreciation, is
designed to take advantage of this favorable interest-rate environment.
Careful bond selection and credit analysis will remain of supreme importance
in providing our shareholders with attractive tax-free income and favorable
total returns
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 10/31/95, there is no guarantee the fund will continue to
hold these securities in the future.
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Performance summary
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.
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.
TOTAL RETURN FOR PERIODS ENDED 10/31/95
NAV Market price
-------------------------------------------------------
1 year 14.88% 24.23%
-------------------------------------------------------
5 years 68.64 79.06
Annual average 11.02 12.36
-------------------------------------------------------
Life-of-fund
(since 2/24/89) 85.47 81.81
Annual average 9.69 9.36
-------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/95
Lehman Bros.
Municipal Consumer
Bond Index Price Index
-------------------------------------------------------
1 year 14.84% 2.81%
-------------------------------------------------------
5 years 52.34 15.13
Annual average 8.78 2.86
-------------------------------------------------------
Life-of-fund
(since 2/24/89) 75.16 26.40
Annual average 8.75 3.57
-------------------------------------------------------
Performance data represent past results, do not reflect future performance,
and do not take into account any adjustment for taxes payable on reinvested
distributions. Investment returns, net asset value and market price will
fluctuate so that an investor's shares, when sold, may be worth more or less
than their original cost.
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PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/95
Distributions:
- --------------------------------------------------------------------------
Common shares
- --------------------------------------------------------------------------
No. 12
- --------------------------------------------------------------------------
Income $ 0.762
- --------------------------------------------------------------------------
Total $ 0.762
- --------------------------------------------------------------------------
Preferred shares Series A (550) Series B (550) Series C (650)
- --------------------------------------------------------------------------
Total $3,973.63 $4,017.39 $3,926.90
- --------------------------------------------------------------------------
Share value:
(Common shares) NAV Market price
- --------------------------------------------------------------------------
10/31/94 $ 9.49 $ 9.250
- --------------------------------------------------------------------------
10/31/95 10.08 10.625
- --------------------------------------------------------------------------
Current return
- --------------------------------------------------------------------------
End of period
Current dividend
rate(1) 7.56% 7.17%
- --------------------------------------------------------------------------
Taxable
equivalent(2) 12.52 11.87
- --------------------------------------------------------------------------
(1) Income portion of most recent distribution, annualized and divided by NAV
or market price at end of period.
(2) Assumes maximum 39.6% federal tax rate. Results for investors subject to
lower tax rates would not be as advantageous.
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TOTAL RETURN FOR PERIODS ENDED 9/30/95
(most recent calendar quarter)
NAV Market price
-------------------------------------------------------
1 year 10.54% 15.24%
-------------------------------------------------------
5 years 66.92 70.49
Annual average 10.79 11.26
-------------------------------------------------------
Life-of-fund
(since 2/24/89) 82.49 74.30
Annual average 9.54 8.78
-------------------------------------------------------
Performance data represent past results, do not reflect future performance,
and do not take into account any adjustment for taxes payable on reinvested
distributions. Investment returns, net asset value and market price will
fluctuate so that an investor's shares, when sold, may be worth more or less
than their original cost.
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
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.
10
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Report of independent accountants
For the fiscal year ended October 31, 1995
To the Trustees and Shareholders of
Putnam Managed Municipal Income Trust
We have audited the accompanying statement of assets and liabilities of
Putnam Managed Municipal Income Trust (the "fund"), including the portfolio
of investments owned, as of October 31, 1995, and the related statement of
operations for the year then ended, the statement 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 October 31, 1995 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 Managed Municipal Trust as of October 31, 1995, 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
December 15, 1995
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Portfolio of investments owned
October 31, 1995
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Federal Guaranty Insurance Corporation
GNMA -- Government National Mortgage Association Collateral
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
IF -- Inverse Floater
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (100.5%)*
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT RATINGS** VALUE
Arizona (2.3%)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 3,345,000 AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
(St. Luke's Hlth. Syst.), 7-1/4s, 11/1/14 Aaa $ 3,942,919
2,000,000 Gila Cnty., Indl. Dev. Auth. Poll Control Rev.
Bonds (Asarco Inc. Project), Ser. 85, 8.9s,
7/1/06 Baa 2,182,500
2,000,000 Maricopa Cnty. U. Schl. Dist. #48 IFB 5.742s,
7/1/14 (acquired 6/28/94, cost $1,810,812)++ AA 1,760,000
4,000,000 Payson, Indl. Dev. Auth. Hosp. Rev. Bonds
(Payson Regl. Med. Ctr. Inc. Project), 7.7s,
10/1/23 B/P 3,515,000
2,750,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A 3,183,125
-----------
14,583,544
California (11.9%)
- -----------------------------------------------------------------------------------------------
7,220,000 CA Hlth Facs. Fing. Rev. Bonds
(Pac. Presbyterian), Ser. B, III, 6-3/4s,
6/1/15 A 7,481,725
5,000,000 Contra Costa, Wtr. Dist. Wtr. Rev. Bonds Ser. G,
MBIA, 5-1/2s, 10/1/19 AAA 4,843,750
2,775,000 Corona, COP (Vista Hosp. Syst.), Ser. B, 9-1/2s,
7/1/20 B/P 2,938,031
Metro Wtr. Dist. Rev. Bonds
(Southern Calif. Waterwks),
10,000,000 5.95s, 8/5/22 AA 10,100,000
17,800,000 6-3/4s, 7/1/18 AA 20,047,250
3,500,000 San Bernardino Cnty. IF COP
(PA-100-Med. Ctr. Fin. Project), MBIA, 7.822s,
8/1/28 (acquired 6/27/95, cost $3,774,716)++ AAA 3,880,625
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 9,537,500
15,000,000 U. of CA Rev. Bonds (USCD Med. Ctr. Satellite
Med. Fac.), 7.9s, 12/1/19 Baa 16,181,250
-----------
75,010,131
</TABLE>
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MUNICIPAL BONDS AND NOTES
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT RATINGS** VALUE
Colorado (5.4%)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Denver City & Cnty. Arpt. Rev. Bonds
$ 4,100,000 Ser. C, 6-1/8s, 11/15/25 Baa $ 3,956,500
4,000,000 Ser. A, 8-3/4s, 11/15/23 Baa 4,665,000
7,645,000 Ser. A, MBIA, 8-1/2s, 11/15/23 AAA 9,040,213
2,240,000 Ser. D, 7-3/4s, 11/15/21 Baa 2,444,400
1,050,000 Ser. D, 7-3/4s, 11/15/13 Baa 1,239,000
9,670,000 Ser. C, 6-3/4s, 11/15/22 Baa 9,875,488
2,800,000 Ser. C, MBIA, 6-3/4s, 11/15/13 AAA 2,971,500
-----------
34,192,101
Connecticut (0.7%)
- -----------------------------------------------------------------------------------------------
4,000,000 CT State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Norwalk Health Care Inc. Project), Ser. A,
8.7s, 7/1/22 BB/P 4,315,000
Florida (4.6%)
--------------------------------------------------------------------------------------------
5,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds
(FL Crushed Stone Co.), 8-1/2s, 12/1/14 B/P 5,437,500
7,900,000 Lee Cnty., Hosp. Board of Directors Hosp. IFB
(Lee Memorial Hosp.), MBIA, 9.524s, 3/26/20 AAA 8,522,125
1,185,000 Palm Beach Cnty., Hlth. Fac. Auth. Rev. Bonds
(JFK Med. Ctr. Inc. Project), 8-7/8s, 12/1/18 BBB 1,364,231
1,800,000 Pinellas Cnty. Hlth. Facs. Auth. Sun. Coast
Hlth. Syst. Rev. Bonds (Sun. Coast Hosp.),
Ser. A, 8-1/2s, 3/1/20 BBB 1,901,250
10,615,000 Tampa, Cap. Impt. Rev. Bonds Ser. B, 8-3/8s,
10/1/18 BBB 11,304,975
-----------
28,530,081
Georgia (0.9%)
- -----------------------------------------------------------------------------------------------
1,505,000 Atlanta, Special Purpose Fac. Rev. Bonds (Delta
Air Lines, Inc. Project), Ser. B, 7.9s,
12/1/18 Ba 1,610,350
3,250,000 Gwinnett Cnty., Indl. Dev. Auth. Rev. Bonds
(Kawneer Co. Inc. Project), Ser. 1984, 9-1/2s,
6/1/15 BBB/P 3,530,313
-----------
5,140,663
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 4,080,000
Illinois (5.1%)
- -----------------------------------------------------------------------------------------------
Chicago, O'Hare Intl. Arpt. Special Fac. Rev.
Bonds (United Air Lines , Inc.),
5,453,000 Ser. B, 8.95s, 5/1/18 Baa 6,148,258
1,865,000 Ser. 84B, 8.85s, 5/1/18 Baa 2,093,463
3,270,000 Ser. 84A, 8.85s, 5/1/18 Baa 3,670,575
Chicago, O'Hare Intl. Arpt. Special Fac. Rev.
Bonds (American Airlines, Inc. Project),
3,000,000 8.2s, 12/1/24 Baa 3,525,000
</TABLE>
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MUNICIPAL BONDS AND NOTES
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT RATINGS** VALUE
Illinois (continued)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 5,000,000 Ser. A, 7-7/8s, 11/1/25 Baa $ 5,381,250
2,790,000 (Delta Airlines Inc. Terminal), 6.45s, 5/1/18 BB 2,803,950
2,500,000 IL Dev. Fin. Auth. Retirement Hsg. Rev. Bonds
(Regency Park-Lincolnwood), Ser. A, 10-1/4s,
4/15/19 B/P 1,875,000
6,100,000 Robbins Res. Recvy. Rev. Bonds (Recov.
Partners), Ser. A, 9-1/4s, 10/15/14 B/P 6,588,000
-----------
32,085,496
Indiana (0.7%)
- -----------------------------------------------------------------------------------------------
3,950,000 Indianapolis Indl. Arpt. Auth. Special Fac. Rev.
Bonds (Federal Express Corp. Project), 7.1s,
1/15/17 BBB 4,231,438
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 3,000,000
2,350,000 9.85s, 7/1/09 B/P 2,350,000
-----------
5,350,000
Kansas (2.9%)
- -----------------------------------------------------------------------------------------------
7,500,000 Burlington, Poll. Control, IFB (KS Gas &
Electric), Ser. 91-4, MBIA, 9.653s, 6/1/31
(acquired 12/17/91, cost $7,797,096)++ AAA 9,103,120
8,400,000 Witchita, Hosp. IFB SER. 111-A, MBIA, 8.753s,
10/1/17 AAA 9,345,000
-----------
18,448,120
Kentucky (0.5%)
- -----------------------------------------------------------------------------------------------
2,000,000 Kenton Cnty., Arpt. Board. Special. Facs. Rev.
Bonds (Delta Air Lines, Inc. Project), Ser. A,
7-1/2s, 2/1/20 Ba 2,130,000
1,000,000 Scott Cnty., Indl. Dev. VRDN
(Hoover Group Inc. Project), 8-1/2s,
11/1/14 VMIGI 1,027,500
-----------
3,157,500
Louisiana (5.7%)
- -----------------------------------------------------------------------------------------------
5,000,000 Hodge, Combined Util. Rev. Bonds
(Stone Container Corp.), 9s, 3/1/10 B/P 5,437,500
12,500,000 Lake Charles, Harbor & Term. Dist. Port Facs.
Rev. Bonds (Trunkline Co. Project), 7-3/4s,
8/15/22 Baa 14,062,500
Port of New Orleans, Indl. Dev. Rev. Bonds
(Continental Grain Co. Project),
4,000,000 Ser. A, 14-1/2s, 2/1/02 BB 4,355,000
3,500,000 14-1/2s, 1/1/02 BB 3,793,125
W. Feliciana Parish, Poll. Control Rev. Bonds
(Gulf States Utils. Co. Project),
5,050,000 8s, 12/1/24 Ba 5,441,375
2,750,000 Ser. C, 7s, 11/1/15 Ba 2,853,125
-----------
35,942,625
</TABLE>
14
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MUNICIPAL BONDS AND NOTES
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT RATINGS** VALUE
Maryland (0.8%)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$4,000,000 MD State, Hlth. & Higher Edl. Facs. Auth. Rev.
Bonds (Doctors Cmnty. Hosp.), 8-3/4s, 7/1/12 AAA $ 4,785,000
Massachusetts (4.5%)
- -----------------------------------------------------------------------------------------------
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,000,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 Ba 2,005,000
4,000,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7-7/8s,
8/15/24 BB/P 4,085,000
1,010,000 (MA Eye & Ear Infirmary), Ser. A, 7-3/8s,
7/1/11 Baa 1,010,000
2,215,000 (MA Eye & Ear Infirmary), Ser. A, 7.2s, 7/1/02 BB 2,228,844
1,000,000 (Norwood Hosp.), Ser. C, 7s, 7/1/14 Ba 867,500
5,000,000 MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA Project), Ser. B, 9-1/4s,
7/1/15 BB/P 5,600,000
MA State Indl. Fin. Agcy. Rev. Bonds
2,000,000 (Orchard Cove Inc.), 9s, 5/1/22 BB/P 2,272,500
2,000,000 (1st. Mtge. Pioneer Valley Living Ctr.), 7s,
10/1/20 B/P 1,945,000
1,323,784 (1st. Mtge. Pioneer Valley Living Ctr.), zero %
10/1/20 B/P 1,655
2,865,000 MA State Indl. Fin. Agcy. Tunnel Rev. Bonds
(Mass Tpk.) 9s, 10/1/20 BBB/P 3,140,756
4,900,000 MA State VRDN Ser. B, 3.7s, 12/1/97 VMIGI 4,900,000
-----------
28,056,255
Michigan (9.5%)
- -----------------------------------------------------------------------------------------------
2,375,000 Detroit, G.O. Bonds Ser. A, 6.8s, 4/1/15 BBB 2,493,750
4,400,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment Rev.
Bonds Ser. A, 9-1/2s, 5/1/21 BBB/P 5,527,800
1,600,000 Detroit, Wtr. Supply Syst. 2nd Lien Rev. Bonds
Ser. A, MBIA, 5-1/2s, 7/1/2015, AAA 1,553,104
Greater Detroit, Resource Recvy. Auth. Rev.
Bonds
2,000,000 Ser. B, 9-1/4s, 12/13/08 BBB 2,068,040
1,300,000 Ser. C, 9-1/4s, 12/13/08 BBB 1,344,226
4,780,000 Highland Park, Hosp. Fin. Auth. Fac. Rev. Bonds
(MI Hlth. Care Corp. Project), Ser. A, 9-7/8s,
12/1/19 (In default)+ Caa 1,816,400
4,000,000 Kenton Cnty., Arpt. Board. Special. Facs. Rev.
Bonds (Delta Airlines Project), Ser. A,
6-1/8s, 2/1/22 Ba 3,840,000
2,000,000 Livonia, Pub. Sch. Dist. Rev. Bonds
FGIC, 5-1/2s, 5/1/14 AAA 1,970,000
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
6,850,000 (Env. Research Project), 8-1/8s, 10/1/14 A/P 7,475,063
4,000,000 (Blue Wtr. Fiber Project), 8s, 1/1/12 B/P 3,840,000
3,000,000 (Ford Motor Co. Project), Ser. A, 7.1s, 2/1/06 Aa 3,495,000
4,250,000 MI, Stragetic Fund Poll. Control Rev. Bonds
(General Motors Corp.), 6.2s, 9/1/20 A 4,303,125
8,000,000 Midland Cnty., Econ. Dev. Corp. Poll. Control
Rev. Bonds Ser. B, 9-1/2s, 7/23/09 B/P 8,670,000
</TABLE>
15
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MUNICIPAL BONDS AND NOTES
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT RATINGS** VALUE
Michigan (continued)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$2,390,000 Pontiac Hosp. Fin. Auth. Rev. Bonds 6s, 8/1/23 Baa $ 2,121,125
6,500,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Centerbury Hlth. Care), 8-3/8s, 7/1/23 BB/P 6,784,375
2,150,000 Wayne Charter Cnty., Special Arpt. Fac. Rev.
Bonds (Republic Air Lines, Inc. Project),
10-3/8s, 12/1/15 B/P 2,219,467
-----------
59,521,475
Minnesota (0.5%)
- -----------------------------------------------------------------------------------------------
1,965,000 Chaska, Indl. Dev. Rev. Bonds
(Lifecore Biomedical Inc. Project), 10-1/4s,
9/1/20 BB/P 2,279,400
1,000,000 Rochester, Hlth. Care Fac. IFB (Mayo
Foundation), Ser. H, 7.92s, 11/15/15 AA 1,025,000
-----------
3,304,400
Mississippi (0.7%)
- -----------------------------------------------------------------------------------------------
4,100,000 Claiborne Cnty., Poll. Control Rev. Bonds
(Middle South Energy, Inc.), Ser. A, 9-1/2s,
12/1/13 BBB/P 4,694,500
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 4,260,000
Montana (0.5%)
- -----------------------------------------------------------------------------------------------
3,850,000 MT, State Hlth. Fac. Auth. Hosp. Fac. IFB AMBAC,
6.448s, 2/25/25 AAA 3,301,375
Nebraska (1.6%)
- -----------------------------------------------------------------------------------------------
2,000,000 Gage Cnty. Indl. Dev. VRDN (Hoover Group Inc.
Project) 8-1/2s, 12/1/07 VMIGI 2,055,000
NE Investment Fin. Auth. Single Fam. Mtge. IFB
1,300,000 Ser. B, GNMA, 10.973s, 3/15/22 AAA 1,486,875
6,120,000 Ser. 1, MBIA, 8-1/8s, 8/15/38 AAA 6,410,700
-----------
9,952,575
Nevada (0.7%)
- -----------------------------------------------------------------------------------------------
4,000,000 Clark Cnty., Indl. Dev. Rev. Bonds (NV Pwr. Co.
Project), 7.8s, 6/1/20 Baa 4,270,000
New Hampshire (0.9%)
- -----------------------------------------------------------------------------------------------
2,215,000 NH Higher Edl. & Hlth. Fac. Auth. Rev. Bonds
(Alice Peck Day Memorial Hosp. Project),
9-3/8s, 11/1/20 BB/P 2,411,581
2,800,000 NH State Indl. Dev. Auth. Poll. Control Rev.
Bonds (United Illuminating Co.), Ser. B,
10-3/4s, 10/1/12 Baa 3,157,000
-----------
5,568,581
</TABLE>
16
<PAGE>
MUNICIPAL BONDS AND NOTES
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT RATINGS** VALUE
New Jersey (2.4%)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 6,500,000 Landis, Swr. Auth. Rev. Bonds
FGIC, 5.65s, 9/19/19 AAA $ 6,475,625
5,000,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
(St. Elizabeth Hosp.), Ser. B, 8-1/4s, 7/1/20 Baa 5,425,000
3,500,000 NJ State Transn. Trust Fund Rev. Bonds (Transn.
Syst.), Ser. A, MBIA, 5s, 6/15/15 AAA 3,215,625
-----------
15,116,250
New York (9.6%)
- -----------------------------------------------------------------------------------------------
NY City G.O. Bonds
3,365,000 Ser. F, 8-1/4s, 11/15/10 A 4,059,031
3,635,000 8-1/4s, 11/15/10 A 4,257,494
500,000 NY City Muni. Wtr. Fin. Auth. Wtr. & Swr. Syst.
VRDN Ser. C, FGIC, 4s, 6/15/23 VMIGI 500,000
NY City, G.O. Bonds
4,925,000 Ser. D, Group C, 8s, 8/1/2018 AAA 5,848,438
10,000,000 Ser. E, 6-1/2s, 2/15/06 BBB 10,550,000
4,000,000 NY City, Muni. Wtr. Fin. Auth. VRDN
Ser. G, FGIC, 3.9s, 6/15/24 VMIGI 4,000,000
1,000,000 NY City, VRDN FGIC, Ser. C, 2-1/4s, 10/1/22 VMIGI 1,000,000
NY State Dorm. Auth. Rev. Bonds
(Court Facs. Lease),
6,000,000 Ser. A, 5-3/8s, 5/15/16 Baa 5,535,000
3,000,000 Ser. A, 5-1/2s, 5/15/23 Baa 2,763,750
6,500,000 Ser. A, 5-1/4s, 5/15/21 Baa 5,793,125
10,600,000 NY State Energy Research & Dev. Auth. Poll.
Control VRDN (NY State Elec. & Gas Co.), Ser.
C, 3.43s, 6/1/29 VMIGI 10,600,000
5,000,000 NY State Med. Care Facs. Fin. Agcy. Rev. Bonds
Ser. A, AMBAC, 6-1/2s, 8/15/29 AAA 5,300,000
-----------
60,206,838
North Carolina (1.6%)
- -----------------------------------------------------------------------------------------------
10,500,000 NC Eastern Muni. Pwr. Agcy. Pwr. Syst. Rev.
Bonds Ser. B, 6s, 1/1/22 A 10,303,125
Ohio (4.8%)
- -----------------------------------------------------------------------------------------------
1,950,000 Dayton, Special Fac. Rev. Bonds
(Emery Air Freight Corp.), Ser. A, 12-1/2s,
10/1/09 B/P 2,281,500
20,000,000 OH State Air Quality Dev. Auth. Rev. Bonds
(Cleveland Co. Project), FGIC, 8s, 12/1/13 AAA 24,000,000
4,000,000 Ohio State, Wtr. Dev. Auth. Solid Disp. Rev.
Bonds (North Star BHP Steel Cargill), 6.3s,
9/1/20 AA 4,065,000
-----------
30,346,500
Oklahoma (0.5%)
- -----------------------------------------------------------------------------------------------
2,975,000 Oklahoma Cnty., Indl. Auth. Rev. Bonds (Epworth
Villa Project), Ser. A, 10-1/4s, 4/1/19 BB/P 3,242,750
</TABLE>
17
<PAGE>
MUNICIPAL BONDS AND NOTES
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT RATINGS** VALUE
Pennsylvania (4.5%)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 4,000,000 Allegheny Cnty., Indl. Dev. Auth. Arpt. Facs.
Rev. Bonds (USAIR Inc. Project), Ser. B,
8-1/2s, 3/1/2001 B $ 4,285,000
2,500,000 Beaver Cnty. Indl. Dev. Poll. Conrtrol Rev.
Bonds (Toledo Edison Co. Project), 7-5/8s,
5/1/20 Ba 2,587,500
3,200,000 Delaware Cnty., Indl. Dev. Auth. Arpt. Fac. VRDN
(UTD Parcel Svc. Project), 3.647s, 12/1/15 AAA 3,200,000
2,000,000 Langhorne Manor Boro Higher Ed. Hlth. Auth. Rev.
Bonds (Lower-Bucks Hosp. Project), 7.35s,
7/1/22 Ba 1,910,000
Montgomery Cnty. Higher Edl. & Hlth. Auth. Hosp.
Rev. Bonds
1,000,000 (United Hosp. Inc.--St. Christopher), 8-1/4s,
11/1/03 Ba 1,046,250
1,000,000 (United Hosp. Inc. Project), 8-1/2s, 11/1/17 Ba 1,045,000
7,000,000 PA Economic Dev. Fing. Auth. Recycling Rev.
Bonds (Ponderosa Fibres Project), Ser. A,
9-1/4s, 1/1/22 B/P 7,306,250
6,000,000 PA State Higher Ed. Assistance Agcy. IFB
Ser. B, MBIA, 10.661s, 3/1/20 AAA 6,727,500
-----------
28,107,500
Puerto Rico (0.4%)
- -----------------------------------------------------------------------------------------------
3,000,000 Cmnwlth. of Puerto Rico, Hwy. & Transn. Auth.
Hwy. Rev. Bonds Ser. X, FSA, 5-1/4s, 7/1/21 AAA 2,827,500
South Carolina (1.6%)
- -----------------------------------------------------------------------------------------------
5,000,000 SC Jobs Econ. Dev. Auth. Hosp. Fac. Rev. Bonds
AMBAC, 6.892s, 8/1/15 AAA 4,775,000
5,000,000 SC State Hsg. Fin. & Dev. Auth. Multi-Fam. Mtge.
Rev. Bonds 8-1/2s, 10/1/21 BBB 5,506,250
-----------
10,281,250
Tennessee (2.8%)
- -----------------------------------------------------------------------------------------------
5,000,000 Maury Cnty., Indl. Dev. Board Poll. Control Rev.
Bonds (Saturn Corp. Project), 6-1/2s, 9/1/24 A 5,150,000
12,000,000 Metro. Nashville & Davidson Cnty. Rev. Bonds
(Water & Sewer Rev.), AMBAC, 6.075s, 1/1/22 AAA 12,180,000
-----------
17,330,000
Texas (5.7%)
- -----------------------------------------------------------------------------------------------
3,850,000 Amarillo, Hlth. Fac. Hosp. Corp. IFB
(High Plains Baptist Hosp.), FSA, 8.947s,
1/3/22 AAA 4,196,500
Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
3,170,000 (Heartway Corp.), Ser. A-1, 10-1/4s, 3/1/19 B/P 2,853,000
3,200,000 (St. Luke's Lutheran Hosp. Project), 7.9s,
5/1/11 AAA/P 3,820,000
</TABLE>
18
<PAGE>
MUNICIPAL BONDS AND NOTES
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT RATINGS** VALUE
Texas (continued)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$7,250,000 Brazos River, Poll. Control Auth. Rev. Bonds (TX
Utils. Elec. Co. Project), Ser. A, 7-7/8s,
3/1/21 Baa $ 8,074,688
2,211,000 Houston, Hsg. Fin. Corp. Single Fam. Mtge. Rev.
Bonds Ser. A, Verex Mtg. Ins., 10-7/8s,
2/15/16 A 2,244,165
2,000,000 Lone Star, TX Arpt. Impt. Auth. Inc. Rev. Bonds
(American Airlines Inc. Project), 9-1/8s,
12/1/15 Baa 2,050,260
Southeast TX Multi-Fam. Hsg. Fin. Corp. Rev.
Bonds
3,000,000 (Bayou Pk. Village Apt. Project), Ser. B,
10.175s, 8/1/16 B/P 3,063,750
2,500,000 (Promenade Place Apts. Project), Ser. B,
10.175s 8/1/16 B/P 2,531,250
5,000,000 (Pavilion Place Apts. Project), Ser. A, 7.6s,
7/1/16 BBB/P 5,018,750
3,000,000 Tarrant Cnty., Hlth. Facs. Dev. Corp. Hosp. Rev.
Bonds (Cmnty. Hlth. Care Foundation. Inc.
Project), 10-1/8s, 4/1/21 B/P 2,250,000
-----------
36,102,363
Utah (0.9%)
- -----------------------------------------------------------------------------------------------
5,350,000 Intermountain Power Agcy. Power Supply Rev.
Bonds Ser. D, AMBAC, 7-3/4s, 7/1/20 AAA 5,844,875
Virginia (0.9%)
- -----------------------------------------------------------------------------------------------
5,400,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB
FGIC, 9.114s, 8/15/23 AAA 5,967,000
Washington (2.1%)
- -----------------------------------------------------------------------------------------------
5,000,000 Port Walla Walla Pub. Corp. Solid Waste
Recycling Rev. Bonds
(Ponderosa Fibres Project), 9-1/8s, 1/1/26 B/P 5,125,000
1,300,000 WA State Hlth. Care Facs. Auth. VRDN (Sisters
Providence), Ser. B, 3.9s, 10/1/05 VMIGI 1,300,000
6,315,000 WA State Pub. Pwr. Supply Syst. Rev. Bonds
(Nuclear Project No. 1), Ser. A, 7-1/2s,
7/1/15 AA 6,851,775
-----------
13,276,775
- -----------------------------------------------------------------------------------------------
Total Investments (cost $602,711,986)*** $631,733,586
- -----------------------------------------------------------------------------------------------
</TABLE>
* Percentages indicated are based on net assets of $628,454,219.
+ Non Income Producing.
** The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at October 31, 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 would ascribe to these securities at October
31, 1995. Securities rated by Putnam are indicated by "/P" and are not
publicly rated. Ratings are not covered by the Report of independent
accountants.
++ Restricted as to public resale. At the date of acquisition 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 October 31, 1995 was $14,743,745 or 2.3% of net assets.
*** The aggregate identified cost for federal income tax purposes is
$602,927,973, resulting in gross unrealized appreciation and depreciation
of $34,940,954 and $6,135,341, respectively, or net unrealized
appreciation of $28,805,613.
19
<PAGE>
The fund had the following insurance concentration greater than 10% of net
assets at October 31, 1995:
MBIA 10.4%
The fund had the following industry group concentrations greater than 10% of
net assets at October 31, 1995:
Transportation 19.0%
Utilities/Water & Sewage 18.0
Hospitals/Health Care 17.0
The rates shown on IFB, which are securities paying variable interest rates
that vary inversely to changes in the market interest rates and VRDNs are the
current interest rates at October 31, 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 October 31,
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
Rated securities of comparable quality
as a percentage of as a percentage of
Ratings fund's net assets fund's net assets
"AAA"/"Aaa" 28.8% 0.6%
"AA"/"Aa" 6.4 --
"A"/"A" 6.5 1.2
"BBB"/"Baa" 25.1 3.4
"BB"/"Ba" 6.4 4.9
"B"/"B" 2.2 10.6
"CCC"/"Caa" 0.4 --
"VMIGI" 4.0 --
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Statement of assets and liabilities
October 31, 1995
<TABLE>
<CAPTION>
Assets
<S> <C>
- -----------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $602,711,986) (Note 1) $631,733,586
- -----------------------------------------------------------------------------------------
Cash 607,958
- -----------------------------------------------------------------------------------------
Interest and other receivables 13,270,766
- -----------------------------------------------------------------------------------------
Receivable for securities sold 6,158,600
- -----------------------------------------------------------------------------------------
Total assets 651,770,910
- -----------------------------------------------------------------------------------------
Liabilities
- -----------------------------------------------------------------------------------------
Payable for securities purchased 19,070,852
- -----------------------------------------------------------------------------------------
Distributions payable to shareholders 3,061,642
- -----------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 3) 1,089,103
- -----------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 3) 562
- -----------------------------------------------------------------------------------------
Payable for administrative services (Note 3) 1,146
- -----------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 3) 63,654
- -----------------------------------------------------------------------------------------
Other accrued expenses 29,732
- -----------------------------------------------------------------------------------------
Total liabilities 23,316,691
- -----------------------------------------------------------------------------------------
Net assets $628,454,219
- -----------------------------------------------------------------------------------------
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; 44,961,926
shares outstanding (Note 1) 414,847,346
- -----------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 17,879,998
- -----------------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions (Note 1) (8,294,725)
- -----------------------------------------------------------------------------------------
Net unrealized appreciation of investments 29,021,600
- -----------------------------------------------------------------------------------------
Net assets $628,454,219
- -----------------------------------------------------------------------------------------
Computation of net asset value
- -----------------------------------------------------------------------------------------
Remarketed preferred shares at liquidation preference $175,000,000
- -----------------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 79,727
- -----------------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares at liquidation preference 175,079,727
- -----------------------------------------------------------------------------------------
Net assets available to common shares:
Net asset value per share $10.08 ($453,374,492 divided by
44,961,926 shares) 453,374,492
- -----------------------------------------------------------------------------------------
Net assets $628,454,219
- -----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Statement of operations
Year ended October 31, 1995
Tax exempt interest income $45,781,940
- ----------------------------------------------------------------------
Expenses:
- ----------------------------------------------------------------------
Compensation of Manager (Note 3) 4,170,165
- ----------------------------------------------------------------------
Investor servicing and custodian fees (Note 3) 429,311
- ----------------------------------------------------------------------
Compensation of Trustees (Note 3) 19,511
- ----------------------------------------------------------------------
Reports to shareholders 64,404
- ----------------------------------------------------------------------
Auditing 46,931
- ----------------------------------------------------------------------
Legal 16,973
- ----------------------------------------------------------------------
Postage 88,179
- ----------------------------------------------------------------------
Administrative services (Note 3) 14,474
- ----------------------------------------------------------------------
Exchange listing fees 33,669
- ----------------------------------------------------------------------
Preferred share remarketing agent fees 445,364
- ----------------------------------------------------------------------
Other 30,676
- ----------------------------------------------------------------------
Total expenses 5,359,657
- ----------------------------------------------------------------------
Expense reduction (Note 3) (141,438)
- ----------------------------------------------------------------------
Net expenses 5,218,219
- ----------------------------------------------------------------------
Net investment income 40,563,721
- ----------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 4) 3,434,135
- ----------------------------------------------------------------------
Net realized loss on written options (Notes 1 and 4) (4,786,973)
- ----------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 4) (2,263,576)
- ----------------------------------------------------------------------
Net unrealized appreciation of investments during the year 30,712,230
- ----------------------------------------------------------------------
Net gain on investments 27,095,816
- ----------------------------------------------------------------------
Net increase in net assets resulting from operations $67,659,537
- ----------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
Statement of changes in net assets
Year ended October 31
---------------------
1995 1994
- --------------------------------------------------------------------------------
Increase (decrease) in net assets
- --------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------
Net investment income $ 40,563,721 $ 41,590,495
- --------------------------------------------------------------------------------
Net realized loss on investments (3,616,414) (4,278,598)
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 30,712,230 (56,090,200)
- --------------------------------------------------------------------------------
Net increase (decrease) in assets resulting
from operations 67,659,537 (18,778,303)
- --------------------------------------------------------------------------------
Distributions to remarketed preferred
shareholders from:
Net investment income (7,104,957) (4,753,458)
- --------------------------------------------------------------------------------
Net increase (decrease) in assets resulting
from operations applicable to common
shareholders (excluding cumulative
undeclared dividends on remarketed preferred
shares of $79,727 and $237,109 respectively) 60,554,580 (23,531,761)
- --------------------------------------------------------------------------------
Distributions to common shareholders from:
- --------------------------------------------------------------------------------
Net investment income (34,075,362) (33,732,841)
- --------------------------------------------------------------------------------
Net realized gain on investments -- (4,069,833)
- --------------------------------------------------------------------------------
Issuance of common shares in connection with
reinvestment of distributions 4,983,445 5,504,121
- --------------------------------------------------------------------------------
Total increase (decrease) in net assets 31,462,663 (55,830,314)
- --------------------------------------------------------------------------------
Net assets
- --------------------------------------------------------------------------------
Beginning of year 596,991,556 652,821,870
- --------------------------------------------------------------------------------
End of year (including undistributed net
investment income of $17,879,998 and
$18,238,370 respectively) $628,454,219 $596,991,556
- --------------------------------------------------------------------------------
Number of fund shares
- --------------------------------------------------------------------------------
Common shares outstanding at beginning of
year 44,449,876 43,918,097
- --------------------------------------------------------------------------------
Common shares issued in connection with
reinvestment of distributions 512,050 531,779
- --------------------------------------------------------------------------------
Common shares outstanding at end of year 44,961,926 44,449,876
- --------------------------------------------------------------------------------
Remarketed preferred shares outstanding at
beginning and end of year 1,750 1,750
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
Financial highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
Year ended October 31
-------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period
(common shares) $ 9.49 $ 10.88 $ 9.81 $ 9.44 $ 8.94
- ------------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------------
Net investment income .90 .94 .98 1.01 1.02
Net realized and unrealized gain (loss) on
investments .60 (1.37) 1.04 .26 .44
- ------------------------------------------------------------------------------------------------------
Total from investment operations 1.50 (.43) 2.02 1.27 1.46
- ------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
- ------------------------------------------------------------------------------------------------------
Net investment income
To preferred shareholders (.15) (.11) (.11) (.14) (.20)
To common shareholders (.76) (.76) (.76) (.76) (.76)
Net realized gain on investments
To common shareholders -- (.09) (.08) -- --
- ------------------------------------------------------------------------------------------------------
Total distributions (.91) (.96) (.95) (.90) (.96)
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period (common
shares) $ 10.08 $ 9.49 $ 10.88 $ 9.81 $ 9.44
- ------------------------------------------------------------------------------------------------------
Market value, end of period (common shares) $ 10.63 $ 9.25 $ 11.38 $ 9.88 $ 10.00
- ------------------------------------------------------------------------------------------------------
Total investment return at market value
(common shares) (%)(a) 24.23 (11.56) 24.84 6.72 22.33
- ------------------------------------------------------------------------------------------------------
Net assets, end of period
(total fund)(in thousands) $628,454 $596,992 $652,660 $600,849 $580,495
- ------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets
(%)(b)(c) 1.20 1.23 1.22 1.24 1.33
- ------------------------------------------------------------------------------------------------------
Ratio of net investment income to average
net assets (%)(b) 7.70 9.20 8.44 8.94 8.92
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 79.71 48.40 35.16 67.72 49.62
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total investment return assumes dividend reinvestment.
(b) Ratios reflect net assets available to common shares only; net investment
income ratio also reflects reduction for dividend payments to preferred
shareholders.
(c) The ratio of expenses to average net assets for the year ended October
31, 1995 includes amounts paid through brokerage service and expenses
offset arrangements. Prior period ratios exclude these amounts. See Note
3.
24
<PAGE>
Notes to financial statements
October 31, 1995
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 Putnam Investment Management, Inc.
("Putnam Management"), the fund's manager, a wholly-owned subsidiary of
Putnam Investments, Inc. following procedures approved by the Trustees, and
such valuations and procedures are reviewed periodically by Trustees.
B) Determination of net asset value Net asset value of the common shares is
determined by dividing the value of all assets of the fund (including accrued
interest and dividends), less all liabilities (including accrued expenses and
undeclared dividends on remarketed preferred shares), 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 and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options are
valued at the last sale price, or if no sales are reported, the last bid
price
25
<PAGE>
for purchased options and the last ask price for written options. Options
traded over-the-counter are valued using prices supplied by dealers.
E) Federal taxes It is the policy of the fund to distribute all of its 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
position 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 and for excise
tax on income and capital gains.
At October 31, 1995 the fund had a capital loss carryover of approximately
$4,292,000 which may be available to offset future capital gains, if any.
The amount of the carryover and the expiration dates:
Loss Carryover Expiration
- ----------------------------
$3,958,000 10/31/2002
$334,000 10/31/2003
F) Distributions to shareholders Distributions to common and preferred
shareholders are recorded by the fund on the ex-dividend date. Dividends on
remarketed preferred shares become payable when, as and if declared by the
Trustees. Each dividend period for the remarketed shares is generally a 28
day period for Series A and B, and a 7 day period for Series C. The
applicable dividend rate for the remarketed preferred shares on October 31,
1995 was Series A 3.779%, Series B 3.759%; Series C was 3.850%.
The amount and character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences include treatment of
defaulted bond interest, losses on wash sale transactions, realized and
unrealized gains and losses on certain futures contracts 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 October 31, 1995, the fund reclassified $258,226 to
increase undistributed net investment income and $40,302 to increase paid-
in-capital, with an increase to accumulated net realized losses of $298,528.
The calculation of net investment income per share in the financial
highlights table excludes these adjustments.
G) 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 original issued discount 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 October 31, 1995 amounted to
$79,727.
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
26
<PAGE>
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 the shares' rating agencies.
Should these requirements not be met, or should dividends accrued on the
remarketed preferred shares not be paid, the fund may be restricted in its
ability to declare dividends to common shareholders or may be required to
redeem certain of the remarketed preferred shares. At October 31, 1995, no
such restrictions have been placed on the fund.
Note 3
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,
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 reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Trustees of the fund receive an annual Trustee's fee of $1,280 and an
additional fee for each Trustees' 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.
During the year ended October 31, 1995, the fund adopted a Trustee Fee
Deferral Plan (the "Plan") which allows the Trustees to defer the receipt of
all or a portion of Trustees Fees payable on or after July 1, 1995. The
deferred fees remain in the fund and are invested in the fund or in other
Putnam funds until distribution in accordance with the Plan.
Custodial functions for the fund are provided by Putnam Fiduciary Trust
Company (PFTC), a wholly-owned 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.
For the year ended October 31, 1995, fund expenses were reduced by $141,438
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 the assets utilized in connection with the offset
arrangements in an income-producing asset if it had not entered into such
arrangements.
Note 4
Purchases and sales of securities
During the year ended October 31, 1995, purchases and sales of investment
securities other than short-term investments aggregated $441,160,160 and
$461,020,355, respectively. Purchases and sales of short-term obligations
aggregated $228,878,150 and $199,247,500, respectively. In determining the
net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
27
<PAGE>
Written option transactions during the year are summarized as follows:
Contract Premiums
Amounts Received
- ------------------------------------------------------------------------
Contracts outstanding at beginning of year $ -- $ --
- ------------------------------------------------------------------------
Options opened 145,200,000 2,479,695
- ------------------------------------------------------------------------
Options expired -- --
- ------------------------------------------------------------------------
Options closed (145,200,000) (2,479,695)
- ------------------------------------------------------------------------
Written options
outstanding at
end of year $ -- $ --
- ------------------------------------------------------------------------
28
<PAGE>
Selected quarterly data
(Unaudited)
<TABLE>
<CAPTION>
Available to common shareholders
Net increase
Net realized (decrease)
and unrealized in net assets
Investment Net invest- gain (loss) on from
income ment income investments operations
--------------------- ------------------- --------------------- ----------------------
Quarter Per Per Per Per
ended Total Share+ Total Share+ Total Share+ Total Share+
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10/31/95 $11,423,326 $.25 $8,414,921 $.19 $ 9,278,854 $ .20 $ 17,693,775 $ .39
7/31/95 11,332,161 .25 8,356,667 .19 3,758,278 .08 12,114,945 .27
4/30/95 11,456,026 .26 8,411,515 .19 10,122,836 .23 18,534,351 .42
1/31/95 11,570,427 .26 8,433,043 .19 3,935,848 .08 12,368,891 .27
10/31/94 11,693,577 .26 8,924,821 .20 (22,814,166) (.51) (13,889,345) (.31)
7/31/94 11,598,178 .26 8,899,135 .20 (76,157) -- 8,822,978 .20
4/30/94 11,884,996 .27 9,602,081 .22 (40,050,878) (.92) (30,448,797) (.70)
1/31/94 11,953,487 .27 9,411,000 .21 2,572,403 .06 11,983,403 .27
</TABLE>
+Per common share
29
<PAGE>
Federal tax information (Unaudited)
The fund has designated 99.9% 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 1996 will show the tax status of all
distributions paid to your account in calendar 1995.
Results of October 5, 1995 shareholder meeting (Unaudited)
An annual meeting of shareholders of the fund was held on October 5, 1995. At
the meeting, each of the nominees for Trustees was elected, as follows.
Votes for Votes withheld
Jameson Adkins Baxter 40,021,228 499,826
Hans H. Estin 39,996,200 524,854
Elizabeth T. Kennan 40,018,544 490,169
Lawrence J. Lasser 40,030,885 132,520
Donald S. Perkins 39,989,643 531,411
William F. Pounds 39,999,934 521,120
George Putnam 39,992,609 528,445
George Putnam, III 40,012,085 508,969
E. Shapiro 39,901,294 619,760
A.J.C. Smith 40,027,071 493,983
W. Nicholas Thorndike 40,030,026 491,028
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as auditors
for the fund was approved as follows: 39,689,150 votes for, and 218,272 votes
against, with 613,632 abstentions and broker non-votes. All tabulations have
been rounded to the nearest whole number.
30
<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
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
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
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.
31
<PAGE>
PUTNAM INVESTMENTS
The Putnam Funds Bulk Rate
One Post Office Square U.S. Postage
Boston, Massachusetts 02109 PAID
Putnam
Investments
21699-052 12/95
