Putnam
Managed
Municipal
Income Trust
ANNUAL REPORT
October 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "While PMM's (Putnam Managed Municipal Income Trust's) portfolio has
shifted, its monthly dividend has remained stable at $0.0635 per share
since mid-1990*. Although other municipal-bond funds also sport steady
dividends, most have accomplished that by holding tight to their
original bonds. PMM, by contrast, has picked up extra income by snapping
up out-of-favor issues."
-- Morningstar Mutual Funds, September 20, 1996
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
23 Financial statements
*Past performance is, of course, no assurance of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
Putnam Managed Municipal Income Trust spent much of the second half of
fiscal 1996 recovering from the challenges presented during the first
half. As you will recall, your fund began its year in November 1995 amid
concerns by municipal bond investors that a flat tax would erase the
advantage enjoyed by tax-exempt securities. Later, the entire bond
market recoiled in fear that the economy's still-robust growth would
touch off greater inflation.
During the second half of the fiscal year, the fixed-income markets --
and your fund -- made up some lost ground as investors regained their
composure. Prospects for the year ahead now seem more positive. Demand
for tax-exempt securities is strong, especially relative to fairly
modest supply. The economy, interest rates, and inflation remain
generally favorable.
Shortly before the end of fiscal 1996, Richard Wyke assumed management
of your fund. Rick has 14 years of investment experience; has been
managing municipal bond portfolios at Putnam since 1987 and is now a
Senior Vice President. He reviews the fund's performance and prospects
in the report that follows.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
December 18, 1996
Report from the Fund Manager
Richard P. Wyke
Thanks to the strong performance gains made by health care and airline
holdings as well as an overweighting in California municipal bonds,
Putnam Managed Municipal Income Trust's returns for the 12 months ended
October 31, 1996, were respectable: 5.27% at net asset value and 10.26%
at market price. The fund's results did lag slightly behind its
comparative benchmark, the Lehman Municipal Bond Index, which returned
5.71% for the same period. However, we attribute this to our emphasis on
the project finance sector, which suffered in the wake of disappointing
news from the paper recycling and resource recovery industries. Returns
for longer time periods can be found on pages 9 and 10.
* PROSPECT OF HIGHER INTEREST RATES UNNERVES MARKET
A glimpse of the beginning and end of the fund's fiscal year would
reveal two very different bond markets, one ecstatic about the prospect
of falling interest rates and the other nervous about the potential for
rising rates and inflation. Early on, the bond market's euphoria was
driven by declining interest rates, benign inflation, and slow economic
growth. Despite the market's uncertainty over the various political
proposals to reform the tax code, your fund actively participated in the
rally. In the aftermath of a decision by the Federal Reserve Board to
reduce short-term interest rates by a quarter of a percentage point on
December 19, the fund finished calendar 1995 with a total return of
19.23% at net asset value (23.62% at market price).
An additional quarter-point drop in rates at the end of January only
served to bolster bond investors' optimism further. Despite the
breakdown of budget talks in Washington, bond prices climbed. However,
by early March, evidence of rapid employment growth fueled fears of
inflation and a possible end to the Federal Reserve's program of
lowering short-term interest rates, bringing the extended bond rally to
an abrupt halt. While the board, to the surprise of many, held short-
term interest rates steady for the balance of the fund's fiscal year,
prices of fixed-income investments seesawed as the markets tried to
anticipate the future course of rates. Despite this uneasiness, yields
remained within a limited range, as evidenced by the bellwether 30-year
Treasury bond, whose yield fluctuated between 6.70% and 7.20% during the
latter half of the fiscal year.
* BOND INVESTORS WATCH FED CLOSELY
Given the potential inflationary pressures of stronger growth, bond
investors kept nervous eyes on the policymakers at the Federal Reserve.
Each of the Federal Reserve Board's meetings was preceded by waves of
speculation about the possibility of a short-term rate increase.
Nowhere was this drama more evident than in the weeks leading up to the
September 24 Federal Reserve board meeting. On one side of the debate
were those who viewed August's rise in average wages paid to American
workers and the recent rise in oil prices as major warning signs that
action was needed. This position was further bolstered by the fact that
the national unemployment rate fell to a 6-year low of 5.1% in August.
On the other side were those who said that price pressures hadn't seeped
through to consumers and that the numbers for third-quarter growth were
suggesting a mixed picture of economic growth. In the end, the Fed,
counting on slower growth to keep prices from rising, decided to hold
interest rates steady.
[GRAPHIC OMITTED: HORIZONTAL BAR CHART OF TOP INDUSTRY SECTORS*]
TOP INDUSTRY SECTORS*
Health care 26.2%
Utilities 23.9%
Transportation 17.1%
Housing 7.7%
Education 5.7%
Water and sewer 3.4%
Footnote reads:
*Based on net assets as of 10/31/96. Holdings will vary over time.
[GRAPHIC OMITTED: PIE CHART OF CREDIT QUALITY OVERVIEW*]
Credit quality overview*
Aaa 28.9%
Aa 8.8%
A 5.4%
Baa 32.1%
Ba 13.2%
B and under 10.8%
VMIGI 0.8%
Footnote reads:
*As a percentage of market value as of 10/31/96. A bond rated Baa or
higher is considered investment grade. All ratings reflect Moody's
descriptions unless noted otherwise; percentages may include unrated
bonds considered by Putnam Management to be of comparable quality.
Ratings will vary over time.
* MULTILAYERED STRATEGY TARGETS BONDS WITH THE GREATEST POTENTIAL IMPACT
ON PERFORMANCE
In the day-to-day management of the fund, we search for municipal bonds
that offer the right balance of credit quality, yield, and relative
price stability. Despite our issue-by-issue, credit-by-credit analysis,
some common themes do emerge as a result of our effort to evaluate the
relative attractiveness of sectors and geographic locales nationwide.
This multilayered strategy, which led us to overweight assets in health-
care, utilities, transportation (airline/airport), and California
municipal bonds, enabled the fund to bounce back quickly after last
spring's sudden interest-rate reversal.
Health-care investments, which were more than one-quarter of total net
assets on October 31, made a particularly strong contribution to the
fund's performance. This concentration stems from our perception that on
a credit-by-credit and market-by-market basis, hospitals continue to
offer some of the best values across the nation. In addition, the
sector's high coupons are expected to continue to provide a healthy
boost to the fund's income stream, assuming the current yield spreads
between sectors remain fairly constant. The fund's assisted-care
holdings can be expected to increase going forward. Given the positive
demand/supply dynamics of an aging baby-boom generation and the current
shortage of nursing homes, the supply constraints could spell attractive
appreciation potential in this sector.
With California's economy vastly improved and Orange County's fiscal
woes behind, the state's municipal bonds are once again attracting the
attention of investors. The fund's California municipal holdings,
approximately 13% of total assets, have experienced a noticeable boost
in price appreciation as a result of the state's recent credit upgrade.
Given the shrinking supply of these bonds in the face of steady demand,
we believe California municipal bonds have the potential to outperform
the rest of the market over the next several months.
Airline and airport holdings make up almost 15% of total assets. In the
airline industry, the fund's positions in bonds backed by United, Delta,
and American airlines have done particularly well this year. These
holdings are primarily high-coupon bonds with improving credit
characteristics. During the course of the fiscal year, yield spreads for
these bonds narrowed relative to other sectors, reflecting their
outperformance.
While we believe the future of the resource recovery and cogeneration
industries remains promising, this sector experienced some disappointing
news. Paper recycling was negatively impacted by declining prices of
recycled pulp, largely the result of abundant supply. Some of the laws
and regulations written to provide for cogeneration and resource
recovery plants have come into question. In an effort to soften
volatility over the short term, we sold most of the holdings with weak
performance records but retained an interest in stronger projects that
suffered more as a result of guilt by association than because of any
specific fundamentals.
As with investments in any new industry, bonds linked to these sectors
represent a certain degree of risk for investors. However, intensive
scrutiny of bond issuers' credit quality, funding sources, and future
prospects has guided the fund's investment process. We believe that
these businesses, which are devoted to recycling and converting trash
into fuel, should become more valuable as the nation becomes more
environmentally conscious. As the industry gains broader acceptability,
it is likely that these bonds will be considered more creditworthy
investments, and, should upgrades occur, they could be expected to
reflect favorably on the bonds' prices.
* RECENT SHIFTS POSITION FUND TO BENEFIT FROM A POTENTIAL MARKET RALLY
While the housing market continues to be a surprising source of
strength, we see evidence of slowing in many other sectors of the
economy, including manufacturing, retail, and exports. It is our belief
that the economy will lose some of its momentum in the coming months and
that inflation will remain well behaved at 3% to 3.5%. Needless to say,
the Fed would be unlikely to raise interest rates in such a scenario.
Our more sanguine view led us to position the fund to benefit from an
eventual market rally. In fact, in the last weeks of the period, we
began to lengthen the fund's duration by buying longer-maturity discount
bonds. In a slower-growth environment, these bonds offer attractive
appreciation potential when rates are declining. We are also targeting
investments in states that are likely to maintain positive economic
growth, such as Texas, Georgia, and Michigan, as well as in Puerto Rico.
As fiscal 1997 begins, we believe the portfolio's commitment to its
largest sectors may hold the key to the fund's performance in the months
ahead. Outperformance will largely be the result of careful attention to
bond structure and credit analysis. With no real inflationary pressure
on the horizon, we remain optimistic about the prospects for your fund
and the municipal bond market as a whole.
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 10/31/96, there is no guarantee the fund
will continue to hold these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Managed Municipal Income Trust is designed for
investors seeking high current income free 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 in the fund.
TOTAL RETURN FOR PERIODS ENDED 10/31/96
Lehman Bros.
Market Municipal Consumer
NAV price Bond Index Price Index
- ------------------------------------------------------------------------
1 year 5.27% 10.26% 5.71% 2.99%
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5 years 54.86 61.40 43.61 15.21
Annual average 9.14 10.05 7.50 2.87
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Life of fund (2/24/89) 95.25 100.47 85.21 30.18
Annual average 9.09 9.47 8.37 3.49
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TOTAL RETURN FOR PERIODS ENDED 9/30/96
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------
1 year 5.68% 12.99%
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5 years 54.00 63.72
Annual average 9.02 10.36
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Life of fund (2/24/89) 92.86 96.94
Annual average 9.03 9.33
- ------------------------------------------------------------------------
Performance data represent past results and do not reflect future
performance. They 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.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 10/31/96
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Distributions: (common shares):
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Number 12
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Income $0.762
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Capital gains1 --
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Total $0.762
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Preferred shares Series A Series B Series C
(550 shares) (550 shares) (650 shares)
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Income $3614.74 $3599.69 $3628.08
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Capital gains1 -- -- --
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Total $3614.74 $3599.69 $3628.08
- ------------------------------------------------------------------------
Share value (common shares): NAV Market price
- ------------------------------------------------------------------------
10/31/95 $10.08 $10.625
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10/31/96 9.85 10.875
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Current return (common shares):
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End of period
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Current dividend rate2 7.74% 7.01%
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Taxable equivalent3 12.81 11.61
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1 Capital gains, if any, are taxable for federal and, in most cases,
state tax purposes. For some investors, investment income may also be
subject to the federal alternative minimum tax. Investment income may be
subject to state and local taxes.
2Income portion of most recent distribution, annualized and divided by
NAV or Market Price at end of period.
3Assumes maximum 39.6% federal tax rate. Results for investors subject
to lower tax rates would not be as advantageous.
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 payable 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
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
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. The index assumes
reinvestment of all distributions and interest payments and does not
take into account brokerage fees or taxes. Securities in the fund do not
match those in the index and performance of the fund will differ. It is
not possible to invest directly in an index.
Report of independent accountants
For the fiscal year ended October 31, 1996
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, including the portfolio of
investments owned, as of October 31, 1996, and the related statement of
operations for the year then ended, the statements of changes in net
assets for each of the two years in the period then ended, and the
financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of
the fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of October 31, 1996, 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 Income Trust as of
October 31, 1996, 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 11, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
October 31, 1996
Key to Abbreviations
AMBAC --AMBAC Indemnity Corporation
COP --Certificate of Participation
FGIC --Financial Guaranty Insurance Company
FSA --Financial Security Assurance
GNMA Coll. --Government National Mortgage Association Collateralized
G.O. Bonds --General Obligation Bonds
IF --Inverse Floater
IFB --Inverse Floating Rate Bonds
MBIA --Municipal Bond Investors Assurance Corporation
VRDN --Variable Rate Demand Notes
<S> <C> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (98.7%) *
PRINCIPAL AMOUNT RATINGS** VALUE
Alabama (0.7%)
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$4,000,000 Baldwin Cnty., Eastern Shore Hlth. Care Auth. Hosp. Rev. Bonds (Thomas Hospital),
6 3/4s, 4/1/21 Baa 4,050,000
Arizona (3.0%)
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5,000,000 Central AZ Wtr. Conservation Dist. Rev. Bonds (Central AZ Project), Ser. A, 5 1/2s,
11/1/08 AA 5,125,000
3,965,000 Payson, Indl. Dev. Auth. Hosp. Rev. Bonds (Payson Regl. Med. Ctr. Inc. Project), 7.7s,
10/1/23 B/P 3,588,325
6,768,296 Phoenix Indl. Dev. Auth. Arpt. Fac. Rev. Bonds (American West Airlines), Ser. A 95-1,
8.3s, 1/1/06 B/P 6,800,512
2,750,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds (Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A 3,131,562
------------
18,645,399
California (12.5%)
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CA State G.O. Bonds
5,000,000 6.6s, 2/1/09 A 5,643,750
5,000,000 MBIA, 5 1/2s, 4/1/12 Aaa 5,037,500
6,660,000 CA State Wtr. Dept. Resources Rev. Bonds (Central Valley Project), Ser. O, 5s, 12/1/22 Aa 6,010,650
4,000,000 Contra Costa Wtr. Dist. Wtr. Rev. Bonds, Ser. G, MBIA, 5s, 10/1/24 Aaa 3,645,000
3,000,000 Contra Costa, Trans. Auth. Sales Tax Rev. Bonds, Ser. A, FGIC, 6s, 3/1/09 Aaa 3,206,250
Corona COP (Vista Hosp. Syst. Inc.)
2,775,000 Ser. B, 9 1/2s, 7/1/20 B/P 2,931,094
5,000,000 Ser. C, 8 3/8s, 7/1/11 B/P 5,250,000
Kern High School Dist. Rev. Bonds, Ser. A, MBIA
3,825,000 6 1/2s, 8/1/14 Aaa 4,240,968
3,840,000 6 1/2s, 2/1/14 Aaa 4,257,600
3,500,000 San Bernardino Cnty. IF COP (PA-100-Med. Ctr. Fin. Project), MBIA, 8.238s, 8/1/28
(acquired 6/27/95 cost $3,777,340)(double dagger) Aaa 4,436,250
8,750,000 Santa Clara Cnty. Fin. Auth. Lease Rev. Bonds (Vmc. Fac. Replacement Project), Ser. A,
AMBAC, 6 3/4s, 11/15/20 Aaa 9,635,938
15,000,000 U. of CA Rev. Bonds (UCSD Med. Ctr. Satellite Med. Fac.), 7.9s, 12/1/19 BBB/P 16,368,750
7,500,000 Valley Hlth. Syst. Hosp. Rev. Bonds (Rfdg. & Impt. Project), 6 1/2s, 5/15/25 BBB 7,500,000
------------
78,163,750
Colorado (2.8%)
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Denver, City & Cnty. Arpt. Rev. Bonds
4,000,000 Ser. A, 8 3/4s, 11/15/23 Baa 4,710,000
7,645,000 Ser. A, MBIA, 8 1/2s, 11/15/23 Aaa 8,887,313
2,240,000 Ser. D, 7 3/4s, 11/15/21 Baa 2,480,800
1,050,000 Ser. D, 7 3/4s, 11/15/13 Baa 1,261,312
------------
17,339,425
Connecticut (0.7%)
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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 4,325,000
Florida (4.9%)
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3,210,000 Escambia Cnty., Poll. Control Rev. Bonds (Champion Intl. Corp. Project), 6.9s, 8/1/22 Baa 3,394,575
5,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds (FL Crushed Stone Co.), 8 1/2s, 12/1/14 B/P 5,562,500
7,900,000 Lee Cnty., Hosp. Board of Directors Hosp. IFB (Lee Memorial Hosp.), MBIA, 8.711s,
3/26/20 Aaa 8,650,500
Orange Cnty., Hlth. Fac. Auth. Rev. Bonds (Orlando Regl. Hlthcare), MBIA
2,000,000 6 1/4s, 10/1/18 Aaa 2,157,500
2,170,000 6 1/4s, 10/1/11 Aaa 2,365,300
7,000,000 Orlando Util. Comm. Wtr. & Elec. Rev. Bonds, Ser. B, 5 1/4s, 10/1/23 Aa 6,527,500
1,615,000 Pinellas Cnty. Hlth. Fac. Auth. Sun. Coast Hlth. Syst. Rev. Bonds (Sun. Coast
Hosp.), Ser. A, 8 1/2s, 3/1/20 BB 1,732,088
------------
30,389,963
Georgia (2.9%)
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2,000,000 Atlanta, Arpt. Fac. Rev. Bonds, AMBAC, 5 1/4s, 1/1/10 Aaa 1,972,500
1,505,000 Atlanta, Special Purpose Fac. Rev. Bonds (Delta Air Lines, Inc. Project),
Ser. B, 7.9s, 12/1/18 Ba 1,602,825
7,000,000 GA Muni. Elec. Auth. Special Obligation Rev. Bonds (Fifth Crossover), Ser.
Project One, Ser. , AMBAC, 6.4s, 1/1/13 Aaa 7,612,500
3,250,000 Gwinnett Cnty., Indl. Dev. Auth. Rev. Bonds (Kawneer Co. Inc. Project),
Ser. 1984, 9 1/2s, 6/1/15 A 3,558,750
3,180,000 Savannah, Hosp. Rev. Bonds (Chandler Hosp.), 7s, 1/1/11 Baa 3,319,125
------------
18,065,700
Hawaii (0.4%)
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2,250,000 HI State G.O. Bonds, Ser. CL, 6s, 3/1/11 Aa 2,390,625
Illinois (3.6%)
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Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds (United Air Lines, Inc.)
5,363,000 Ser. B, 8.95s, 5/1/18 Baa 6,060,190
3,215,000 Ser. 84A, 8.85s, 5/1/18 Baa 3,624,912
1,835,000 Ser. 84B, 8.85s, 5/1/18 Baa 2,068,963
Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds (American
Airlines, Inc. Project)
3,000,000 8.2s, 12/1/24 Baa 3,521,250
5,000,000 Ser. A, 7 7/8s, 11/1/25 Baa 5,387,500
2,500,000 IL Dev. Fin. Auth. Retirement Hsg. Rev. Bonds (Regency Park-Lincolnwood), Ser. A,
10 1/4s, 4/15/19( In Default) + CCC/P 1,850,000
------------
22,512,815
Indiana (1.6%)
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9,300,000 Indianapolis Indl. Arpt. Auth. Special Fac. Rev. Bonds (Federal Express Corp.
Project), 7.1s, 1/15/17 Baa 9,939,375
Iowa (1.0%)
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IA Fin. Auth. Hlth. Care Fac. Rev. Bonds (Care Initiatives Project)
2,350,000 9.15s, 7/1/09 BB/P 2,802,375
3,000,000 9 1/4s, 7/1/25 BB/P 3,596,250
------------
6,398,625
Kansas (3.0%)
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7,500,000 Burlington, Poll. Control IFB (KS Gas & Electric), Ser. 91-4, MBIA, 9.913s, 6/1/31
(acquired 12/17/91 cost $7,800,000)(double dagger) Aaa 9,028,125
8,400,000 Witchita, Hosp. IFB, Ser. 111-A, MBIA, 9.003s, 10/1/17 Aaa 9,471,000
------------
18,499,125
Kentucky (0.5%)
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2,000,000 Kenton Cnty., Arpt. Board Special Fac. Rev. Bonds (Delta Air Lines, Inc. Project),
Ser. A, 7 1/2s, 2/1/20 Baa 2,150,000
1,000,000 Scott Cnty. Indl. Dev. Rev. Bonds (Hoover Group Inc. Project), 8 1/2s, 11/1/14 Baa 1,020,000
------------
3,170,000
Louisiana (4.8%)
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12,500,000 Lake Charles Harbor & Term. Dist. Port Fac. Rev. Bonds (Trunkline Co. Project),
7 3/4s, 8/15/22 Baa 14,046,875
Port of New Orleans, Indl. Dev. Rev. Bonds (Continental Grain Co. Project)
4,000,000 Ser. A, 14 1/2s, 2/1/02 BB 4,077,920
3,500,000 14 1/2s, 1/1/02 BB 3,544,205
W. Feliciana Parish Poll. Control Rev. Bonds (Gulf States Util. Project)
5,050,000 8s, 12/1/24 Baa 5,390,875
2,750,000 Ser. C, 7s, 11/1/15 Baa 2,860,000
------------
29,919,875
Maryland (0.7%)
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4,000,000 MD, State Hlth. & Higher Edl. Fac. Auth. Rev. Bonds (Doctors Cmnty. Hosp.),
8 3/4s, 7/1/12 Aaa 4,640,000
Massachusetts (5.0%)
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MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,000,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 Ba 2,035,000
4,000,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s, 8/15/24 BB/P 4,155,000
1,010,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 BB 1,023,886
3,000,000 (New England Baptist Hosp.), Ser. B, 7.3s, 7/1/11 Baa 3,217,500
1,100,000 (Beth Israel Hosp.), Ser. E, 7s, 7/1/14 A 1,164,625
1,000,000 (Norwood Hosp.), Ser. C, 7s, 7/1/14 Ba 957,500
2,000,000 (Beth Israel Hosp.), Ser. E, 7s, 7/1/09 A 2,107,500
3,400,000 (Sisters Providence Hlth. Syst), Ser. A, 6 5/8s, 11/15/22 Baa 3,408,500
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 5,668,750
MA State Indl. Fin. Agcy. Rev. Bonds
2,000,000 (Orchard Cove Inc.), 9s, 5/1/22 BB/P 2,247,500
2,000,000 (1st Mtge. Pioneer Valley Living Ctr.), 7s, 10/1/20 B/P 1,985,000
1,323,785 (1st Mtge. Pioneer Valley Living Ctr.), zero %, 10/1/20 B/P 1,655
2,835,000 MA State Indl. Fin. Agcy. Tunnel Rev. Bonds (Mass Tpk.,), 9s, 10/1/20 AAA/P 3,327,580
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31,299,996
Michigan (7.6%)
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1,385,000 Cadillac, Pub. School G.O. Bonds, FGIC, 5 3/8s, 5/1/17 Aaa 1,334,794
4,390,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment Rev. Bonds, Ser. A, 9 1/2s, 5/1/21 BBB/P 5,416,163
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 932,100
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
6,685,000 (Env. Research Project), 8 1/8s, 10/1/14 A/P 7,395,281
4,000,000 (Blue Wtr. Fiber Project), 8s, 1/1/12 B/P 3,000,000
3,000,000 (Ford Motor Co. Project), Ser. A, 7.1s, 2/1/06 A 3,483,750
MI State Hosp. Fin. Auth. Rev. Bonds
3,000,000 (Detroit-Macomb Hosp. Corp.), Ser. A, 7.4s, 6/1/13 BB 3,015,000
4,905,000 (Pontiac Osteopathic Hosp.), Ser. A, 6s, 2/1/14 Baa 4,745,588
8,000,000 Midland Cnty., Econ. Dev. Corp. Poll. Control Rev. Bonds, Ser. B,
9 1/2s, 7/23/09 B/P 8,740,000
2,700,000 Pontiac Hosp. Fin. Auth. Rev. Bonds (NOMC Obligation), 6s, 8/1/18 Baa 2,548,125
6,500,000 Waterford, Econ. Dev. Corp. Rev. Bonds (Canterbury Hlth. Care), 8 3/8s, 7/1/23 BB/P 6,825,000
------------
47,435,801
Minnesota (2.2%)
- --------------------------------------------------------------------------------------------------------------------------------
1,945,000 Chaska Indl. Dev. Rev. Bonds (Lifecore Biomedical Inc. Project), 10 1/4s, 9/1/20 BB/P 2,222,163
5,000,000 MN State Hsg. Fin. Agcy. Single Fam. Rev. Bonds, Ser. E, 6.85s, 1/1/24 Aa 5,206,250
6,000,000 St. Paul, Hsg. & Hosp. Redev. Auth. Rev. Bonds (Healtheast), Ser. B,
6 5/8s, 11/1/17 Baa 6,112,500
------------
13,540,913
Mississippi (1.4%)
- --------------------------------------------------------------------------------------------------------------------------------
Claiborne Cnty. Poll. Control Rev. Bonds (Middle South Energy, Inc.)
4,000,000 Ser. C, 9 7/8s, 12/1/14 Ba 4,455,000
4,100,000 Ser. A, 9 1/2s, 12/1/13 Ba 4,535,625
------------
8,990,625
Missouri (0.7%)
- --------------------------------------------------------------------------------------------------------------------------------
3,900,000 Kansas City, Indl. Dev. Auth. Hlth. Fac. Rev. Bonds (Park Lane Med.
Ctr. Project), 8 3/4s, 1/1/15 BB/P 4,168,125
Nebraska (2.4%)
- --------------------------------------------------------------------------------------------------------------------------------
2,000,000 Gage Cnty. Neb Indl. Dev. Rev. Bonds (Hoover Group Inc. Project),
8 1/2s, 12/1/07 Ba 2,040,000
NE Investment Fin. Auth. Single Fam. Mtge. IFB
1,950,000 GNMA Coll., 9.271s, 9/15/24 Aaa 2,042,625
1,200,000 Ser. B, GNMA Coll., 11.328s, 3/15/22 Aaa 1,323,000
1,900,000 Ser. B, GNMA Coll., 10.164s, 9/15/23 Aaa 2,063,875
2,150,000 Ser. C, 8.030s, 3/1/20 Aaa 2,085,500
5,085,000 NE Investment Fin. Auth. Single Fam. Mtge. Rev. Bonds, Ser. 1, MBIA,
8 1/8s, 8/15/38 Aaa 5,320,181
------------
14,875,181
Nevada (0.7%)
- --------------------------------------------------------------------------------------------------------------------------------
4,000,000 Clark Cnty. Indl. Dev. Rev. Bonds (NV Pwr. Co. Project), 7.8s, 6/1/20 Baa 4,320,000
New Hampshire (0.9%)
- --------------------------------------------------------------------------------------------------------------------------------
2,190,000 NH Higher Edl. & Hlth. Fac. Auth. Rev. Bonds (Alice Peck Day Memorial
Hosp. Project), 9 3/8s, 11/1/20 BB/P 2,403,525
2,800,000 NH State Indl. Dev. Auth. Poll. Control Rev. Bonds (United Illuminating Co.),
Ser. B, 10 3/4s, 10/1/12 Baa 3,019,548
------------
5,423,073
New Jersey (1.4%)
- --------------------------------------------------------------------------------------------------------------------------------
8,000,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds (St. Elizabeth Hosp.),
Ser. B, 8 1/4s, 7/1/20 Baa 8,740,000
New York (3.6%)
- --------------------------------------------------------------------------------------------------------------------------------
NY City G.O. Bonds
560,000 Ser. F, 8 1/4s, 11/15/10 Baa 645,400
6,440,000 Ser. F, Rfdg., 8 1/4s, 11/15/10 Aaa 7,575,050
4,925,000 Ser. D, (Group C) 8s, 8/1/18 Aaa 5,700,688
3,105,000 NY State Dorm. Auth. Rev. Bonds (City U. Syst.), 6s, 7/1/26 Baa 3,089,475
5,000,000 Port Auth. NY & NJ G.O. Bonds, Ser. 96, FGIC, 6.6s, 10/1/23 Aaa 5,381,250
------------
22,391,863
Ohio (4.1%)
- --------------------------------------------------------------------------------------------------------------------------------
1,950,000 Dayton Special Fac. Rev. Bonds (Emery Air Freight Corp.), Ser. A,
12 1/2s, 10/1/09 BB/P 2,220,563
20,000,000 OH State Air Quality Dev. Auth. Rev. Bonds (Cleveland Co. Project),
FGIC, 8s, 12/1/13 Aaa 23,375,000
------------
25,595,563
Oklahoma (1.1%)
- --------------------------------------------------------------------------------------------------------------------------------
2,945,000 Oklahoma Cnty., Indl. Auth. Rev. Bonds (Epworth Villa Project), Ser. A, 10 1/4s,
4/1/19 BB/P 3,165,875
3,500,000 Tulsa Muni. Arpt. Trust Rev. Bonds (American Airlines, Inc.), 7 3/8s, 12/1/20 Baa 3,718,750
------------
6,884,625
Pennsylvania (7.4%)
- --------------------------------------------------------------------------------------------------------------------------------
4,000,000 Allegheny Cnty., Indl. Dev. Auth. Arpt. Special Fac. Rev. Bonds (U.S. Air,
Inc. Project), Ser. B, 8 1/2s, 3/1/21 Ba 4,295,000
1,600,000 Delaware Cnty., Indl. Dev. Auth. Arpt. Fac. VRDN (UTD Parcel Svc. Project),
3.6s, 12/1/15 A1 1,600,000
1,240,000 Langhorne Manor Boro Higher Ed. Hlth. Auth. Rev. Bonds (Lower -Bucks Hosp.
Project), 7.35s, 7/1/22 Ba 1,191,950
Montgomery Cnty., Higher Edl. & Hlth. Auth.
1,000,000 Hosp. Rev. Bonds (United Hosp. Inc. St Chistopher), 8 1/2s, 11/1/17 Ba 1,064,960
2,615,000 Rev. Bonds (Northwestern Corp.), Ser. A, 8 3/8s, 6/1/04 BBB/P 2,817,662
7,250,000 PA Convention Ctr. Auth. Rev. Bonds, MBIA, 6.7s, 9/1/14 # Aaa 8,020,313
7,750,000 PA Econ. Dev. Fin. Auth. Rev. Bonds (MacMillan Ltd. Partnership Project),
7.6s, 12/1/20 Baa 8,641,250
7,000,000 PA Economic Dev. Fin. Auth. Recycling Rev. Bonds (Ponderosa Fibres Project),
Ser. A, 9 1/4s, 1/1/22 B/P 6,571,250
6,000,000 PA State Higher Ed. Assistance Agcy. IFB, (Graduate Hlth. Syst. Oblig.)
Ser. B, MBIA, 8.253s, 3/1/20 Aaa 6,532,500
5,000,000 Philadelphia Hosp. & Higher Ed. Fac. Auth. Rev. Bonds, (Graduate Hlth.
Syst. Oblig.) Ser. A&B, 7 1/4s, 7/1/10 BBB 5,206,250
------------
45,941,135
Puerto Rico (1.1%)
- --------------------------------------------------------------------------------------------------------------------------------
6,895,000 PR Elec. Pwr. Auth. Rev. Bonds, Ser. X, 5 1/2s, 7/1/25 Baa 6,601,963
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 5,431,250
Tennessee (0.3%)
- --------------------------------------------------------------------------------------------------------------------------------
2,000,000 Memphis-Shelby Cnty. Arpt. Auth. Rev. Bonds (Federal Express Project),
6 3/4s, 9/1/12 Baa 2,107,500
Texas (7.8%)
- --------------------------------------------------------------------------------------------------------------------------------
Alliance Arpt. Auth. Special Fac. Rev. Bonds
3,000,000 (American Airlines, Inc. Project), 7 1/2s, 12/1/29 Baa 3,198,750
5,000,000 (Federal Express Corp.), 6 3/8s, 4/1/21 Baa 5,012,500
3,850,000 Amarillo, Hlth. Fac. Hosp. Corp. IFB (High Plains Baptist Hosp.), FSA,
9.241s, 1/3/22 Aaa 4,340,875
Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
3,170,000 (Heartway Corp.), Ser. A-1, 10 1/4s, 3/1/19 (InDefault)+ CCC/P 2,219,000
3,200,000 (St. Luke's Lutheran Hosp. Project), 7.9s, 5/1/11 AAA/P 3,748,000
7,250,000 Brazos River, Poll. Control Auth. Rev. Bonds (TX Utils. Elec. Co.
Project), Ser. A, 7 7/8s, 3/1/21 Baa 7,993,125
3,100,000 Harris Cnty., Hlth. Fac. Dev. Corp. VRDN (TX Med. Ctr.), MBIA, 3.48s, 2/15/22 VMIG1 3,100,000
2,016,000 Houston, Hsg. Fin. Corp. Single Fam. Mtge. Rev. Bonds, (Verex Mtg. Ins.)
Ser. A, 10 7/8s, 2/15/16 # A 2,021,705
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 2,587,500
2,500,000 (Promenade Place Apts. Project), Ser. B, 10.175s, 8/1/16 B/P 2,750,000
5,000,000 (Pavilion Place Apts. Project), Ser. A, 7.6s, 7/1/16 A/P 5,000,000
3,000,000 Tarrant Cnty., Hlth. Facs. Dev. Corp. Hosp. Rev. Bonds (Cmnty. Hlth. Care
Foundation. Inc. Project), 10 1/8s, 4/1/21 (InDefault) CCC/P 900,000
5,495,000 Texas State Fin. Auth. Rev. Bonds, Ser. A, 5.9s, 10/1/12 Aa 5,673,588
------------
48,545,043
Utah (2.6%)
- --------------------------------------------------------------------------------------------------------------------------------
15,350,000 Intermountain Power Agcy. Power Supply Rev. Bonds, Ser. B, 7 3/4s, 7/1/20 Aa 16,386,125
Virginia (1%)
- --------------------------------------------------------------------------------------------------------------------------------
5,400,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB, FGIC, 9.468s, 8/15/23 Aaa 6,156,000
Washington (2.8%)
- --------------------------------------------------------------------------------------------------------------------------------
11,500,000 Port Walla Walla Pub. Corp. Solid Waste Recycling Rev. Bonds (Ponderosa
Fibres Project), 9 1/8s, 1/1/26 B/P 10,637,500
6,315,000 WA State Pub. Pwr. Supply Syst. Rev. Bonds (Nuclear Project No. 1),
Ser. A, 7 1/2s, 7/1/15 Aa 6,922,819
------------
17,560,319
West Virginia (0.6%)
- --------------------------------------------------------------------------------------------------------------------------------
3,500,000 Randolph Cnty. Rev. Bonds (Davis Memorial Hosp.), Ser. A, 7.65s, 11/1/21 Baa 3,766,875
- --------------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $598,665,661)*** $ 614,611,652
- --------------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $622,566,126.
+ Non-income-producing security.
** The Moody's or Standard & Poor's ratings indicated are
believed to be the most recent ratings available on
October 31, 1996 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, 1996
Securities rated by Putnam are indicated by "/P"and
are not publicly rated. Ratings are not coverd by Report
of Independent Accountants.
The table below shows the percentage of the fund's
investment on October 31, 1996 in securities
assigned to various rating categories by Moody's and
Standard & Poor's and in unrated securities determined by
Putnam Management to be of comparable quality.
Unrated securities
Rated securities of comparable quality,
as a percentage of as a percentage of
Rating fund's net assets fund's net assets
- ---------- ------------------ ------------------------
AAA/Aaa 27.4% --
AAA/P -- 1.1%
AA/Aa 8.7 --
A/A 3.4 --
A/P -- 2.0
BBB/Baa 27.6 --
BBB/P -- 4.0
BB/Ba 6.1 --
BB/P -- 7.0
B/P -- 9.7
B -- --
CCC/P -- 0.8
Caa 0.1 --
VMIG1/A1 0.8 --
------ -------
74.1% 24.6%
(double dagger) Restricted, excluding 144A securities, as to public resale.
The total market value of restricted securities held at
October 31, 1996 was $13,464,375 or less than 2.2% of net
assets.
# A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts
at October 31, 1996.
*** The aggregate identified cost on a tax basis is $598,682,478,
resulting in gross unrealized appreciation and depreciation of
$29,294,814 and $13,365,640, respectively, or net unrealized
appreciation of $15,929,174.
The rates shown on IFB, and IF COP, which are securities paying
interest rates that vary inversely to changes in the market interest
rates, and VRDN's are the current interest rates at October 31, 1996.
The fund had the following industry group concentrations greater
than 10% at October 31, 1996 (as a percentage of net assets):
Hospital / Healthcare 26.2%
Utilities 23.9
Transportation 17.1
The fund had the following insurance concentration greater than
10% at October 31, 1996 (as a percentage of net assets):
MBIA 13.7%
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Futures Contracts Outstanding at October 31, 1996
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Muni Index Future(short) $1,622,250 $ 1,613,621 Dec-96 $(8,629)
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an intergal part of these finanical statements.
</TABLE>
<TABLE>
<CAPTION>
Statment of assets and liabilities
October 31, 1996
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $598,665,661) (Note 1) $614,611,652
- -----------------------------------------------------------------------------------------------------
Cash 106,242
- -----------------------------------------------------------------------------------------------------
Interest and other receivable 13,249,114
- -----------------------------------------------------------------------------------------------------
Receivable for securities sold 25,000
- -----------------------------------------------------------------------------------------------------
Total assets 62,992,008
Liabilities
- -----------------------------------------------------------------------------------------------------
Payable for variation margin 8,750
- -----------------------------------------------------------------------------------------------------
Distributions payable to shareholders 2,886,053
- -----------------------------------------------------------------------------------------------------
Payable for securities purchased 1,320,496
- -----------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 1,080,076
- -----------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 42,975
- -----------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 1,606
- -----------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,073
- -----------------------------------------------------------------------------------------------------
Other accrued expenses 81,853
- -----------------------------------------------------------------------------------------------------
Total liabilities 5,425,882
- -----------------------------------------------------------------------------------------------------
Net Assets $622,566,126
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
(Note 4) $175,000,000
- -----------------------------------------------------------------------------------------------------
Paid in capital-common shares (Note 1) 419,593,994
- -----------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 16,567,786
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (4,533,016)
- -----------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 15,937,362
- -----------------------------------------------------------------------------------------------------
Total - Representing net assets applicable to capital shares outstanding $622,566,126
Computation of net asset value:
- -----------------------------------------------------------------------------------------------------
Remarketed preferred shares $175,000,000
- -----------------------------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 106,169
- -----------------------------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares -- liquidation preference $175,106,169
- -----------------------------------------------------------------------------------------------------
Net assets available to common shares $447,459,957
- -----------------------------------------------------------------------------------------------------
Net asset value per common share ($447,459,957 divided by 45,450,073 shares) $9.85
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended October 31, 1996
<S> <C>
Tax exempt interest income $44,593,110
- -----------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,247,725
- -----------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 434,569
- -----------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 20,955
- -----------------------------------------------------------------------------------------
Administrative services (Note 2) 12,422
- -----------------------------------------------------------------------------------------
Reports to shareholders 77,360
- -----------------------------------------------------------------------------------------
Auditing 93,089
- -----------------------------------------------------------------------------------------
Legal 18,972
- -----------------------------------------------------------------------------------------
Postage 152,158
- -----------------------------------------------------------------------------------------
Exchange listing fees 40,809
- -----------------------------------------------------------------------------------------
Preferred share remarketing agent fees 445,508
- -----------------------------------------------------------------------------------------
Other 24,798
- -----------------------------------------------------------------------------------------
Total expenses 5,568,365
- -----------------------------------------------------------------------------------------
Expense reduction (Note 2) (111,350)
- -----------------------------------------------------------------------------------------
Net expenses 5,457,015
- -----------------------------------------------------------------------------------------
Net investment income 39,136,095
- -----------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 2,839,268
- -----------------------------------------------------------------------------------------
Net realized gain on futures contracts (Notes 1) 1,032,835
- -----------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the year (13,084,238)
- -----------------------------------------------------------------------------------------
Net loss on investments (9,212,135)
- -----------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $29,923,960
- -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended October 31,
----------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- -----------------------------------------------------------------------------------------------------------------------
Operations:
- -----------------------------------------------------------------------------------------------------------------------
Net investment income $39,136,095 $40,563,721
- -----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 3,872,103 (3,616,414)
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (13,084,238) 30,712,230
- -----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 29,923,960 67,659,537
- -----------------------------------------------------------------------------------------------------------------------
Distributions to remarketed preferred shareholders from net investment income (6,326,188) (7,104,957)
- -----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations
applicable to common shareholders (excluding cumulative
undeclared dividends on remarketed preferred shares of $106,169
and $79,727, respectively) 23,597,772 60,554,580
- -----------------------------------------------------------------------------------------------------------------------
Distributions to common shareholders from
net investment income (34,469,622) (34,075,362)
- -----------------------------------------------------------------------------------------------------------------------
Issuance of common shares in connection with reinvestment of
distributions 4,983,757 4,983,445
- -----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (5,888,093) 31,462,663
- -----------------------------------------------------------------------------------------------------------------------
Net Assets
- -----------------------------------------------------------------------------------------------------------------------
Beginning of year 628,454,219 596,991,556
- -----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income of
$16,567,786 and $17,879,998 respectively) $622,566,126 $628,454,219
- -----------------------------------------------------------------------------------------------------------------------
Number of fund shares
- -----------------------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning of year 44,961,926 44,449,876
- -----------------------------------------------------------------------------------------------------------------------
Shares issued in connection with reinvestment of distributions 488,147 512,050
- -----------------------------------------------------------------------------------------------------------------------
Common shares outstanding at end of year 45,450,073 44,961,926
- -----------------------------------------------------------------------------------------------------------------------
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.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
Year ended October 31
-------------------------------------------------
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period (common shares) $10.08 $9.49 $10.88
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .86 .90 .94
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.19) .60 (1.37)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .67 1.50 (.43)
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income
- ---------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.14) (.15) (.11)
- ---------------------------------------------------------------------------------------------------------------------------
To common shareholders (.76) (.76) (.76)
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
- ---------------------------------------------------------------------------------------------------------------------------
To common shareholders -- -- (.09)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.90) (.91) (.96)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period (common shares) $9.85 $10.08 $9.49
- ---------------------------------------------------------------------------------------------------------------------------
Market value, end of period (common shares) $10.88 $10.63 $9.25
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at market value (common shares) (%)(a) 10.26 24.23 (11.56)
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (total fund) (in thousands) $622,566 $628,454 $596,992
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b)(c) 1.24 1.20 1.23
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%)(b) 7.31 7.70 9.20
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 78.92 79.71 48.40
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial Highlights (continued)
(For a share outstanding throughout the period)
Year ended October 31
------------------------------
1993 1992
------------------------------
<S> <C> <C>
Net asset value, beginning of period (common shares) $9.81 $9.44
- ------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------
Net investment income .98 1.01
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.04 .26
- ------------------------------------------------------------------------------------------------------
Total from investment operations 2.02 1.27
- ------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ------------------------------------------------------------------------------------------------------
From net investment income
- ------------------------------------------------------------------------------------------------------
To preferred shareholders (.11) (.14)
- ------------------------------------------------------------------------------------------------------
To common shareholders (.76) (.76)
- ------------------------------------------------------------------------------------------------------
From net realized gain on investments
- ------------------------------------------------------------------------------------------------------
To common shareholders (.08) --
- ------------------------------------------------------------------------------------------------------
Total distributions (.95) (.90)
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period (common shares) $10.88 $9.81
- ------------------------------------------------------------------------------------------------------
Market value, end of period (common shares) $11.38 $9.88
- ------------------------------------------------------------------------------------------------------
Total investment return at market value (common shares) (%)(a) 24.84 6.72
- ------------------------------------------------------------------------------------------------------
Net assets, end of period (total fund) (in thousands) $652,660 $600,849
- ------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b)(c) 1.22 1.24
- ------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%)(b) 8.44 8.94
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 35.16 67.72
- ------------------------------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment and does not
reflect the effects of sales charges.
(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 and thereafter includes amounts paid through expense offset arrangements.
Prior period ratios exclude these amounts.(Note 2)
</TABLE>
Notes to financial statements
October 31, 1996
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 preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. The fair
value of restricted securities is determined by the 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 the liquidation preference 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 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 imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
At October 31, 1996, the fund had a capital loss carryover of
approximately $2,415,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
---------------- ----------------
$2,094,000 10/31/2002
321,000 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 preferred
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, 1996 was Series A 3.460%, Series B
3.413%; and Series C 3.500%. 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, market
discount and realized and unrealized gains and losses on certain future
contracts. 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, 1996, the fund reclassified $347,503 to increase
undistributed net investment income and $237,109 to decrease paid-in-
capital, with an increase to accumulated net realized loss on
investments of $110,394. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.
G) Amortization of bond premium and accretion of bond discount Any
premium resulting from the purchase of securities in excess of maturity
value is amortized on a yield-to-maturity basis. Discounts on zero
coupon bonds and original issue bonds are accreted according to the
effective yield method.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.70% 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 subject, under
current law, to reduction in any year by the amount of certain brokerage
commissions and fees (less expenses) received by affiliates of Putnam
Management on the fund's portfolio transactions.
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 Management 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.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended October 31, 1996, fund expenses were reduced by
$111,350 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $1,220 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund
and are invested in certain Putnam funds until distribution in
accordance with the Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in compensation of trustee in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
Note 3
Purchase and sales of securities
During the year ended October 31, 1996, purchases and sales of
investment securities other than short-term investments aggregated
$494,995,157 and $480,890,797, respectively. There were no purchases and
sales of U.S. government obligations. In determining the net gain or
loss on securities sold, the cost of securities has been determined on
the identified cost basis.
Note 4
Remarketed preferred shares
The Series A (550), B (550) and C (650) 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.
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 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, 1996, no such
restrictions have been placed on the fund.
Federal tax information
(Unaudited)
The fund has designated 99.91% 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 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
Results of October 3, 1996 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on October 3,
1996. At the meeting, each of the nominees for Trustees was elected, as
follows:
Common Shares
Votes
Votes for withheld
Jameson Adkins Baxter 27,861,176 554,918
Hans H. Estin 27,861,265 554,829
R.J. Jackson 27,851,224 564,870
Elizabeth T. Kennan 27,848,010 568,084
Lawrence J. Lasser 27,855,674 560,420
Donald S. Perkins 27,856,174 559,920
William F. Pounds 27,855,674 560,420
George Putnam 27,856,174 559,920
George Putnam, III 27,853,174 562,920
Eli Shapiro 27,853,074 563,020
A.J.C. Smith 27,855,674 560,420
W. Nicholas Thorndike 27,856,174 559,920
Preferred Shares
Votes
Votes for withheld
Jameson Adkins Baxter 903 0
Hans H. Estin 903 0
John A. Hill 903 0
R.J. Jackson 903 0
Elizabeth T. Kennan 903 0
Lawrence J. Lasser 903 0
Robert E. Patterson 903 0
Donald S. Perkins 903 0
William F. Pounds 903 0
George Putnam 903 0
George Putnam, III 903 0
Eli Shapiro 903 0
A.J.C. Smith 903 0
W. Nicholas Thorndike 903 0
Common Shares
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as
auditors for the fund was approved as follows: 27,538,623 votes for, and
240,651 votes against, with 636,820 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to diversification of investments was approved as follows:
24,348,445 votes for, and 1,070,597 votes against, with 2,997,052
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in the securities of a single issuer was approved
as follows: 23,774,993 votes for, and 1,520,418 votes against, with
3,120,683 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to making loans through purchases of debt obligations,
repurchase agreements and securities loans was approved as follows:
23,017,710 votes for, and 2,256,507 votes against, with 3,141,877
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in real estate was approved as follows:
23,323,848 votes for, and 2,041,664 votes against, with 3,050,582
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in commodities or commodity contracts was
approved as follows: 22,774,802 votes for, and 2,533,927 votes against,
with 3,107,365 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to concentration of its assets was approved as follows:
23,761,899 votes for, and 1,514,104 votes against, with 3,140,091
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in securities of issuers in which management
of the fund or Putnam Investment Management, Inc. owns securities was
approved as follows: 23,173,520 votes for, and 2,028,247 votes against,
with 3,214,327 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to margin transactions was approved as follows: 22,484,629
votes for, and 2,728,810 votes against, with 3,202,655 abstentions and
broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to short sales was approved as follows: 22,687,890 votes
for, and 2,561,426 votes against, with 3,166,778 abstentions and broker
non-votes.
A proposal to eliminate the fund's fundamental investment restriction
which limits the fund's ability to pledge assets was approved as
follows: 22,576,587 votes for, and 2,648,675 votes against, with
3,190,832 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in restricted securities was approved as
follows: 22,841,312 votes for, and 2,346,288 votes against, with
3,228,494 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in certain oil, gas an mineral interests was
approved as follows: 23,212,216 votes for, and 2,081,200 votes against,
with 3,122,678 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to invest to gain control of a company's management was
approved as follows: 23,199,398 votes for, and 2,026,940 votes against,
with 3,189,756 abstentions and broker non-votes.
All tabulations are rounded to nearest whole number.
Preferred Shares
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as
auditors for the fund was approved as follows: 893 votes for, and 7
votes against, with 3 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to diversification of investments was approved as follows: 900
votes for, and 1 vote against, with 2 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in the securities of a single issuer was approved
as follows: 900 votes for, and 0 votes against, with 3 abstentions and
broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to making loans through purchases of debt obligations,
repurchase agreements and securities loans was approved as follows: 889
votes for, and 2 votes against, with 12 abstentions and broker non-
votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in real estate was approved as follows: 888 votes
for, and 3 votes against, with 12 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in commodities or commodity contracts was
approved as follows: 886 votes for, and 15 votes against, with 2
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to concentration of its assets was approved as follows: 887
votes for, and 3 votes against, with 13 abstentions and broker non-
votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in securities of issuers in which management
of the fund or Putnam Investment Management, Inc. owns securities was
approved as follows: 889 votes for, and 2 votes against, with 12
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to margin transactions was approved as follows: 886 votes
for, and 5 votes against, with 12 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to short sales was approved as follows: 886 votes for, and
5 votes against, with 12 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
which limits the fund's ability to pledge assets was approved as
follows: 888 votes for, and 3 votes against, with 12 abstentions and
broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in restricted securities was approved as
follows: 887 votes for, and 4 votes against, with 12 abstentions and
broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in certain oil, gas an mineral interests was
approved as follows: 886 votes for, and 15 votes against, with 2
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to invest to gain control of a company's management was
approved as follows: 887 votes for, and 14 votes against, with 2
abstentions and broker non-votes.
All tabulations are rounded to nearest whole number.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
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
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary Coburn
Vice President
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Richard P. Wyke
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
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.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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29200-052 12/96
