PUTNAM
HIGH YIELD
MUNICIPAL
TRUST
[GRAPHIC OMITTED:
art work]
ANNUAL REPORT
March 31, 1995
[LOGO: BOSTON - LONDON - TOKYO]
<PAGE>
PERFORMANCE HIGHLIGHTS
o "While many bond funds tumbled in 1994 under the Federal Reserve's series of
rate hikes, Putnam High Yield Municipal Trust performed relatively well,
landing in the top quartile of its objective."
-- Morningstar Closed End Funds, March 24, 1995*
o Performance should always be considered in light of a fund's investment
strategy. Putnam High Yield Municipal Trust is designed for investors seeking
high current income free from federal income tax through higher-yielding,
lower-rated municipal securities.
---------------------------------------------------------------
FISCAL 1995 RESULTS AT A GLANCE
---------------------------------------------------------------
TOTAL RETURN: NAV MARKET PRICE
---------------------------------------------------------------
(change in value during
period plus reinvested
distributions)
12 months ended 3/31/95 6.21% 11.50%
SHARE VALUE: NAV MARKET PRICE
---------------------------------------------------------------
3/31/94 $9.23 $9.250
3/31/95 9.03 9.500
CAPITAL
DISTRIBUTIONS: NO. INCOME GAINS<F1> TOTAL
---------------------------------------------------------------
Common shares 12 $0.7500 -- $0.7500
SERIES INCOME TOTAL
Preferred shares A $1709.88 -- $1709.88
CURRENT RETURN: NAV MARKET PRICE
---------------------------------------------------------------
End of period
Current dividend rate<F2> 8.31% 7.89%
Taxable equivalent<F3> 13.76 13.06
---------------------------------------------------------------
Performance data represent past results. For performance over longer periods,
see pages 8 and 9. <F1>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. <F2>Income portion of most recent
distribution, annualized and divided by NAV or mar ket price at end of
period. <F3>Assumes maximum 39.6% federal tax rate. Results for investors
subject to lower tax rates would not be as advantageous.
* Morningstar is an independent research firm that rates funds relative to
funds with similar objectives, based on risk-adjusted medium- and long-term
performance, as applicable, and adjusted for sales charges. Past performance
is no assurance of future results.
<PAGE>
FROM THE CHAIRMAN
[GRAPHIC OMITTED:
Photo of
George Putnam]
(C) Karsh, Ottawa
Dear Shareholder:
The municipal bond market's volatile environment in 1994 has finally given way
to a more agreeable climate. During the first quarter of 1995, the market --
and Putnam High Yield Municipal Trust -- made impressive gains. The market's
exuberant performance during the quarter made a significant contribution to the
fund's positive results for the fiscal year that ended on March 31, 1995.
Tax-conscious investors finally seemed ready to concede that the Federal Reserve
Board's sustained boost in short-term interest rates throughout 1994 is having
the desired dampening effect on inflation without choking off economic growth.
While the possibility of additional increases -- and additional impact on the
market -- cannot be ruled out, expectations of sharp reductions in new-issue
bonds this year raised the prospect of brisk demand, and higher prices for
existing issues.
For the past several months, Fund Manager Triet Nguyen has been positioning the
portfolio in anticipation of the brighter mood that now seems to be emerging. In
the report that follows, Triet discusses the fund's fiscal 1995 performance and
what he sees in store for fiscal 1996.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
May 17, 1995
<PAGE>
REPORT FROM THE FUND MANAGER
TRIET NGUYEN
Virtually all fixed-income investments endured a tough year in 1994; however,
Putnam High Yield Municipal Trust's performance proved more resilient than
most. This was due, in part, to the fact that the fund primarily invests in
lower-rated, high-yield bonds, which historically, have tended to outperform
their higher-rated brethren during economic expansions.
Sometimes, however, protection comes at a price. Now that 1994's storm clouds
have given way to a sunnier environment in the bond market, your fund's
performance, though substantially stronger, has strengthened to a lesser
degree than most of its high-quality rivals. Over the first three months of
calendar 1995, the fund gained 6.81% at net asset value (NAV), compared with
7.07% for the Lehman Brothers Municipal Bond Index.
This modest underperformance reflects the fact that the fund's relatively
short portfolio duration -- while helping reduce the impact of interest-rate
increases -- can limit the fund's ability to participate in bond market
rallies. It has, however, proved an effective strategy for much of fiscal
1994. Total return over the 12 months ended March 31, 1995, remained
competitive: 6.21% at net asset value.
o THE CAPITAL COMPONENT
As goes Washington, so goes the municipal market -- or so it seemed during
the past year. During 1994, a perceived lack of leadership in our nation's
capital made the financial markets very skittish. This nervousness, combined
with the Federal Reserve Board's propensity toward raising short-term
interest rates, led to quite a negative environment for fixed-income
investments. During the calendar year, the federal funds rate -- the rate at
which banks lend each other money -- ranged from a low of 2.875% on January
21, to a high of 7.00% on November 21. In addition, the discount rate -- the
rate at which banks can borrow money from the Federal Reserve -- moved from
3.00% to 4.75%.
The fall elections laid the groundwork for a change in market sentiment, with
the Republican party winning control of both houses of Congress for the first
time in 40 years. Since the financial markets tend to view Republicans as
more fiscally conservative than Democrats, this prompted a re-examination of
valuation levels. With a new sense of perspective, investors began to realize
that the Fed was probably near the end of its rate-increase agenda. In
addition, participants in the financial arena became more confident that
firmer hands were in control in Washington, allowing the fixed-income market
to seek more reasonable levels and a rally to occur.
o PORTFOLIO POSITIONING PROVES PROFITABLE
While your fund's objective is current income, capital preservation is of
equal importance. This should help explain why we continue to take a barbell
approach to portfolio construction, both in terms of maturity and in terms of
credit quality. Portfolio holdings are concentrated in the two ends of the
credit spectrum in lower-rated and Aaa-rated (investment grade) bonds, with
fewer securities owned in the middle-range credits. A substantial portion of
holdings in the higher-quality portion of the barbell are insured securities;
the "flight to quality" that followed the announcement of fiscal
improprieties in Orange County, California, boosted the value of insured
bonds in general and, in turn, your fund's performance. (The fund does not
hold any Orange County bonds.)
[GRAPHIC OMITTED: bar chart "TOP INDUSTRY SECTORS*" showing:
Hospitals/health care 23.4%; Transportation 22.0%; Housing 7.0%;
Utilities 6.3% and Water and Sewer 1.3%. Footnote reads:
*Based on net assets on 3/31/95. Holdings will vary over time.]
<PAGE>
As noted in the last shareholder report, we recently began investing a
substantial portion of assets into resource recovery bonds. This proved a
timely decision, as these bonds, along with most investments in cyclical
issues, performed well due to a strengthening economy. Among the strongest
performers: industrial revenue bonds issued to support a paper recycling
operation in Ponderosa, Pennsylvania, and SEMASS, a resource recovery project
in the Cape Cod, Massachusetts, area.
As mentioned in past reports, leverage is used to enhance the fund's income
production when appropriate. This strategy -- in which the fund issues
preferred shares with dividends based on short-term interest rates and
invests the proceeds in longer-term, higher-paying bonds -- is employed
specifically to enhance income, when appropriate. We believe leveraging
strategies still make sense in the current environment because the municipal
yield curve remains steep. The reason short-term interest rates remain well
below those of longer-term rates is fairly straight forward: new issuance of
securities with short maturities is extraordinarily scarce relative to
demand.
o A LOOK AHEAD
Putnam High Yield Municipal Trust is a research-driven fund. Investment
decisions are made based on thorough analysis of fundamental credit and
technical data. Our current research indicates volatile cyclical influences
may be abating and that the economy may take a breather in the months ahead.
With this in mind, our focus is likely to be on upgrading the portfolio's
credit profile. The cyclical bonds which have performed so well recently tend
to lose steam in a stalling economy. Therefore, we also stand ready to change
course and shift the portfolio away from cyclicals.
Even with recent rallies slowing, we believe prospects for fixed-income
investments remain favorable. The fundamental outlook is strong as investor
psychology improves. In addition, the bond markets have become increasingly
confident that our leaders are becoming more fiscally responsible.
<PAGE>
-----------------------------------------------------------------
TOP 10 ISSUERS (3/31/95) STATE
-----------------------------------------------------------------
CHICAGO, O'HARE INTERNATIONAL AIRPORT ILLINOIS
SPECIAL FACILITY REVENUE BONDS
-----------------------------------------------------------------
DENVER, CITY/COUNTY COLORADO
AIRPORT REVENUE BONDS
-----------------------------------------------------------------
PORT OF CORPUS CHRISTI TEXAS
INDUSTRIAL DEVELOPMENT REVENUE BONDS
-----------------------------------------------------------------
IOWA FINANCING AUTHORITY IOWA
HEALTH CARE FACILITY REVENUE BONDS
-----------------------------------------------------------------
CALIFORNIA HEALTH FACILITY AUTHORITY CALIFORNIA
REVENUE BONDS
-----------------------------------------------------------------
MASSACHUSETTS PORT AUTHORITY MASSACHUSETTS
SPECIAL PROJECT REVENUE BONDS
-----------------------------------------------------------------
LONE STAR, TEXAS, AIRPORT IMPROVEMENT AUTHORITY TEXAS
INDUSTRIAL REVENUE BONDS
-----------------------------------------------------------------
BUTLER INDUSTRIAL DEVELOPMENT BOARD ALABAMA
REVENUE BONDS
-----------------------------------------------------------------
HAMMOND INDUSTRIAL PORT AUTHORITY INDIANA
CERTIFICATE OF PARTICIPATION
-----------------------------------------------------------------
MASSACHUSETTS STATE INDUSTRIAL FINANCE AGENCY MASSACHUSETTS
RESOURCE RECOVERY REVENUE BONDS
-----------------------------------------------------------------
These holdings represent 33% of the fund's net assets. Portfolio holdings
will vary in future.
During the past year, municipal bonds have been the best-performing fixed
income sector, and there's a good chance the trend will continue. This
phenomenon is largely the result of technical factors. As demand is
increasing, supply continues to diminish. Tax-exempt supply was down 40% in
1994 from 1993 levels. While supply varies widely from state to state it was
down as much as 90% in some areas (New Jersey, for example). To compound the
lack of new supply, the period from May to July is expected to bring with it
one of the highest bond redemption levels in years. This supply/demand
dynamic creates a positive environment for tax-exempt bonds.
Putnam utilizes its position as one of the nation's premier money managers to
stay abreast developing market trends. While prospects for municipal bonds
appear bright, there is a potential the outlook could dim. A flat tax or tax
decreases could significantly affect the relative value of municipal bonds.
Rest assured that we will garner our extensive resources and experience and
seek to position the fund to take advantage of upcoming trends wherever it is
possible to do so.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 3/31/95, there is no guarantee the fund will continue to hold
these securities in the future.
<PAGE>
PERFORMANCE SUMMARY
This section provides, at a glance, information about your fund's performance.
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions back into the fund. We show total return in two ways: on a
cumulative long-term basis and on average how the fund might have grown each
year over varying periods. For comparative purposes, we show how the fund
performed relative to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDED 3/31/95
LEHMAN BROS.
MUNICIPAL
NAV MARKET PRICE BOND INDEX CPI
- ------------------------------------------------------------------------
1 year 6.21% 11.50% 7.43% 2.85%
- ------------------------------------------------------------------------
5 years 47.79 55.98 48.59 17.64
Annual average 8.13 9.30 8.24 3.30
- ------------------------------------------------------------------------
Life of fund
(since 5/25/89) 57.62 53.56 57.20 22.29
Annual average 8.09 7.61 8.04 3.50
- ------------------------------------------------------------------------
Performance data represent past results. Investment returns and principal value
will fluctuate so an investor's shares, when sold, may be worth more or less
than their original cost. Fund performance data do not take into account any
adjustment for taxes payable on reinvested distributions.
The lower credit ratings of high-yield bonds reflect a greater possibility that
adverse changes in the economy or their issuers may affect their ability to pay
principal and interest on the bonds.
<PAGE>
TERMS AND DEFINITIONS
NET ASSET VALUE (NAV) is the value of all your fund's assets, minus any
liabilities, the liquidation preference and cumulative undeclared dividends paid
on the remarketed preferred shares, divided by the number of outstanding common
shares.
MARKET PRICE is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York Stock
Exchange.
COMPARATIVE BENCHMARKS
THE 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.
<PAGE>
A PUTNAM PERSPECTIVE ON RISK AND REWARD
You've probably been told how important it is to understand the relationship
between an investment's potential rewards and its accompanying risks. Given
the cautionary nature of such instructions, it may take most investors a
while to realize that risk has a positive side.
EVERY RISK SIGNALS A POTENTIAL REWARD. Selecting only those investments that
offer the greatest degree of security generally leads to only modest rewards.
Furthermore, even insured or guaranteed investments may be subject to changes
in their rates of return or, in some cases, in their principal values.
Experienced investors know that no investment is truly risk free and are
therefore willing to take on some measure of risk in order to increase their
potential gains.
THE GREATER THE RISK, THE GREATER THE POTENTIAL REWARD. Accepting an
appropriate level of investment risk can give you a better chance of
outpacing inflation over time and seeking to maximize your investment's
return. How much risk? Your financial advisor's feedback and your time
horizon can make all the difference in determining how much risk is
compatible with your investment goals and your peace of mind.
o FITTING YOUR FUND SELECTION TO YOUR RISK TOLERANCE
How do you find the right balance between investment risks and their
potential rewards? It's helpful to understand the types of risks that can
apply to different types of investments, and to look at your own portfolio
with this perspective.
For short-term goals, your first priority may be managing market risk.
Longer-term investors may be more concerned with inflation risk. And all
income-oriented investors should consider interest-rate, credit, and
prepayment risks carefully.
o A RUNDOWN OF RISK TYPES
MARKET RISK Most important for stock funds, but relevant to all funds, this
is a measure of how sensitive a fund's holdings are to changes in general
market conditions. Remember, though, that securities that lose value quickly
in market declines may also show the strongest gains in more favorable
environments.
INTEREST-RATE RISK Since bond prices fall as interest rates rise, this type
of risk is a particular concern for fixed-income investors. However,
interest-rate increases can also have a substantial negative effect on the
stock market.
INFLATION RISK If your investments cannot keep pace with inflation, your
money will begin to lose its purchasing power. Stock investments are
generally considered among the best ways of addressing inflation risk over
the long term.
CREDIT AND PREPAYMENT RISK Credit risk is the concern that the security's
issuer will not be able to meet its payment, while prepayment risk involves
the premature payoff of a loan, with a resulting loss of interest income.
Professional management and in-depth research are invaluable in managing both
these risks.
LIQUIDITY RISK Not all investments can be readily converted into cash at
their perceived market values. Liquidity risk can affect the price of
securities held in the fund's portfolio and, thus, the fund's share prices.
This list covers only the most general types of risks; however, each
investment will also have its own specific risks.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
For the year ended March 31, 1995
To the Trustees and Shareholders of
Putnam High Yield Municipal Trust
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments owned (except for bond ratings), and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Putnam High Yield Municipal Trust (the "Fund") at March 31, 1995, and the
results of its operations, the changes in its net assets and the financial
highlights for the years indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments owned at March 31, 1995, by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
May 16, 1995
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
March 31, 1995
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (98.1%)<F1>
PRINCIPAL AMOUNT RATINGS<F2> VALUE
ALABAMA (2.6%)
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$5,750,000 Butler, Indl. Dev. Board Rev. Bonds
(Solid Waste Disp. James River Corp. Project),
8s, 9/1/28 BBB $ 6,037,500
ARIZONA (2.1%)
- --------------------------------------------------------------------------------------------
1,450,000 AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
(St. Luke's Hosp. Syst.), Ser. A, 10 1/8s, 11/1/15 Ba 1,524,312
3,000,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A 3,405,000
------------
4,929,312
CALIFORNIA (9.2%)
- --------------------------------------------------------------------------------------------
CA Hlth. Fac. Auth. Rev. Bonds
1,800,000 (Summit Med. Ctr.), Ser. 85A, 9s, 5/1/15 Ba 1,827,000
4,500,000 (Valley Presbyterian Hosp. Project), Ser. A, 9s, 5/1/12 B 4,505,625
5,700,000 CA Statewide Cmntys., Dev. Auth. Inverse Floating Rate
Note (I/F), Certif. of Participation (COP),
(Motion Picture & TV Fund), American Municipal Bond
Assurance Corporation (AMBAC), 6.28s, 1/1/22 AAA 4,267,875
3,500,000 Cerritos Pub. Fing. Auth. Rev. Bonds (Los Coyotes
Redev. Project), AMBAC, 5 3/4s, 11/1/22 AAA 3,355,625
2,000,000 La Habra, COP, (Friendly Hills Hlth. Care
Foundation), Ser. A, 7.15s, 7/1/23 BB/P 2,120,000
1,320,000 Los Angeles Wastewater Syst. Rev. Bonds
Ser. B, Municipal Bond Insurance Association (MBIA),
5.7s, 6/1/23 AAA 1,247,400
580,000 San Bernardino, Hosp. Rev. Bonds
(San Bernardino Cmnty. Hosp.), 7 7/8s, 12/1/19 B 529,250
2,000,000 San Francisco City & Cnty. Swr. Rev. Bonds
AMBAC, 5 1/2s, 10/1/15 AAA 1,870,000
2,000,000 Southern CA Pub. Pwr. Auth. Rev. Bonds
(Transmission Project), MBIA, 5 3/4s, 7/1/21 AAA 1,905,000
------------
21,627,775
COLORADO (5.2%)
- --------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds,
5,000,000 Ser. A, 8 3/4s, 11/15/23 Baa 5,518,750
6,350,000 Ser. A, 8 1/2s, 11/15/23 Baa 6,865,938
------------
12,384,688
<PAGE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS<F2> VALUE
FLORIDA (3.0%)
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$3,965,000 Levy Cnty., Indl. Dev. Rev. Bonds
(National Med. Assn. Inc. Project), 10s, 7/1/19 B/P $ 3,875,787
3,500,000 Orange Cnty., Hlth. Fac. Auth. 1st. Mtge. Rev. Bonds
(RHA/Princeton Hosp.), 9s, 7/1/21 B/P 3,171,875
------------
7,047,662
GEORGIA (1.3%)
- --------------------------------------------------------------------------------------------
3,025,000 De Kalb Cnty., Hsg. Auth. Muni. Rev. Bonds
(Briarcliff Park Apts. Project), Ser. B, 10s, 4/1/17 BB/P 3,146,000
ILLINOIS (6.2%)
- --------------------------------------------------------------------------------------------
Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
1,463,000 (United Air Lines, Inc.), Ser. B, 8.95s, 5/1/18 Baa 1,611,128
1,900,000 (United Air Lines, Inc.), Ser. 84A, 8.85s, 5/1/18 Baa 2,111,375
3,845,000 (United Air Lines, Inc. Project), Ser. C, 8.2s, 5/1/18 Baa 4,094,925
4,250,000 (American Airlines Inc. Project), 8.2s, 12/1/24 Baa 4,701,562
2,015,000 IL Edl. Fac. Auth. Rev. Bonds
(Steppenwolf Theatre Project), 9.65s, 7/1/19 BB/P 2,108,193
------------
14,627,183
INDIANA (2.5%)
- --------------------------------------------------------------------------------------------
5,769,134 Hammond, Indl. Port Auth. COP, 9.65s, 6/1/14 BB/P 6,021,534
IOWA (2.7%)
- --------------------------------------------------------------------------------------------
6,500,000 IA Fin. Auth. Hlth. Care Fac. Rev. Bonds
(Mercy Hlth. Initiatives Project), 9.95s, 7/1/19 B/P 6,370,000
KENTUCKY (1.4%)
- --------------------------------------------------------------------------------------------
1,500,000 Jefferson Cnty., 1st Mtge. Rev. Bonds
(AHF/KY-IOWA Inc. Project), 10 1/4s, 1/1/20 B/P 1,543,125
1,675,000 Louisville & Jefferson Cnty., Regl. Arpt. Syst. Rev.
Bonds, Ser. A, MBIA, 8 1/2s, 7/1/17 AAA 1,819,469
------------
3,362,594
LOUISIANA (5.7%)
- --------------------------------------------------------------------------------------------
LA Pub. Fac. Auth. 1st Mtge. Rev. Bonds
1,953,099 (Emily Morten Foundation), 10 1/4s, 5/1/19 B/P 2,055,637
2,500,000 (St. James Place Project), 10s, 11/1/21 B/P 2,675,000
2,000,000 Port of New Orleans, Indl. Dev. Rev. Bonds
(Continental Grain Co. Project), 14 1/2s, 1/1/02 BB 2,227,500
3,440,000 St. James Parish, Solid Waste Disp. Rev. Bonds
(Kaiser Aluminum Project), 7 3/4s, 8/1/22 B/P 3,526,000
3,000,000 West Feliciana Parish, Poll. Control Rev. Bonds
(Gulf States Util. Co.), 8s, 12/1/24 Baa 3,127,500
------------
13,611,637
<PAGE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS<F2> VALUE
MASSACHUSETTS (8.8%)
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$2,000,000 MA Hlth. & Edl. Fac. Auth. Rev. Bonds
(Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s, 8/15/24 BB/P $ 1,985,000
1,000,000 MA Indl. Fin. Agcy. Rev. Bonds
(Oddfellows Home of MA), 9.6s, 1/1/15 BB/P 1,075,000
5,800,000 MA Port Auth. Special Project Rev. Bonds
(Harborside Hyatt), 10s, 3/1/26 B/P 6,300,250
3,000,000 MA State Hlth. & Edl. Fac. Auth. Inverse Floating
Bond (IFB) (St. Elizabeth Hosp.), Ser. E, Financial
Security Assurance, Inc. (FSA) 9.18s, 8/15/21 AAA 3,262,500
MA State Indl. Fin. Agcy. Resource Recvy. Rev. Bonds
(Southeastern MA Project),
1,500,000 Ser. B, 9 1/4s, 7/1/15 BB/P 1,644,375
3,500,000 Ser. A, 9s, 7/1/15 BB/P 3,823,750
2,500,000 MA State Indl. Fin. Agcy. Tunnel Rev. Bonds
(MA Tpk.), 9s, 10/1/20 BBB/P 2,696,875
------------
20,787,750
MICHIGAN (5.6%)
- --------------------------------------------------------------------------------------------
2,773,000 Detroit, Hosp. Fac. Fin. Auth. Rev. Bonds
(MI Hlth. Care Corp.), 10s, 12/1/20 B 1,109,200
2,815,000 Detroit, Local Dev. Fin. Auth. Tax Increment
Rev. Bonds, Ser. A, 9 1/2s, 5/1/21 BBB/P 3,465,969
3,000,000 Greater Detroit, Resource Recvy. Auth. Rev. Bonds,
Ser. B, 9 1/4s, 12/13/08 BBB 3,135,000
4,000,000 MI Hosp. Fin. Auth. Rev. Bonds
(Genesys Hlth. Syst.), Ser. A, 7 1/2s, 10/1/27 Baa 3,940,000
975,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds
(MI Hlth. Care Corp. Project), 9.1s, 12/1/14 B/P 390,000
1,250,000 Wayne Charter Cnty., Special Arpt. Fac. Rev. Bonds
(Republic Air Lines, Inc. Project), 10 3/8s, 12/1/15 B/P 1,309,375
------------
13,349,544
MISSOURI (2.3%)
- --------------------------------------------------------------------------------------------
5,000,000 Kansas City, Indl. Dev. Auth. Hlth. Fac. Rev. Bonds
(Park Lane Med. Ctr. Project), 8 3/4s, 1/1/15 BBB/P 5,400,000
NEBRASKA (0.5%)
- --------------------------------------------------------------------------------------------
1,000,000 NE Investment Fin. Auth. Hosp. Rev. IFB,
MBIA, 8.838s, 11/15/16 AAA 1,066,250
NEW HAMPSHIRE (2.6%)
- --------------------------------------------------------------------------------------------
1,935,000 NH Higher Edl. & Hlth. Fac. Auth. Rev. Bonds
(Havenwood/Heritage Heights), 9 3/4s, 12/1/19 B/P 2,060,775
3,500,000 NH State Indl. Dev. Auth. Poll. Control Rev. Bonds
(United Illuminating Co.), Ser. B, 10 3/4s, 10/1/12 Baa 3,985,625
------------
6,046,400
<PAGE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS<F2> VALUE
NEW JERSEY (2.6%)
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$4,000,000 Camden Cnty., Impt. Auth. Hsg. Dev. Rev. Bonds
(Chestbury Apts. Project), 8 3/4s, 12/15/16 BB/P $ 3,980,000
2,000,000 NJ State Hsg. & Mtge. Fin. Agcy. Rev. IFB,
Ser. I, 7.665s, 11/1/07 (acquired 6/23/93, cost
$2,120,500)<F3> A 2,110,000
------------
6,090,000
NEW YORK (7.2%)
- --------------------------------------------------------------------------------------------
3,000,000 NY State Dorm. Auth. Rev. Bonds,
Ser. A, 5 3/8s, 5/15/16 Baa 2,632,500
2,350,000 NY State Energy Research & Dev. Auth. Poll. Control
IFB, FGIC, 8.804s, 7/1/29 (acquired 12/19/94, cost
$2,453,729)<F3> AAA 2,752,438
3,000,000 NY State Hsg. Fin. Agcy. Svcs. Contract Oblig. Rev.
Bonds, Ser. A, 7 3/8s, 9/15/21 AAA 3,446,250
NY State Local Govt. Assistance Corp. Rev. Bonds
1,500,000 Ser. A, 7s, 4/1/16 AAA 1,676,250
2,000,000 Ser. D, 6 3/4s, 4/1/21 AAA 2,225,000
1,800,000 New York City, Variable Rate Demand Note
(VRDN), Ser. B, FGIC, 4.3s, 10/1/22 VMIG1 1,800,000
3,150,000 Port Ath NY & NJ, IFB,
FGIC, 5.2s, 11/15/20 (acquired 3/10/1995, cost
$2,441,124)<F3> AAA 2,476,688
------------
17,009,126
OHIO (2.8%)
- --------------------------------------------------------------------------------------------
4,550,000 Dayton, Special Fac. Rev. Bonds
(Emery Air Freight Corp.), Ser. A, 12 1/2s, 10/1/09 B/P 5,357,625
1,185,000 OH State Air Quality Dev. Auth. Rev. Bonds
(Dayton Pwr. & Lt. Co. Project), 9 1/2s, 12/1/15 AA 1,248,694
------------
6,606,319
PENNSYLVANIA (9.1%)
- --------------------------------------------------------------------------------------------
250,000 Allegheny Cnty., Indl. Dev. Auth. Arpt. Special Fac. Rev.
Bonds, (U.S. Air, Inc. Project), Ser. A, 8 7/8s, 3/1/21 B 253,750
Montgomery Cnty., Higher Edl. & Hlth. Auth. Hosp.
Rev. Bonds (United Hosp. Inc. Project),
1,940,000 8 1/2s, 11/1/17 Ba 2,003,050
2,000,000 Ser. A, 8 3/8s, 11/1/11 Ba 2,080,000
3,250,000 PA Econ. Dev. Fing. Auth. Rev. Bonds
(MacMillan Ltd. Partnership Project), 7.6s, 12/1/20 Baa 3,432,813
5,000,000 PA Econ. Dev. Fing. Auth. Recycling Rev. Bonds
(Ponderosa Fibres Project), Ser. A, 9 1/4s, 1/1/22 B/P 5,050,000
2,500,000 PA State Higher Edl. Assistance Agcy. Student
Loan Rev. IFB, AMBAC, 9.242s, 9/3/26 AAA 2,640,625
<PAGE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS<F2> VALUE
PENNSYLVANIA (continued)
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$2,100,000 Philadelphia, Muni. Auth. Rev. Bonds
(Justice Lease), Ser. C, 8 5/8s, 11/15/16 (Prerfdg.) AAA $ 2,543,625
3,400,000 Philadelphia, Regl. Port Auth. Lease IFB,
MBIA, 7.82s, 9/1/13 AAA 3,514,750
------------
21,518,613
TEXAS (12.9%)
- --------------------------------------------------------------------------------------------
2,000,000 Austin Utility Syst. Rev. Bonds,
Federal Guaranty Insurance Company (FGIC),
5 3/4s, 5/15/24 AAA 1,897,500
1,000,000 Bell Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Living Tech. Inc. Project), Ser. A, 10 1/2s,
6/15/18 B/P 920,000
2,705,000 Calhoun Cnty., West Side Navy Dist. Solid Waste
Disp. Rev. Bonds (Union Carbide Chemicals Project),
6.4s, 5/1/23 Ba 2,505,506
765,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Nancy Travis Memorial Hosp. Project), 10s, 5/15/13 B/P 813,769
6,000,000 Lone Star, TX Arpt. Impt. Auth. Inc. Rev. Bonds
(American Airlines Inc. Project), 9 1/8s, 12/1/15 Baa 6,232,500
3,060,252 Maverick Cnty., COP (Jail Facility), 9.1s, 6/15/10 CCC/P 1,836,151
Port Corpus Christi, Indl. Dev. Corp. Rev. Bonds
(Valero Refining & Marketing Co.)
5,500,000 Ser. B, 10 5/8s, 6/1/08 Baa 6,139,375
4,480,000 Ser. A, 10 1/4s, 6/1/17 Baa 4,967,200
4,800,000 TX State Hsg. & Cmnty. Affairs Home Mtg. IFB,
GNMA, FNMA, Ser. C, 9.967s, 7/2/24 AAA 5,160,000
------------
30,472,001
UTAH (1.4%)
- --------------------------------------------------------------------------------------------
3,300,000 Carbon Cnty. Util. Rev. Bonds
(Solid Waste Disposal Laidlaw Project),
Ser. A, 7 1/2s, 2/1/10 Baa 3,399,000
WISCONSIN (0.4%)
- --------------------------------------------------------------------------------------------
900,000 WI Hsg. & Econ. Dev. Auth. Home Ownership IFB,
9.642s, 10/25/22 AA 958,500
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (cost $229,147,480)<F4> $231,869,388
- --------------------------------------------------------------------------------------------
<PAGE>
<FN>
<F1> Percentages indicated are based on net assets of $236,333,481, Net assets available to
common shareholders are $191,323,126, which correspond to a net asset value per common
share of $9.03.
<F2> The Moody's or Standard & Poor's ratings indicated are believed to be the most recent
ratings available at March 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 March 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.
<F3> Restricted as to public resale. At the date of acquisition these securities were valued
at cost. There were no outstanding unrestricted securities of the same class as those
held. Total market value of restricted securities owned at March 31, 1995 was
$7,339,126 or 3.1% of net assets.
<F4> The aggregate identified cost for federal income tax purposes is $229,156,232 resulting
in gross unrealized appreciation and depreciation of $10,691,338 and $7,978,182
respectively, or net unrealized appreciation of $2,713,156.
The rates shown on Inverse Floating Bonds (IFB) and Notes (I/F) which are securities
paying variable rates that vary inversely to changes in market interest rates, and
Variable Rate Demand Notes (VRDN) are the current interest rates at March 31, 1995,
which are subject to change based on the terms of the security.
The Fund had the following industry group concentrations greater than 10% on March 31,
1995 (as a percentage of net assets):
Hospitals / Health Care 23.4%
Transportation 22.0
The table below shows the percentages of the Fund's investments on March 31, 1995 in
securities assigned to the various rating categories by Moody's and Standard & Poor's
and in unrated securities determined by Putnam Investment Management to be of
comparable quality:
UNRATED SECURITIES
RATED SECURITIES, OF COMPARABLE QUALITY,
AS A PERCENTAGE OF AS A PERCENTAGE OF
RATINGS (UNAUDITED) FUND'S NET ASSETS FUND'S NET ASSETS
--------------------------------------------------------------------------
"AAA"/"Aaa" 19.8% --%
"AA"/"Aa" 1.0 --
"A"/"A" 2.3 --
"BBB"/"Baa" 30.5 4.9
"BB"/"Ba" 5.1 11.0
"B"/"B" 2.7 19.2
"CCC"/"Caa" -- 0.8
"VMIG1" 0.8 --
--------------------------------------------------------------------------
62.2% 35.9%
--------------------------------------------------------------------------
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995
ASSETS
- -------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $229,147,480) (Note 1) $231,869,388
- -------------------------------------------------------------------------------
Cash 152,752
- -------------------------------------------------------------------------------
Receivable for securities sold 557,392
- -------------------------------------------------------------------------------
Interest receivable 5,593,704
- -------------------------------------------------------------------------------
TOTAL ASSETS 238,173,236
- -------------------------------------------------------------------------------
LIABILITIES
- -------------------------------------------------------------------------------
Distributions payable to shareholders 1,324,902
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 3) 403,248
- -------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 3) 385
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 3) 40,628
- -------------------------------------------------------------------------------
Payable for administrative services (Note 3) 2,086
- -------------------------------------------------------------------------------
Other accrued expenses 68,506
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 1,839,755
- -------------------------------------------------------------------------------
NET ASSETS $236,333,481
REPRESENTED BY
- -------------------------------------------------------------------------------
Series A remarketed preferred shares, without par value; 8,000
shares authorized (900 shares issued at $50,000 per share
liquidation preference) (Note 2) $ 45,000,000
- -------------------------------------------------------------------------------
Common shares, without par value; unlimited shares authorized;
21,198,632 shares outstanding (Note 1) 195,432,834
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 100,198
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments
and futures transactions (6,921,459)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,721,908
- -------------------------------------------------------------------------------
NET ASSETS $236,333,481
- -------------------------------------------------------------------------------
COMPUTATION OF NET ASSET VALUE
- -------------------------------------------------------------------------------
Remarketed preferred shares at liquidation preference $ 45,000,000
- -------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 10,355
- -------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares
at liquidation preference 45,010,355
- -------------------------------------------------------------------------------
Net assets available to common shares:
- -------------------------------------------------------------------------------
Net asset value per share $9.03 ($191,323,126
divided by 21,198,632 shares) 191,323,126
- -------------------------------------------------------------------------------
NET ASSETS $236,333,481
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF OPERATIONS
Year ended March 31, 1995
- -------------------------------------------------------------------------------
TAX EXEMPT INTEREST INCOME $19,325,337
- -------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 3) 1,620,669
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 3) 190,912
- -------------------------------------------------------------------------------
Compensation of Trustees (Note 3) 12,322
- -------------------------------------------------------------------------------
Reports to shareholders 63,160
- -------------------------------------------------------------------------------
Auditing 60,042
- -------------------------------------------------------------------------------
Legal 20,075
- -------------------------------------------------------------------------------
Postage 59,177
- -------------------------------------------------------------------------------
Administrative services (Note 3) 8,691
- -------------------------------------------------------------------------------
Exchange listing fees 33,192
- -------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 1,668
- -------------------------------------------------------------------------------
Preferred share remarketing agent fees 128,397
- -------------------------------------------------------------------------------
Registration fee 472
- -------------------------------------------------------------------------------
Other 7,802
- -------------------------------------------------------------------------------
TOTAL EXPENSES 2,206,579
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME 17,118,758
- -------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 4) (4,079,998)
- -------------------------------------------------------------------------------
Net realized gain on futures (Notes 1 and 4) 93,950
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (104,620)
- -------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS (4,090,668)
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $13,028,090
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED MARCH 31
- -------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $ 17,118,758 $ 17,122,427
- -------------------------------------------------------------------------------
Net realized loss on investments and futures (3,986,048) (2,667,449)
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments (104,620) (3,312,231)
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 13,028,090 11,142,747
- -------------------------------------------------------------------------------
Distributions to remarketed preferred
shareholders from net investment income (1,538,892) (1,078,561)
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS
(EXCLUDING CUMULATIVE UNDECLARED DIVIDENDS
ON REMARKETED PREFERRED SHARES OF $10,355 AND
$6,165, RESPECTIVELY) 11,489,198 10,064,186
- -------------------------------------------------------------------------------
Distributions to common shareholders from
net investment income (15,805,873) (15,599,309)
- -------------------------------------------------------------------------------
Issuance of common shares in connection
with reinvestment of distributions 2,501,794 2,496,418
- -------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (1,814,881) (3,038,705)
NET ASSETS
- -------------------------------------------------------------------------------
Beginning of year 238,148,362 241,187,067
- -------------------------------------------------------------------------------
END OF YEAR (including undistributed net
investment income of $100,198 and $324,921,
respectively) $236,333,481 $238,148,362
NUMBER OF FUND SHARES
- -------------------------------------------------------------------------------
Common shares outstanding at beginning of year 20,924,115 20,673,143
- -------------------------------------------------------------------------------
Common shares issued in connection with
reinvestment of distributions 274,517 250,972
- -------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING AT END OF YEAR 21,198,632 20,924,115
- -------------------------------------------------------------------------------
REMARKETED PREFERRED SHARES OUTSTANDING
AT BEGINNING AND END OF YEAR 900 900
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
- --------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD (common shares) $9.23 $9.49 $8.99 $8.85 $9.28<F1>
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS:
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income .81 .81 .86 .84 .78
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain/(loss) on investments (.19) (.27) .51 .22 (.40)
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .62 .54 1.37 1.06 .38
- --------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income:
- --------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.07) (.05) (.06) (.06)<F1> --
- --------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.75) (.75) (.81) (.81) (.81)
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.82) (.80) (.87) (.87) (.81)
- --------------------------------------------------------------------------------------------------------------------------------
Preferred share offering costs -- -- -- (.05) --
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD (common shares) $9.03 $9.23 $9.49 $8.99 $8.85
- --------------------------------------------------------------------------------------------------------------------------------
Market value, end of period (common shares) $9.50 $9.25 $10.50 $9.88 $9.13
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT MARKET VALUE (%) (common shares) <F2> 11.50 (4.99) 15.48 18.15 7.92
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (total fund) (in thousands) $236,333 $238,148 $241,187 $228,735 $178,871
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) <F3> 1.17 1.17 1.17 1.13 .90
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) <F3> 8.27 7.97 8.58 8.77 8.55
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 49.11 28.55 53.89 62.28 19.69
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Preferred Shares were issued on July 22, 1991.
<F2> Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
<F3> Ratios reflect net assets available to common shares only; net investment income ratio also reflects reduction for dividend
distributions to preferred shareholders.
</FN>
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 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 high current income exempt from federal income tax. The
fund intends to achieve its objective by investing in high yielding tax-exempt
municipal securities constituting a portfolio that the fund's Manager, Putnam
Investment Management, Inc., ("Putnam Management"), a wholly owned subsidiary
of Putnam Investments, Inc. believes to be consistent with prudent investment
management.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A SECURITY VALUATION Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the Trustees, which uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities and various relationships between
securities in determining value. The fair value of restricted securities is
determined by the Manager following procedures approved by the Trustees, and
such valuations and procedures are reviewed periodically by the Trustees.
B SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are
accounted for on the trade date (date the order to buy or sell is executed).
Interest income is recorded on the accrual basis.
C FUTURES The fund may purchase and sell financial futures contracts to hedge
against changes in the values of tax-exempt municipal securities the fund owns
or expects to purchase.
A futures contract is an agreement between two parties to buy or sell units of
a particular index or a certain amount of a U.S. Government security at a set
price on a future date.
Upon entering into such a contract the fund is required to pledge to the
broker an amount of cash or securities equal to the minimum "initial margin"
requirements of the futures. Pursuant to the contract, the fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
"variation margin" and are recorded by the fund as unrealized gains or losses.
When the contract is closed, the fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
The potential risk to the fund is that the change in value of futures contracts
primarily corresponds with the value of underlying instruments which may not
correspond to the change in value of the hedged instruments. In addition, there
is a risk that the fund may not be able to close out its futures positions due
to an illiquid secondary market.
D 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 lia bilities (including accrued expenses),
undeclared dividends on remarketed preferred shares and the liquidation value of
any outstanding remarketed preferred shares, by the total number of common
shares outstanding.
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 of securities held and excise tax on income and
capital gains.
At March 31, 1995, the fund had a capital loss carryover of approximately
$3,934,000 available to offset future realized capital gains, if any, to the
extent provided by regulations. Of this $228,000, $64,000 and $3,642,000 will
expire March 31, 1999, 2002, and 2003 respectively.
<PAGE>
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 7-day period. The applicable dividend rate for the remarketed preferred shares
on March 31, 1995 was 4.20%.
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 amortization of organization
expenses, Post October losses and dividends payable. Reclass i fications are
made to the fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations.
For the year ended March 31, 1995, the fund reclassified $1,284 to increase
undistributed net investment income and $1,284 to decrease additional paid-in
capital. 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 zero-coupon bonds, original issued discount
bonds and step-up bonds is accreted according to the effective yield method.
H UNAMORTIZED ORGANIZATION EXPENSES Expenses incurred by the fund in connection
with its organization aggregated $55,380. These expenses were amortized on a
straight-line basis over a five-year period, which concluded during the year
ended March 31, 1995.
NOTE 2
REMARKETED PREFERRED SHARES
The Series A remarketed preferred shares are redeemable at the option of the
fund on any dividend payment date at a redemption price of $50,000 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 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 March 31, 1995
there were no such restrictions 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. Such fee
is based on the annual rate of 0.7% of average weekly net assets.
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
0.70% of the liquidation preference of the remarketed preferred shares
outstanding during the period).
The fund also reimburses the Manager for the compensation and related expenses
of certain officers of the fund and their staff who provide administrative
services to the fund. The aggregate amount of all such reimbursements is
determined annually by the Trustees.
Trustees of the fund receive an annual Trustee's fee of $800 and an additional
fee for each Trustees' meeting attended. Trustees who are not interested persons
of the Manager and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust
Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing
agent functions are provided by Putnam Investor Services, a division of PFTC.
Investor servicing and custodian fees reported in the Statement of operations
for the year ended March 31, 1995 have been reduced by credits allowed by PFTC.
NOTE 4
PURCHASES AND SALES OF SECURITIES
During the year ended March 31, 1995, purchases and sales of investment
securities other than short-term investments aggregated $117,809,648 and
$110,502,129 respectively. Purchases and sales of short-term municipal
obligations aggregated $64,400,000 and $71,350,000, respectively. In determining
the net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
<PAGE>
SELECTED QUARTERLY DATA
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 31 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31 SEPTEMBER 30 JUNE 30
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1994 1994 1994 1993 1993 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment
income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total $ 4,869,041 $ 4,835,180 $ 4,820,132 $ 4,800,984 $ 4,849,865 $ 5,209,897 $ 4,924,600 $ 4,489,459
Per Share* $ .23 $ .23 $ .22 $ .23 $ .22 $ .26 $ .23 $ .22
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment
income available to
common shareholders
Total $ 3,888,615 $ 3,869,237 $ 3,908,019 $ 3,918,185 $ 4,024,772 $ 4,322,207 $ 4,056,742 $ 3,640,145
Per Share* $ .20 $ .18 $ .18 $ .18 $ .18 $ .21 $ .19 $ .18
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and
unrealized gain
(loss) on
investments
Total $ 8,498,665 $ (6,709,983) $ (1,792,719) $ (4,086,631) $(11,569,251) $ (1,686,445) $ 3,798,438 $ 3,477,578
Per Share* $ .39 $ (.31) $ (.08) $ (.19) $ (.54) $ (.08) $ .18 $ .17
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net
assets available to
common shareholders
resulting from
operations
Total $ 12,381,705 $ (2,840,717) $ 2,155,300 $ (168,446) $ (7,544,479) $ 2,635,762 $ 7,855,180 $ 7,117,723
Per Share* $ .59 $ (.13) $ .10 $ (.01) $ (.36) $ .12 $ .38 $ .35
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets
available to common
shareholders at
end of period
Total $191,323,126 $182,257,758 $188,513,114 $189,691,675 $193,142,197 $203,952,500 $204,589,727 $200,026,144
Per Share* $ 9.03 $ 8.63 $ 8.95 $ 9.04 $ 9.23 $ 9.78 $ 9.84 $ 9.65
- ----------------------------------------------------------------------------------------------------------------------------------
*Per common share.
</TABLE>
FEDERAL TAX
INFORMATION
The Fund has designated all distributions paid during the fiscal year as
exempt-interest dividends. Thus 100% of these distributions are exempt from
federal income tax. The Form 1099 you will receive in January 1996 will tell you
the tax status of any distributions paid to your account in calendar year 1995.
The income earned from each state will also be reported to you at this time.
<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
Price Waterhouse LLP
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
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 Erickson
Vice President
Triet Nguyen
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
<PAGE>
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-to-date
information about the fund's NAV or to request Putnam's quarterly Closed-End
Fund Commentary.
<PAGE>
[LOGO: PUTNAM INVESTMENTS]
THE PUTNAM FUNDS
One Post Office Square
Boston, Massachusetts 02109
------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
------------
054-17784
