Putnam
Investment
Grade
Municipal
Trust
ANNUAL REPORT
November 30, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Not only can bond funds serve as an offset to the capital-gains tax
that equity-fund investors are sure to be socked with next year, munis
also can provide an excellent hedge against the volatility of stocks."
-- Barron's, December 16, 1996
* "Although we expect discussion of broader tax reform to continue, it
is our belief that the flat tax will not be an issue in the near future
and that the municipal market will tend to maintain its current
valuation level relative to the taxable markets. These valuations have
strengthened recently as investor confidence has increased."
-- Richard P. Wyke, manager
Putnam Investment Grade
Municipal Trust
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
21 Financial statements
29 Results of October 31, 1996 shareholder meeting
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
The fiscal year that closed on November 30, 1996, certainly represented
a study in contrasts for shareholders of Putnam Investment Grade
Municipal Trust.
The year opened amidst a flat-tax flurry in the presidential primary
campaign that threw the municipal bond market into a sustained state of
uncertainty. It proceeded in the wake of a succession of further market
worries over the state of the economy and the course of interest rates.
Finally, as the second half unfolded, the municipal bond market began to
develop a degree of serenity, closing the year in an almost upbeat mood.
Toward the end of fiscal '96, Richard Wyke was appointed your fund's
manager. Rick has 14 years of investment experience and has been
managing municipal bond portfolios at Putnam since 1987.
In the report that follows, Rick discusses the events and strategies
that drove your fund's performance during the fiscal year just ended and
takes a look at prospects for the year that has just begun.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
January 15, 1997
Report from the Fund Manager
Richard P. Wyke
Putnam Investment Grade Municipal Trust finished its 1996 fiscal year
with positive momentum, thanks in part to the municipal bond market's
gradual shift toward a more favorable environment. For much of the year,
as the fixed-income market enjoyed one of its strongest advances in
recent memory, the municipal bond sector was left far behind. Tax-reform
proposals with the potential to change -- or even end -- the tax
advantages of municipal bond investing kept investors out of the market,
and dampened performance.
During the year's second half, however, flat-tax fears declined. Your
fund was able to benefit from a relatively flat interest-rate
environment and a strategic shift in emphasis toward intermediate-term
bonds, completing the 12 months ended November 30, 1996, with total
returns of 3.91% at net asset value and 8.65% at market value.
Additional information is shown in the performance tables that begin on
page 9.
* SUPPLY/DEMAND BALANCE SHIFT NOW FAVORS GROWING SUPPLY
Although we expect discussions of broader tax reform to continue, it is
our belief that the flat tax will not be an issue in the near future and
that the municipal market will tend to maintain its current valuation
level relative to the taxable markets. These valuations have
strengthened recently as investor confidence has increased. Demand
benefited from strong retail investor interest as well as from insurance
companies. Those two sectors, along with the mutual fund sector,
represent almost all of the current demand for municipal bonds. While
the mutual fund sector saw negligible cash inflow and outflow during the
period, there was sufficient demand from the other two sectors to
support prices in the municipal market.
On the supply side, approximately $170 billion worth of new-issue
municipal bonds is expected to reach the market by the end of calendar
1996. While that is still much lower than the market's peak (roughly
$295 billion in 1993), it represents an increase over last year's new-
issue level. This large amount of new-issue bonds means that earlier
concerns about vanishing municipal bond supply have not materialized.
One aspect of municipal bond demand we have discussed in past reports
has been the large number of prerefunded bonds awaiting redemption.
Historically, prerefundings have allowed us to know the exact point at
which the bonds would be retired and thus enabled us to plan effectively
for reinvestment of the assets. With the passing of 1996, we expect to
see fewer bonds redeemed through prerefunding. Instead, we believe the
cash flows into the retail, insurance company, and mutual fund sectors
of the market will be the primary sources of demand.
* SHIFT TO BULLETED STRUCTURE INTENDED TO BOOST INCOME
There are basically five variables with which we work in terms of your
fund's portfolio structure and strategy: First and most important is
duration -- a measure of sensitivity to interest-rate changes. A longer
duration can mean a more volatile portfolio if rates rise. But a longer
duration is also more likely to provide greater capital appreciation if
rates decline. Conversely a shorter duration can help preserve portfolio
value when interest rates rise. During the fiscal year, the fund's net
interest-rate sensitivity has roughly coincided with the average
duration for the long-term municipal bond fund universe. This means that
your fund's exposure to interest-rate risk is neither more nor less than
that of the average long-term municipal bond fund in the market today.
[GRAPHIC BAR CHART OMITTED: TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Utilities 22.7%
Housing 13.8%
Transportation 13.2%
Hospital/health care 10.2%
Water and sewerage 6.3%
Footnote reads:
*Based on net assets as of 11/30/96. Holdings will vary over time.
The second important variable in terms of fund performance is the
portfolio's yield curve positioning. During the period, we reallocated
the fund's assets from a barbell maturity structure to a bulleted
maturity structure. By this we mean that we moved from a portfolio
structure in which assets were roughly positioned at both the short-term
and the long-term ends of the interest-rate spectrum to a concentration
of holdings with midrange maturities between 15 and 25 years. That
strategy is intended to generate a higher-yielding portfolio.
* CREDIT AND SECTOR SELECTION STRATEGIES PROVE REWARDING
The fund's credit quality structure and sector selection make up the
third performance variable. In our opinion, it is more advantageous in
today's market to allocate some portion of the portfolio to Baa-rated
bonds. While your fund's portfolio has an average credit quality of AA,
the fund is underweighted in AA-rated and A-rated bonds. Its AA credit
quality average comes from a mixture of AAA-rated and Baa-rated bonds.
A look at the fund's sector selection reveals that transportation-
related bonds, in particular, those bonds issued to support the Denver
International Airport, remain key holdings. These bonds continue to
offer attractive financial performance and are rated as investment grade
by both major rating agencies. In our view, these bonds are worthwhile
holdings because of their potential for generating a high level of
income with periodic opportunities to provide attractive market price
returns.
In the health-care sector, we believe the opportunities offered by
corporate mergers and taxable buyouts have been fully priced into the
market. We now view this sector as more of a trading market in which the
focus is on buying bonds that have lagged a rally or selling bonds that
have outperformed in a market correction. We anticipate that in coming
months we will diversify the fund's sector risk further by shifting more
assets into the airline, waste management, and nursing home sectors.
[GRAPHIC PIE CHART OMITTED: PORTFOLIO QUALITY OVERVIEW]
PORTFOLIO QUALITY OVERVIEW*
Aaa --48.2%
Aa--7.0%
A--11.4%
Baa--25.2%
Ba and below--6.3%
VMIG1--1.9%
Footnote reads:
*As a percentage of portfolio market value as of 11/30/96. A bond rated
Baa or higher is considered investment grade. All ratings reflect
Moody's Investors Service descriptions, unless noted otherwise;
percentages may include unrated bonds considered by Putnam Management to
be of comparable quality. Ratings will vary over time.
* NONCALLABLE STRUCTURE AND FINANCIAL LEVERAGE PROVE BENEFICIAL
The management of price volatility is the fourth variable affecting your
fund's performance. Volatility is reflected in how much and how often
the price of a security changes, up or down. Rapid, wide price swings
indicate a high degree of volatility. We believe there are unique
valuation opportunities that occur in the municipal bond market because
of the way a bond's call structure works in conjunction with its coupon
and the shape of the yield curve. We consider noncallable bonds to be
currently undervalued in the municipal market and feel that they have
been so for some time. Consequently the market may be underestimating
their potential for rising volatility. We have attempted where possible
to build a noncallable structure into the portfolio and to focus on
other areas in which such potential, in our view, is being overlooked by
the market.
The last primary driver of your fund's performance is financial
leverage. To enhance income stream, the fund issues preferred shares
that pay dividends at prevailing short-term rates. These shares are sold
to corporate and institutional investors; the resulting assets are then
invested in longer-term bonds with higher yields. The difference between
the dividend paid to holders of preferred shares and the income earned
by the fund augments the flow of income to holders of common shares.
Given the continuing prospect for low short-term interest rates in
general, we believe the effects of leverage should continue to be
positive over the near term.
* OUTLOOK: UNDERVALUED MUNICIPAL BOND MARKET BODES WELL FOR FUND IN 1997
Fundamentally, given the growing prospect for slow growth in 1997 and
the lack of evidence that wage pressures are pushing on general
inflation rates, we believe interest-rate levels should continue to
decline. That prospect, coupled with the seasonal bulge in the municipal
market, should result in what we expect will be an undervalued municipal
bond market. We expect that prices in the municipal bond market may move
up over the near term, a situation that could bode well for your fund.
Footnote reads:
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 11/30/96, 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 Investment Grade Municipal Trust is designed for
investors seeking high current income free from federal income tax,
consistent with preservation of capital.
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 11/30/96
(common shares)
Lehman Bros.
Market Municipal Consumer
NAV price Bond Index Price Index
- ------------------------------------------------------------------------
1 year 3.91% 8.65% 5.89% 3.26%
- ------------------------------------------------------------------------
5 years 53.77 70.09 45.83 15.09
Annual average 8.99 11.21 7.83 2.85
- ------------------------------------------------------------------------
Life of fund
(since 10/26/89) 86.68 97.23 76.21 26.27
Annual average 9.19 10.04 8.33 3.34
- ------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 12/31/96
(most recent calendar quarter)
(common shares)
Market
NAV price
- ------------------------------------------------------------------------
1 year 2.65% 5.69%
- ------------------------------------------------------------------------
5 years 48.87 58.61
Annual average 8.28 9.66
- ------------------------------------------------------------------------
Life of fund
(since 10/26/89) 86.75 94.83
Annual average 9.09 9.73
- ------------------------------------------------------------------------
Footnote reads:
Performance data represent past results, do not reflect future
performance, and will differ for each share class. 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 11/30/96
- ------------------------------------------------------------------------
Distributions (number) (common shares) 12
- ------------------------------------------------------------------------
Income $0.96
- ------------------------------------------------------------------------
Capital gains1
- ------------------------------------------------------------------------
Long-term --
- ------------------------------------------------------------------------
Short-term --
- ------------------------------------------------------------------------
Total $0.96
- ------------------------------------------------------------------------
Preferred shares Series A (1400 shares)
- ------------------------------------------------------------------------
Income $3,714.35
- ------------------------------------------------------------------------
Capital gains1
- ------------------------------------------------------------------------
Long-term --
- ------------------------------------------------------------------------
Short-term 32.17
- ------------------------------------------------------------------------
Total $3,746.52
- ------------------------------------------------------------------------
Share value (common shares) NAV Market price
- ------------------------------------------------------------------------
11/30/95 $12.37 $13.500
- ------------------------------------------------------------------------
11/30/96 11.94 13.625
- ------------------------------------------------------------------------
Current return (common shares) NAV Market price
- ------------------------------------------------------------------------
End of period
- ------------------------------------------------------------------------
Current dividend rate2 8.04% 7.05%
- ------------------------------------------------------------------------
Taxable equivalent3 13.31 11.67
- ------------------------------------------------------------------------
1 Capital gains 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.
2 Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
3 Assumes maximum 39.6% federal tax rate. Results for investors subject
to lower tax rates would not be as advantageous.
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, and the liquidation preference 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 is not leveraged, 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. Performance of the fund will differ. It is not possible to
invest directly in an index.
Report of independent accountants
To the Trustees and Shareholders of
Putnam Investment Grade 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 Investment Grade Municipal Trust (the
"fund") at November 30, 1996, and the results of its operations, the
changes in its net assets and the financial highlights for the periods
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 November 30, 1996 by correspondence
with the custodian, provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Boston, Massachusetts
January 10, 1997
<TABLE>
<CAPTION>
Portfolio of investments owned
November 30, 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
IFB --Inverse Floating Rate Bonds
MBIA --Municipal Bond Investors Assurance Corporation
PSFG --Permanent School Fund Guaranteed
VRDN --Variable Rate Demand Notes
<S> <C> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (98.4%) *
PRINCIPAL AMOUNT RATING** VALUE
Alabama (1.7%)
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$5,500,000 Gadsden East, Med. Clinic Board Rev. Bonds (Baptist Hosp. of Gadsden Inc.),
Ser. A, 7.8s, 11/1/21 BBB $ 6,407,500
Arizona (1.1%)
- ------------------------------------------------------------------------------------------------------------------------------
4,000,000 Gila Cnty., Indl. Dev. Auth. Poll. Control Rev. Bonds (Asarco Inc.),
Ser. 85, 8.9s, 7/1/06 Baa 4,209,840
California (12.0%)
- ------------------------------------------------------------------------------------------------------------------------------
1,000,000 CA Poll. Control Fin. Auth. VRDN (Shell Oil Co.), Ser. A, 3.85s, 10/1/07 VMIG1 1,000,000
4,650,000 CA State U. IFB, AMBAC, 10.05s, 11/1/21 (acquired various dates from 8/5/91
to 8/31/94,cost $4,659,603)(double dagger) Aaa 5,580,000
5,200,000 Central Valley Fin. Auth. Rev. Bonds (Carson Ice-Cogeneration), 6s, 7/1/09 BBB 5,343,000
3,000,000 Contra Costa Wtr. Dist. Rev. Bonds, Ser. G, MBIA, 5s, 10/1/24 Aaa 2,816,250
10,000,000 Foothill/Eastern Trans. Corridor Agcy. Rev. Bonds (CA Toll Rd.),
Ser. A, zero %, 11/1/09 Baa 6,500,000
Los Angeles Cnty., Metro. Trans. Auth. Sales Tax Rev. Bonds
3,030,000 Second Tier Lien, Ser. A, MBIA, 5 5/8s, 7/1/11 Aaa 3,147,413
3,235,000 Ser. A, MBIA, 5 3/4s, 7/1/11 Aaa 3,392,706
2,800,000 Orange Cnty., Local Trans. Auth. Sales Tax Rev. Bonds, FGIC, 6.1s, 2/14/11 Aaa 2,884,000
2,550,000 Orange Cnty., Pub. Fac. Corp. COP (Solid Waste Management), 7 7/8s, 12/1/13 Baa 2,699,813
4,625,000 San Diego, Pub. Facs. Fin. Auth. Swr. Rev. Bonds, FGIC, 5s, 5/15/25 Aaa 4,307,031
3,000,000 Southern CA Public Pwr. Auth. VRDN (Transmission), AMBAC, 3.4s, 7/1/19 VMIG1 3,000,000
5,000,000 U. of CA Rev. Bonds (UCSD Med. Ctr. Satellite Med. Fac.), 7.9s, 12/1/19
(acquired 3/2/92, cost $5,229,150)(double dagger) BBB/P 5,468,750
------------
46,138,963
Colorado (8.0%)
- ------------------------------------------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds
1,000,000 Ser. A, 8 3/4s, 11/15/23 Baa 1,192,500
4,775,000 Ser. A, 8 1/2s, 11/15/23 Baa 5,521,094
4,900,000 Ser. A, 8 1/4s, 11/15/12 Baa 5,622,750
5,200,000 Ser. A, 8s, 11/15/25 Baa 5,915,000
8,000,000 Ser. D, 7 3/4s, 11/15/21 Baa 8,910,000
3,000,000 Ser. D, 7 3/4s, 11/15/13 Baa 3,671,250
------------
30,832,594
Connecticut (1.9%)
- ------------------------------------------------------------------------------------------------------------------------------
4,825,000 CT State Dev. Auth. Poll. Control Rev. Bonds (New England Power Co.),
7 1/4s, 10/15/15 A 5,198,937
2,000,000 CT State Res. Recv. Auth. Muni. Rev. Bonds (Bridgeport Service Fee),
Ser. A, 7 1/2s, 1/1/09 Baa 2,112,500
------------
7,311,437
District of Columbia (0.7%)
- ------------------------------------------------------------------------------------------------------------------------------
2,500,000 DC Rev. Bonds (Georgetown U.), Ser. B, 7.15s, 4/1/21 A 2,684,375
Florida (3.9%)
- ------------------------------------------------------------------------------------------------------------------------------
11,555,000 Broward Cnty., Resource Recvy. Rev. Bonds (SES Broward Cnty.
LP South), 7.95s, 12/1/08 A 12,782,719
2,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds (FL Crushed Stone Co.),
8 1/2s, 12/1/14 B/P 2,240,000
------------
15,022,719
Georgia (2.5%)
- ------------------------------------------------------------------------------------------------------------------------------
4,000,000 Burke Cnty., Dev. Auth. Control Rev. Bonds (Oglethorpe Pwr. Co. ),
MBIA, 8s, 1/1/22# Aaa 4,775,000
4,800,000 De Kalb Cnty., Muni. Hsg. Auth. Rev. Bonds (Briarcliff Park Apts.),
Ser. A, 7 1/2s, 4/1/17 BBB/P 5,016,000
------------
9,791,000
Hawaii (1.3%)
- ------------------------------------------------------------------------------------------------------------------------------
4,500,000 HI State Dept. of Budget & Fin. Special Purpose Mtge.
IFB, 9.391s, 11/1/21 AAA 5,068,125
Illinois (1.9%)
- ------------------------------------------------------------------------------------------------------------------------------
7,000,000 Cook Cnty., G.O. Bonds, FGIC, 5 7/8s, 11/15/22 Aaa 7,148,750
Indiana (0.6%)
- ------------------------------------------------------------------------------------------------------------------------------
1,000,000 Indiana Bond Bank Note (Special Loan Program), Ser. B, 8 1/2s, 2/1/18 A 1,060,000
1,000,000 Rockport, Indl. Poll. Ctrl. Rev. Bonds (Indiana-Michigan Pwr.),
Ser. B, FGIC, 7.6s, 3/1/16 Aaa 1,123,750
------------
2,183,750
Kansas (1.3%)
- ------------------------------------------------------------------------------------------------------------------------------
4,500,000 Burlington, Poll. Control Rev. Bonds (Kansas Gas & Electric Co.),
MBIA, 7s, 6/1/31 Aaa 4,989,375
Louisiana (7.4%)
- ------------------------------------------------------------------------------------------------------------------------------
9,250,000 St. Charles Parish, Poll. Control Rev. Bonds (LA Pwr. & Lt. Co.), 8s, 12/1/14 Baa 10,128,750
W. Feliciana Parish, Poll. Control Rev. Bonds (Gulf States Utils. Co.)
2,500,000 8s, 12/1/24 Ba 2,700,000
5,100,000 7.7s, 12/1/14 Ba 5,648,250
3,000,000 Ser. III, 7.7s, 12/1/14 Ba 3,322,500
6,000,000 Ser. A, 7 1/2s, 5/1/15 Aa 6,495,000
------------
28,294,500
Maryland (0.6%)
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2,000,000 MD, State Hlth. & Higher Edl. Fac. Auth. Rev. Bonds (Doctors
Cmnty. Hosp.), 8 3/4s, 7/1/12 AAA 2,330,000
Massachusetts (7.3%)
- ------------------------------------------------------------------------------------------------------------------------------
8,750,000 MA State Hlth. & Edl. Fac. Auth. IFB (Med. Ctr. of Central MA),
Ser. B, AMBAC, 9.28s, 6/23/22 Aaa 10,325,000
5,000,000 MA State Indl. Fin. Agcy. Rev. Bonds (Cape Cod Hlth. Syst. Issue),
8 1/2s, 11/15/20 Aaa 5,850,000
2,100,000 MA State Wtr. Poll. Auth. Rev. Bonds, Ser. B, 5 1/4s, 8/1/14 Aa 2,086,875
9,405,000 MA State Wtr. Resources Auth. Rev. Bonds, Ser. A, MBIA, 6s, 8/1/20 Aaa 9,734,175
------------
27,996,050
Michigan (3.2%)
- ------------------------------------------------------------------------------------------------------------------------------
1,755,000 Detroit, Dev. Fin. Auth. Tax Increment Rev. Bonds, Ser. A, 8.72s, 5/1/21 BBB/P 2,180,588
2,200,000 Detroit, Wtr. Supply Syst. IFB, FGIC, 8.841s, 7/1/22 Aaa 2,480,500
1,690,000 Highland Park, Fin. Auth. Hosp. Fac. Rev. Bonds (MI Hlth. Care Corp.),
Ser. A, 9 3/4s, 12/1/06 (In Default) + Caa 329,550
3,000,000 MI State Strategic Fund Rev. Bonds (Mercy Svcs. for Aging), 9.4s, 5/15/20 BBB/P 3,390,000
3,630,000 Monroe Cnty., Poll. Ctrl. Rev. Bonds (Detroit Edison), Ser. I, AMBAC, 7.3s, 9/1/19 Aaa 3,979,388
------------
12,360,026
Mississippi (2.3%)
- ------------------------------------------------------------------------------------------------------------------------------
7,950,000 Claiborne Cnty., Poll. Control Rev. Bonds (Middle South Energy Inc.),
Ser. C, 9 7/8s, 12/1/14 Ba 8,854,313
Missouri (3.9%)
- ------------------------------------------------------------------------------------------------------------------------------
2,500,000 MO State Hlth. & Edl. Fac. Auth. Rev. Bonds (BJC Hlth. Syst.),
Ser. A, 6 1/2s, 5/15/20 Aa 2,759,375
8,900,000 SCA Tax Exempt Trust Multi-Fam. Mtge. Rev. Bonds (Whispering Lake),
Ser. A-11, FSA, 7.1s, 1/1/30 Aaa/P 9,422,875
2,500,000 Sikeston, Elec. Auth. Rev. Bonds, MBIA, 6s, 6/1/13 Aaa 2,712,500
------------
14,894,750
Nebraska (2.4%)
- ------------------------------------------------------------------------------------------------------------------------------
2,200,000 NE Investment Fin. Auth. Single Fam. Mtge. IFB, Ser. B,
GNMA Coll., 11.328s, 3/15/22 Aaa 2,439,250
6,375,000 NE Investment Fin. Auth. Single Fam. Mtge. Rev. Bonds, Ser. 1,
GNMA Coll, 8 1/8s, 8/15/38 Aaa 6,677,813
------------
9,117,063
Nevada (1.8%)
- ------------------------------------------------------------------------------------------------------------------------------
6,500,000 Clark Cnty., Indl. Dev. Rev. Bonds (NV Pwr. Co.), 7.8s, 6/1/20 Baa 7,052,500
New York (7.1%)
- ------------------------------------------------------------------------------------------------------------------------------
NY State Dorm. Auth. Rev. Bonds
4,500,000 (City U. Syst.), Ser. F, 7 7/8s, 7/1/17 Aaa 5,118,750
6,250,000 (State U. Edl. Fac.), Ser. A, 7.7s, 5/15/12 Aaa 7,054,687
2,000,000 (City U. Syst.), Ser. A, 7 5/8s, 7/1/20 Aaa 2,260,000
2,450,000 NY State Energy Research & Dev. Auth. Elec. Fac. Rev. Bonds (Cons. Edison
Co. of NY, Inc.), Ser. A, 7 3/4s, 1/1/24 A 2,566,473
700,000 NY State Local Govt. Assistance Corp. VRDN, Ser. B, 3.3s, 4/1/23 VMIG1 700,000
1,535,000 NY State Urban Dev. Corp. Rev. Bonds (Syracuse U. Ctr.), 6s, 1/1/08 Baa 1,598,319
8,780,000 Triborough Bridge & Tunnel Auth. General Purpose Rev. Bonds, Ser. A, 5s, 1/1/24 Aa 8,198,325
------------
27,496,554
North Carolina (0.7%)
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2,500,000 NC Eastern Muni. Pwr. Agcy. Rev. Bonds, Ser. A, 7 1/4s, 1/1/21 Baa 2,553,300
Ohio (1.5%)
- ------------------------------------------------------------------------------------------------------------------------------
5,000,000 OH State Air Quality Dev. Auth. Rev. Bonds (Cleveland Co.), FGIC, 8s, 12/1/13 Aaa 5,881,250
Oklahoma (0.3%)
- ------------------------------------------------------------------------------------------------------------------------------
1,000,000 Tulsa, Indl. Auth. Rev. Bonds (U. of Tulsa), Ser. A, MBIA, 6s, 10/1/16 Aaa 1,080,000
Pennsylvania (4.4%)
- ------------------------------------------------------------------------------------------------------------------------------
3,125,000 Allegheny Cnty. Resc. Fin. Auth. Mtge. Rev. Bonds (Single Fam.), Ser. M,
GNMA Coll., 7.9s, 6/1/11 Aaa 3,292,969
5,000,000 Montgomery Cnty., Indl. Dev. Auth. Rev. Bonds, 7 1/2s, 1/1/12 A 5,406,250
7,600,000 PA State Higher Ed. Assistance Agcy. IFB, Ser. B, MBIA, 11.031s, 3/1/20 Aaa 8,360,000
------------
17,059,219
South Dakota (3.5%)
- ------------------------------------------------------------------------------------------------------------------------------
13,100,000 SD State Bldg. Auth. COP (Building Authority), Ser. A, 7 1/2s, 12/1/16 A 13,362,000
Tennessee (3.8%)
- ------------------------------------------------------------------------------------------------------------------------------
2,600,000 Metro. Govt. Nashville & Davidson Cnty. Tenn. Wtr. & Swr. IFB, AMBAC,
8.317s, 1/1/22 Aaa 2,743,000
10,900,000 SCA Tax Exempt Trust Multi-Fam. Mtge. Rev. Bonds (Steeplechase Falls),
Ser. A-10, FSA, 7 1/8s, 1/1/30 Aaa 11,921,875
------------
14,664,875
Texas (8.7%)
- ------------------------------------------------------------------------------------------------------------------------------
2,770,000 Austin, School Dist. G.O. Bonds, PSFG, 5 3/4s, 8/1/15 Aaa 2,856,560
Austin Util. Syst. Rev. Bonds
340,000 Ser. A, MBIA, 5s, 11/15/07 Aaa 341,700
665,000 Ser. A, MBIA, 5s, 5/15/07 Aaa 668,325
2,500,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds (St. Luke's Lutheran Hosp.),
7.9s, 5/1/11 AAA/P 2,953,125
4,390,000 Matagorda Cnty., Poll. Control Rev. Bonds (Houston Lt. & Pwr.),
Ser. D, FGIC, 7.6s, 10/1/19 Aaa 4,818,025
16,000,000 North Central TX Hlth. Fac. Dev. Corp. Rev. Bonds (Presbyterian Hlth. Syst.),
MBIA, 6.685s, 6/22/21 Aaa 17,020,000
4,500,000 TX State Nat'l Research Lab Communication Superconductor G.O. Bonds, 7 1/8s, 4/1/20 Aaa 4,972,500
------------
33,630,235
Washington (2.4%)
- ------------------------------------------------------------------------------------------------------------------------------
2,650,000 WA State Hlth. Care Fac. VRDN (Sisters Providence), Ser. E, 4s, 10/1/05 VMIG1 2,650,000
6,075,000 WA State Pub. Pwr. Supply Syst. Rev. Bonds (Nuclear No. 1),
Ser. A, 7 1/2s, 7/1/15 Aa 6,674,906
------------
9,324,906
West Virginia (0.2%)
- ------------------------------------------------------------------------------------------------------------------------------
1,400,000 Marion Cnty., Cmnty. Solid Waste Disp. Fac. Rev. Bonds (American Pwr.
Paper Recycling), 8 1/4s, 12/1/11 CCC/P 700,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $360,961,886)*** $ 378,439,969
- ------------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $384,489,910.
Net assets available to common shareholders are $244,476,830.
** The Moody's or Standard & Poor's ratings indicated are
believed to be the most recent ratings available at November
30, 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 November 30,1996
Securities rated by Putnam are indicated by "/P" and
are not publicly rated. Ratings are not covered by the
Report of independent accountants.
*** The aggregate identified cost on a tax basis is
$360,961,886, resulting in gross unrealized appreciation and
depreciation of $20,252,369 and $2,774,286, respectively,
or net unrealized appreciation of $17,478,083.
+ Non-income-producing security.
(double dagger) Restricted, excluding 144A securities, as to public resale.
At the date of acquisition these securities were valued at cost.
The total market value of restricted securities held at
November 30, 1996 was $11,048,750 or 2.9% of net assets.
# A portion of these securities was pledged and segregated with the
custodian to cover margin requirements for futures contracts
at November 30, 1996. The market value of these securities is
$219,650 or less than 0.1% of net assets.
The rates shown on the IFBs which are securities paying variable interest rates that
vary inversely to changes in the market interest rates and VRDNs are the current
interest rates at November 30, 1996, and are subject to change based
on the terms of the security.
The fund had the following industry group
concentrations) greater than 10% at November 30, 1996
as a percentage of net assets:
Utilities 22.7%
Housing 13.8
Transportation 13.2
Hospital/Health Care 10.2
The fund had the following insurance
concentrations greater than 10% at November
30, 1996 as a percentage of net assets:
MBIA 15.3%
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Futures contracts outstanding at November 30, 1996
Total Aggregate Face Expiration Unrealized
Market Value Value Date Depreciation
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UST Bond 20 Years (Short) $6,952,500 $6,900,000 March 1997 $(52,500)
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1996
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $360,961,886) (Note 1) $378,439,969
- ----------------------------------------------------------------------------------------------------------------
Cash 891,422
- ----------------------------------------------------------------------------------------------------------------
Interest receivable 7,181,833
- ----------------------------------------------------------------------------------------------------------------
Receivable for securities sold 590,000
- ----------------------------------------------------------------------------------------------------------------
Total assets 387,103,224
Liabilities
- ----------------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,729,606
- ----------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 661,441
- ----------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 32,385
- ----------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 5,845
- ----------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,274
- ----------------------------------------------------------------------------------------------------------------
Payable for variation margin 54,375
- ----------------------------------------------------------------------------------------------------------------
Other accrued expenses 128,388
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 2,613,314
- ----------------------------------------------------------------------------------------------------------------
Net Assets $384,489,910
Represented by
- ----------------------------------------------------------------------------------------------------------------
Series A remarketed preferred shares
(1,400 shares authorized and outstanding issued at $100,000 per share) (Note 4) $140,000,000
- ----------------------------------------------------------------------------------------------------------------
Paid in capital-common shares (Note 1) 226,369,604
- ----------------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 8,901,036
- ----------------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (8,206,313)
- ----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 17,425,583
- ----------------------------------------------------------------------------------------------------------------
Net assets $384,489,910
Computation of net asset value:
- ----------------------------------------------------------------------------------------------------------------
Series A remarketed preferred shares $140,000,000
- ----------------------------------------------------------------------------------------------------------------
Cumulative undeclared dividends on Series A remarketed preferred shares 13,080
- ----------------------------------------------------------------------------------------------------------------
Net assets allocated to Series A remarketed preferred shares at liquidation preference $140,013,080
- ----------------------------------------------------------------------------------------------------------------
Net assets available to common shares: $244,476,830
- ----------------------------------------------------------------------------------------------------------------
Net asset value per share ($244,476,830 divided by 20,470,991 outstanding shares) $11.94
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended November 30, 1996
<S> <C>
Tax exempt interest income: $25,381,825
- -------------------------------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,679,663
- -------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 279,078
- -------------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 19,906
- -------------------------------------------------------------------------------------------------------
Administrative services (Note 2) 7,864
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 47,811
- -------------------------------------------------------------------------------------------------------
Auditing 47,574
- -------------------------------------------------------------------------------------------------------
Legal 9,336
- -------------------------------------------------------------------------------------------------------
Postage 124,927
- -------------------------------------------------------------------------------------------------------
Exchange listing fees 35,924
- -------------------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 356,889
- -------------------------------------------------------------------------------------------------------
Other 11,310
- -------------------------------------------------------------------------------------------------------
Total expenses 3,620,282
- -------------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (112,649)
- -------------------------------------------------------------------------------------------------------
Net expenses 3,507,633
- -------------------------------------------------------------------------------------------------------
Net investment income 21,874,192
- -------------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (3,879)
- -------------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 20,915
- -------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures contracts during the year (6,157,973)
- -------------------------------------------------------------------------------------------------------
Net loss on investments (6,140,937)
- -------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $15,733,255
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended November 30
---------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------
Net investment income $21,874,192 $23,652,493
- ----------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 17,036 (5,837,577)
- ----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments (6,157,973) 30,521,242
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 15,733,255 48,336,158
- ----------------------------------------------------------------------------------------------------------------
Distributions to Series A remarketed preferred shareholders:
- ----------------------------------------------------------------------------------------------------------------
From net investment income (5,200,089) (5,504,552)
- ----------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments (45,038) (107,562)
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations applicable to common
shareholders (excluding cumulative undeclared
dividends on remarketed preferred shares
of $13,080 and $161,420, respectively) 10,488,128 42,724,044
- ----------------------------------------------------------------------------------------------------------------
Distributions to common shareholders:
- ----------------------------------------------------------------------------------------------------------------
From net investment income (19,568,069) (18,869,148)
- ----------------------------------------------------------------------------------------------------------------
In excess of net realized net realized gain on investments -- (492,000)
- ----------------------------------------------------------------------------------------------------------------
Increase from capital shares transactions from issuance of common shares 2,567,091 2,826,196
- ----------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (6,512,850) 26,189,092
- ----------------------------------------------------------------------------------------------------------------
Net assets
- ----------------------------------------------------------------------------------------------------------------
Beginning of year 391,002,760 364,813,668
- ----------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $8,901,036 and $11,316,328, respectively) $384,489,910 $391,002,760
- ----------------------------------------------------------------------------------------------------------------
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning of year 20,272,824 20,039,145
- ----------------------------------------------------------------------------------------------------------------
Shares issued in connection with reinvestment of distributions 198,167 233,679
- ----------------------------------------------------------------------------------------------------------------
Common shares outstanding at end of year 20,470,991 20,272,824
- ----------------------------------------------------------------------------------------------------------------
Series A remarketed preferred shares outstanding at beginning and end of year 1,400 1,400
- ----------------------------------------------------------------------------------------------------------------
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 November 30
------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period (common shares) $12.37 $11.22 $13.44
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income 1.06 1.17 1.20
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.28) 1.23 (2.03)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .78 2.40 (.83)
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income
- ---------------------------------------------------------------------------------------------------------------------------
to Common Shareholders (.96) (.94) (.97)
- ---------------------------------------------------------------------------------------------------------------------------
to Preferred Shareholders (.25) (.28) (.19)
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
- ---------------------------------------------------------------------------------------------------------------------------
to Common Shareholders -- -- (.21)
- ---------------------------------------------------------------------------------------------------------------------------
to Preferred Shareholders -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
- ---------------------------------------------------------------------------------------------------------------------------
to Common Shareholders -- (.02) (.02)
- ---------------------------------------------------------------------------------------------------------------------------
to Preferred Shareholders --(d) (.01) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (1.21) (1.25) (1.39)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period (common shares) $11.94 $12.37 $11.22
- ---------------------------------------------------------------------------------------------------------------------------
Market value, end of period (common shares) $13.625 $13.500 $11.880
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at market price (common shares)(%)(a) 8.65 22.95 (6.74)
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (total fund) (in thousands) $384,490 $391,003 $364,814
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b)(c) 1.49 1.50 1.45
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%)(b) 6.84 7.50 8.07
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 146.43 122.65 78.97
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year ended November 30
-----------------------------------
1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period (common shares) $12.36 $11.51
- ------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------
Net investment income 1.32 1.35
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .91 .65
- ------------------------------------------------------------------------------------------------------
Total from investment operations 2.23 2.00
- ------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------
From net investment income
- ------------------------------------------------------------------------------------------------------
to Common Shareholders (.96) (.91)
- ------------------------------------------------------------------------------------------------------
to Preferred Shareholders (.16) (.24)
- ------------------------------------------------------------------------------------------------------
From net realized gain on investments
- ------------------------------------------------------------------------------------------------------
to Common Shareholders -- --
- ------------------------------------------------------------------------------------------------------
to Preferred Shareholders (.03) --
- ------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
- ------------------------------------------------------------------------------------------------------
to Common Shareholders -- --
- ------------------------------------------------------------------------------------------------------
to Preferred Shareholders -- --
- ------------------------------------------------------------------------------------------------------
Total distributions (1.15) (1.15)
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period (common shares) $13.44 $12.36
- ------------------------------------------------------------------------------------------------------
Market value, end of period (common shares) $14.000 $13.250
- ------------------------------------------------------------------------------------------------------
Total investment return at market price (common shares)(%)(a) 13.54 20.24
- ------------------------------------------------------------------------------------------------------
Net assets, end of period (total fund) (in thousands) $405,670 $381,681
- ------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b)(c) 1.40 1.45
- ------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%)(b) 8.59 9.20
- ------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 33.73 44.39
- ------------------------------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment
and does not reflect the effect 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 November 30,
1995 and thereafter, includes amounts paid through expense offset arrangements.
Prior period ratios exclude these amounts (Note 2).
(d) Distributions in excess of net realized gain to the preferred shareholders amounted
to less than $0.01 per a common share.
</TABLE>
Notes to financial statements
November 30, 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 provide as high a level of current
income exempt from federal income tax as is believed to be consistent
with preservation of capital. The fund intends to achieve its objective
by investing in a diversified portfolio of tax-exempt municipal
securities that Putnam Investment Management ("Putnam Management"), the
fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc.,
believes do not involve undue risk to income or principal. Under normal
market conditions, the fund will invest at least 80% of its total assets
in tax-exempt municipal securities rated "investment grade" at the time
of investment or, if not rated, determined by Putnam Management to be of
comparable quality.
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. Certain amounts from the prior year have been reclassified to
conform with their current year presentation.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value.
Short-term investments having remaining maturities of 60 days or less
are stated at amortized cost, which approximates market value and other
investments including restricted securities are stated at fair market
value following procedures approved by the 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
taxable 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 November 30, 1996, the fund had a capital loss carryover of
approximately $1,985,000 available to offset future net capital gains,
if any, which will expire on November 30, 2004.
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 seven day period. The applicable dividend rate for
the remarketed preferred shares on November 30, 1996 was 3.41%. 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 dividends payable, defaulted bond interest, realized and
unrealized losses on certain future contracts and market discount.
Reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended November
30, 1996, the fund reclassified $478,674 to increase undistributed net
investment income and $4,334 to increase paid-in-capital, with an
increase to accumulated net realized loss on investments of $483,008.
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. The premium in excess
of the call price, if any, is amortized to the call date; thereafter,
the remaining excess premium is amortized to maturity. Discounts on zero
coupon bonds and original issue discount 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,
including those allocated to the remarketed preferred shares. Such fee
is based on the annual rate of 0.70% of the 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 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 November 30, 1996 fund expenses were reduced by
$112,649 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 $830 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 trustees 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 November 30, 1996, purchases and sales of
investment securities other than short-term investments aggregated
$544,548,014 and $534,723,367, 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 remarketed preferred 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. Additionally, the fund has authorized a separate series of
2,000 Serial Remarketed Preferred shares, which are issuable only under
certain conditions in exchange for Series A shares. No Serial Remarketed
Preferred shares are currently outstanding.
It is anticipated that dividends paid to holders of remarketed preferred
shares will be considered tax-exempt dividends under the Internal
Revenue Code of 1986. To the extent that the fund earns taxable income
and capital gains by the conclusion of a fiscal year, it will be
required to apportion to the holders of the remarketed preferred shares
throughout that year additional dividends as necessary to result in an
after-tax equivalent to the applicable dividend rate for the period.
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 November 30, 1996, no
such restrictions have been placed on the fund.
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
Results of October 31, 1996 shareholder meeting
(Unaudited)
A meeting of shareholders of the fund was held on October 31, 1996. At
the meeting, each of the nominees for Trustees was elected, as follows:
Common Shares Preferred Shares
Votes Votes
Votes for withheld Votes for withheld
---------- --------- --------- --------
Jameson Adkins Baxter 13,111,907 293,478 822 21
Hans H. Estin 13,112,907 292,478 822 21
Ronald J. Jackson 13,114,024 291,361 822 21
Elizabeth T. Kennan 13,115,024 290,361 822 21
Lawrence J. Lasser 13,112,907 292,478 822 21
Donald S. Perkins 13,113,524 291,861 822 21
William F. Pounds 13,114,824 290,561 822 21
George Putnam 13,114,024 291,361 822 21
George Putnam, III 13,115,024 290,361 822 21
Eli Shapiro 13,112,907 292,478 772 71
A.J.C. Smith 13,115,024 290,361 822 21
W. Nicholas Thorndike 13,112,907 292,478 822 21
<TABLE>
<CAPTION>
Results of October 31, 1996 shareholder meeting (continued)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------
Common Shares Preferred shares
- ------------------------------------------------------------------------------------------------------------------
Abstentions Abstentions
Votes Votes and Broker Votes Votes & Broker
For Against Non-Votes For Against Non-Votes
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A proposal to ratify the selection of
Price Waterhouse LLP as auditors
for the fund was approved as follows 13,069,544 83,375 252,466 790 8 45
- ------------------------------------------------------------------------------------------------------------------
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 11,046,828 812,314 1,546,243 771 27 45
- ------------------------------------------------------------------------------------------------------------------
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 10,631,765 1,247,224 1,526,396 760 38 45
- ------------------------------------------------------------------------------------------------------------------
A proposal to amend the fund's
fundamental investment restriction
with respect to investments in
commodities or commodity
contracts was approved as follow 10,536,648 1,352,068 1,516,669 761 37 45
- ------------------------------------------------------------------------------------------------------------------
A proposal to amend the fund's
fundamental investment restriction
with respect to concentration of its
assets was approved as follows 10,992,744 888,590 1,524,051 772 26 45
- ------------------------------------------------------------------------------------------------------------------
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 10,721,974 1,150,238 1,533,173 776 22 45
- ------------------------------------------------------------------------------------------------------------------
A proposal to eliminate the fund's
fundamental investment restriction
with respect to margin transactions
was approved as follows 10,325,353 1,526,146 1,553,866 761 37 45
- ------------------------------------------------------------------------------------------------------------------
A proposal to eliminate the fund's
fundamental investment restriction
with respect to short sales was
approved as follows 10,418,007 1,390,804 1,596,574 721 77 45
- ------------------------------------------------------------------------------------------------------------------
Common Shares Preferred shares
- ------------------------------------------------------------------------------------------------------------------
Abstentions Abstentions
Votes Votes and Broker Votes Votes & Broker
For Against Non-Votes For Against 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 10,368,485 1,454,431 1,582,469 771 27 45
- ------------------------------------------------------------------------------------------------------------------
A proposal to eliminate the fund's
fundamental investment restriction
with respect to investments in
restricted securities was approved
as follows 10,478,036 1,317,931 1,609,418 760 38 45
- ------------------------------------------------------------------------------------------------------------------
A proposal to eliminate the fund's
fundamental investment restriction
with respect to investments in
certain oil, gas and mineral interests
was approved as follows 10,693,351 1,203,151 1,508,883 721 77 45
- ------------------------------------------------------------------------------------------------------------------
A proposal to eliminate the fund's
fundamental investment restriction
with respect to investing to gain
control of a company's management
was approved as follows 10,687,150 1,175,847 1,542,388 771 27 45
- ------------------------------------------------------------------------------------------------------------------
All tabulations are rounded to nearest whole number.
</TABLE>
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
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 N. Coburn
Vice President
Jerome J. Jacobs
Vice President
Blake E. Anderson
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 net asset value.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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29927-058 1/97
