Putnam
Investment
Grade
Municipal
Trust II
Annual
Report
April 30, 1994
For investors seeking
high current income
free from federal
income tax, consistent
with preservation
of capital
Contents
2 How your fund performed
3 From the Chairman
4 Report from Putnam Management
Annual Report
6 Report of Independent Accountants
7 Portfolio of investments owned
12 Financial statements
22 Fund performance supplement
22 Federal tax information
23 Your Trustees
<PAGE>
How your
fund performed
For periods ended April 30, 1994
<TABLE>
<CAPTION>
Lehman
Total return* Fund Brothers
Market Municipal Consumer
NAV price Bond Index Price Index
<S> <C> <C> <C> <C>
One year 2.26% -2.81% 2.16% 2.36%
Life-of-fund 11.47 -3.19 8.11 3.80
(since 11/27/92) 7.89 -2.24 5.61 2.64
</TABLE>
<TABLE>
<CAPTION>
Share data (common shares) Market
NAV price
<S> <C> <C>
April 30, 1993 $ 15.00 $ 14.625
April 30, 1994 $ 14.30 $ 13.250
</TABLE>
<TABLE>
<CAPTION>
Distributions (a)
Fiscal year ended Short-term
April 30, 1994 Investment capital
(common shares) Number income gains Total
<S> <C> <C> <C> <C>
12 $ 0.96 $ 0.077 $ 1.037
(preferred shares) Series Total
630 shares A $1,306.82 $ 91.90 $1,398.72
630 shares B $1,887.79 $142.22 $2,030.01
</TABLE>
<TABLE>
<CAPTION>
Current returns Taxable equivalents+
(common shares)
at the end of
the period NAV Market price NAV Market price
<S> <C> <C> <C> <C>
Current dividend rate 6.71% 7.25% 11.11% 12.00%
</TABLE>
*Performance data represent past results. Investment return, net asset value
and market price will fluctuate so an investor's shares, when sold, may be
worth more or less than their original cost.
(a) Capital gains, if any, are taxable, and income from this fund may be
subject to state and local taxes. For some investors, investment income may
also be subject to the alternative minimum tax.
+Assumes the maximum federal tax rate of 39.6%. Results for investors subject
to lower tax rates would not be as advantageous, although many such investors
would have the opportunity to receive attractive tax benefits from a fund
investment. Consult your tax advisor for more guidance.
Terms and definitions
Total return is the change in value of an investment from the beginning to
the end of a period, assuming the reinvestment of all distributions. It may
be shown at net asset value or at market price.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, the liquidation preference and cumulative undeclared dividends
on the remarketed preferred shares, divided by the number of outstanding
common shares. (See Note 3 in notes to financial statements).
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.
Current dividend rate is calculated by annualizing the income portion of the
fund's most recent distribution and dividing by the NAV or market price on
the last day of the period.
Taxable equivalent return is the return that a taxable investment would have
to produce to equal the fund's current return.
Please see the fund performance supplement on page 22 for additional
information about performance comparisons.
<PAGE>
From the
Chairman
(George Putnam photo)
George Putnam
Chairman of the Trustees
(C) Karsh, Ottawa
Dear Shareholder:
Putnam Investment Grade Municipal Trust II continues to meet its primary
objective of providing attractive monthly income free from federal taxes. On
April 30, 1994, your fund's dividend rate at net asset value was 6.71%--an
attractive tax-free yield given the rates available on alternative taxable
investments. The fund has achieved this goal by concentrating assets in such
sectors as health care and utilities--industries that historically have
offered relatively high-coupon bonds.
The economy's strength during the fourth quarter of 1993 caused much
nervousness in the bond markets during the first few months of 1994. Renewed
fears of inflation led the Federal Reserve to raise short-term interest rates
for the first time in five years. As a result, interest rates have climbed
dramatically. The 30-year Treasury bond yield reached 7.31% by the end of the
annual period--a considerable increase from the 20-year low of 5.79% last
October. Your fund's total return performance suffered somewhat in the wake
of rising interest rates but weathered better than the market in general.
The ability to fine-tune a portfolio in response to changing economic
conditions demonstrates a significant advantage of professional management.
Fund manager Thomas Goggins has worked to minimize the price depreciation
that naturally results from a rising interest rate environment while
capturing the higher income potential offered by newer municipal bonds coming
to market.
In spite of the bond market volatility amid speculation about future interest
rate increases, we believe Putnam Investment Grade Municipal Trust II's
methodically structured portfolio will continue to deliver attractive levels
of tax-free income in the coming months and beyond.
Respectfully yours,
(Signature George Putnam)
George Putnam
June 15, 1994
<PAGE>
Report from
Putnam Management
Top state
concentrations
(on 4/30/94 as a
% of net assets)
Geographically, the
fund is diversified
among 24 states. The
top five states represent
51.2% of the
portfolio.
New York 19.2%
Massachusetts 9.9%
California 8.4%
Texas 7.0%
Virginia 6.7%
Favorable economic and supply/demand trends were not enough to offset the
dampening effect this spring's sudden interest rate increases had on bond
prices. However, Putnam Investment Grade Municipal Trust II turned in a
positive performance for the 12 months ended April 30, 1994. The fund's total
return of 2.26% at net asset value should be viewed in the right perspective:
the period included a dramatic decline that affected every sector of the
fixed-income market, and your fund fared somewhat better than the Lehman
Brothers Municipal Bond Index, which posted a 2.16% return for the same
period.
On a yield basis, the fund continues to provide you with a stable source of
tax-exempt income. To bring home the tax advantages of a fund investment,
consider this: to keep pace with the fund's 6.71% dividend rate at net asset
value, shareholders who pay the maximum 39.6% federal tax rate would have had
to receive 11.11% from an equivalent taxable investment. Most investors in
lower brackets would also enjoy tax benefits, though not necessarily to the
same extent.
Inflation fears fuel rising rates Having reached a 20-year low in October
1993, low interest rates dominated the financial landscape until the last
three months of the annual period. At this point, rates began to climb
noticeably. Strong economic indicators for the fourth quarter of 1993 and
throughout the first months of 1994 aggravated fears of rising inflation and
led the Federal Reserve to raise short-term interest rates three times in
three months. While there has been much debate about the timing and degree of
these rate increases, the bond market reacted as any economist would have
predicted. Prices on existing bonds fell as interest rates on Treasury bonds
increased across the entire yield spectrum.
Municipal bonds have not been immune to the price depreciation that naturally
follows interest rate increases. However, the news is not all bad. Investors
preoccupied with short-term losses and inflationary fears may well overlook
sound buying opportunities. With the aid of our extensive in-house research
capabilities, we're able to identify and capture promising securities at
attractive prices. And, of course, there is an obvious benefit of rising
interest rates: the fund's income stream can directly benefit from the
purchase of new bonds coming to market--bonds that carry a higher coupon than
has been available during recent months.
We expect the U.S. economy to continue demonstrating a respectable level of
growth. Consequently, we believe interest rates are likely to remain at
current levels or may even rise further. We will be monitoring unit labor
costs closely, since increases in wage levels are a major contributor to
inflation and thus help indicate the future direction of interest rates.
Proactive management Leveraging techniques have played an important role in
enhancing the fund's income level since its inception in 1992. By issuing and
selling preferred shares of the fund to institutional
<PAGE>
investors, we have been able to reinvest the proceeds in longer-term,
higher-paying bonds. A portion of the income generated from these
higher-paying bonds is then distributed to the fund's common shareholders,
enhancing their monthly dividend level.
The ability to implement effective leveraging strategies requires an acute
awareness of interest rate trends. Last fall, well ahead of the Federal
Reserve's recent increases in short-term rates, we took pre-emptive steps to
reduce price volatility by extending the dividend period for one class of the
fund's preferred shares from 28 days to 15 months. This helped reduce the
fund's exposure to potential interest rate increases and should continue to
do so over the near term. In effect, this strategy reduces the fund's
susceptibility to higher interest rate payments on the preferred shares,
benefiting shareholders if short-term rates continue to rise.
A longer view Going forward, we expect to add to existing portfolio
positions, taking advantage of today's less expensive price levels. Bonds
from states such as Pennsylvania, New York, and Massachusetts, where supply
is expected to tighten later this year and into 1995, are of particular
interest to us at present. The double-tax-exempt nature of these bonds
contributes to a higher-than-average demand by investors seeking refuge from
higher taxes.
Top industry sectors as of 4/30/94
(as a percentage of net assets)
Utilities 25.0%
Hospitals/Healthcare 19.5%
Transportation 14.6%
Education 5.8%
Housing 4.0%
There may be some redeployment of assets within the portfolio as bonds which
we believe have reached their potential are sold and the proceeds reinvested
in higher-yielding, higher-quality bonds. However, the portfolio's average
quality of AA is not expected to change.
Our fundamental outlook for municipal bonds remains a positive one. Favorable
supply/demand trends have played a pivotal role in your fund's performance,
and are expected to continue to do so during the upcoming fiscal year. Rising
interest rates have had a sobering effect on the refinancing phenomenon,
reducing supply from one of the largest sources of new issues. In the face of
higher taxes and strengthening demand, shrinking supply could further enhance
the value of the bonds in the portfolio, and thus, the fund's net asset
value.
As always, we remain vigilant for new bonds that can help the fund meet its
objective of high tax-free income and low volatility of net asset value. In
the current environment, we believe our hands-on approach will be critical to
successfully uncovering the investment opportunities that exist in today's
market.
<PAGE>
Putnam
Investment
Grade
Municipal
Trust II
Annual
Report
For the Year Ended April 30,1994
Report of Independent Accountants
To the Trustees and Shareholders of
Putnam Investment Grade Municipal Trust II
We have audited the accompanying statement of assets and liabilities of
Putnam Investment Grade Municipal Trust II, including the portfolio of
investments owned, as of April 30, 1994, and the related statement of
operations for the year then ended, the statement of changes in net assets
and the "Financial Highlights" for the year ended April 30, 1994 and for the
period November 27, 1992 (commencement of operations) to April 30, 1993.
These financial statements and "Financial Highlights" are the responsibility
of the Fund's management. Our responsibility is to express an opinion on
these financial statements and "Financial Highlights" based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
"Financial Highlights" are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of April 30, 1994 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and "Financial Highlights" referred
to above present fairly, in all material respects, the financial position of
Putnam Investment Grade Municipal Trust II as of April 30, 1994, the results
of its operations for the year then ended, the changes in its net assets and
the "Financial Highlights" for the year ended April 30, 1994 and for the
period November 27, 1992 (commencement of operations) to April 30, 1993, in
conformity with generally accepted accounting principles.
Coopers & Lybrand
Boston, Massachusetts
June 13, 1994
<PAGE>
Portfolio of
investments owned
April 30, 1994
Municipal Bonds and Notes (99.3%)(a)
<TABLE>
<CAPTION>
Principal Amount Ratings(b) Value
<S> <C> <C> <C>
California (8.4%)
$1,515,000 Fountain Valley, Agcy. for
Cmnty. Dev. Tax Alloc. Rev.
Bonds (Indl. Area Redev.
Project), 9.1s, 1/1/16 BBB $ 1,624,837
Irvine Ranch, Wtr. Dist.
Variable Rate Demand Notes
(VRDN)
1,000,000 3.1s, 6/1/15 A 1,000,000
1,000,000 Ser. B, 2.95s, 10/1/05 A 1,000,000
5,875,000 Los Angeles, Regl. Arpts.
Impt. Corp. Rev. Bonds
(Western Airlines-Delta
Airlines), 11-1/4s, 11/1/25 Ba 6,535,937
2,750,000 Oceanside, Wtr. Use Assn.
Fin. Program, Certif. of
Participation, Ser. A,
American Municipal Bond
Assurance Corp. (AMBAC),
6-1/2s, 10/1/17 AAA 2,805,000
1,000,000 Orange Cnty., Variable
Certif. of Participation
(Sanitation Dist.)
3.05s, 8/1/15 A 1,000,000
2,000,000 AMBAC, 2.2s, 8/1/16 AAA 2,000,000
2,500,000 San Jose, Fin. Auth. Rev.
Bonds (Convention Ctr.
Rfdg. Project), Ser. C,
6.4s, 9/1/22 A 2,487,500
2,800,000 Stanislaus, Solid Waste
Fac. Certif. of
Participation (Ogden Martin
Syst. Inc. Project),
7-5/8s, 1/1/10 BBB 3,017,000
21,470,274
Colorado (4.1%)
2,050,000 Denver, City & Cnty. Arpt.
Rev. Bonds, Ser. D, 7-3/4s,
11/15/21 Baa 2,083,312
$9,000,000 Denver, City & Cnty. Arpt.
Special Facs. Rev. Bonds
(United Air Lines Project),
Ser. A, 6-7/8s, 10/1/32 Baa $ 8,336,250
10,419,562
Connecticut (3.2%)
8,000,000 CT State Hsg. Fin. Auth.
Rev. Bonds, Ser. B, 6-3/4s,
11/15/23 AA 8,110,000
Florida (5.4%)
3,300,000 Citrus Cnty., Poll. Control
Rev. Bonds (FL Pwr.
Corp.-Crystal River), Ser.
B, 6.35s, 2/1/22 A 3,300,000
9,725,000 Tampa, Cap. Impt. Program
Rev. Bonds, Ser. B, 8-3/8s,
10/1/18 BBB 10,454,375
13,754,375
Georgia (1.3%)
3,150,000 Appling Cnty. Dev. Auth.
Poll. Control Rev. Bonds
(Hatch Project), 10.6s,
10/1/15 A 3,441,375
Illinois (3.6%)
8,000,000 Central Lake Cnty., Wtr.
Agcy. Rev. Bonds, 6s,
2/1/19 Aa 7,750,000
1,270,000 Chicago, Gas Supply Rev.
Bonds (Peoples Gas Lt. &
Coke Co.), Ser. A, 8.1s,
5/1/20 AA 1,420,812
9,170,812
Indiana (1.5%)
3,500,000 Petersburg, Indl. Poll.
Control Rev. Bonds
(Indianapolis Pwr. & Lt.
Co.), 9-5/8s, 9/1/12 AA 3,775,625
<PAGE>
Kentucky (1.9%)
$5,000,000 Kenton Cnty., Arpt. Board
Special Fac. Rev. Bonds
(Delta Airlines Project),
Ser. A, 7-1/8s, 2/1/21 Ba $ 4,818,750
Louisiana (2.2%)
2,500,000 Shreveport, Wtr. & Swr.
Rev. Bonds, Ser. A,
Financial Guaranty
Insurance Co. (FGIC),
5.95s, 12/1/14 AAA 2,418,750
St. Charles Parish, Poll.
Control Rev. Bonds (LA
Pwr. & Lt.),
500,000 8-1/4s, 6/1/14 Baa 546,875
2,500,000 (Union Carbide Project),
7.35s, 11/1/22 Baa 2,600,000
5,565,625
Maryland (1.7%)
3,500,000 MD State Hlth. & Higher
Edl. Facs. Auth. Rev. Bonds
(Doctors Cmnty. Hosp.),
8-3/4s, 7/1/22 Aaa 4,213,125
Massachusetts (9.9%)
1,000,000 MA State General Obligation
(G.O.) Bonds, Ser. B, VRDN,
3.1s, 12/1/97 A 1,000,000
MA State Hlth. & Edl. Fac.
Auth. Residual Interest
Bonds (RIBS)
15,000,000 (Med. Ctr. of Central MA),
Ser. B, AMBAC, 10.43s,
6/23/22 AAA 15,881,250
2,000,000 (Boston U.), Ser. L,
Municipal Bond Insurance
Assn. (MBIA), 10.358s,
10/1/31 AAA 2,102,500
$4,130,000 MA State Hsg. Fin. Agcy.
Res. Dev. Rev. Bonds
Federal National Mortgage
Association (FNMA), Ser. E,
6-1/4s, 11/15/12 AAA $ 4,135,163
2,000,000 MA State Indl. Fin. Agcy.
Rev. Bonds (Brookhaven),
Ser. A, 7s, 1/1/09 BBB/P 2,002,500
25,121,413
Michigan (2.0%)
2,000,000 Dickinson Cnty., Econ. Dev.
Corp. Poll. Control Rev.
Bonds (Champion Intl. Corp.
Project), 5.85s, 10/1/18 Baa 1,777,500
3,460,000 St. Clair Shores, Econ.
Dev. Corp. Rev. Bonds (Bon
Secours Hlth. Syst.), 6s,
8/15/27 AAA 3,256,725
5,034,225
Minnesota (2.6%)
2,000,000 St. Louis Park, Hlth. Care
Fac. Rev. Bonds, Ser. A,
AMBAC, 5.2s, 7/1/23 AAA 1,702,500
St. Paul, Hsg. & Redev.
Auth. Hosp. Rev. Bonds
(Healtheast Project),
3,000,000 Ser. B, 9-3/4s, 11/1/17 Baa 3,363,750
1,500,000 Ser. A, 6-5/8s, 11/1/17 Baa 1,417,500
6,483,750
Mississippi (2.7%)
6,000,000 Claiborne Cnty., Poll.
Control Rev. Bonds (Middle
South Energy, Inc.), Ser.
C, 9-7/8s, 12/1/14 BBB/P 6,922,500
<PAGE>
Nevada (2.8%)
$2,500,000 Clark Cnty., Indl. Dev.
Rev. Bonds (Southwest Gas
Corp.), Ser. A, 6-1/2s,
12/1/33 BBB $ 2,334,375
5,000,000 Clark Cnty., Passenger Fac.
Rev. Bonds (Las
Vegas-McCarran Intl.
Arpt.), Ser. A, AMBAC, 6s,
7/1/22(c) AAA 4,762,500
7,096,875
New York (19.2%)
6,370,000 Babylon, Indl. Dev. Agcy.
Resource Recvy. Rev. Bonds
(Ogden Martin Syst.), Ser.
A, 8-1/2s, 1/1/19 Baa 7,022,925
2,750,000 Metro. Trans. Auth. Svcs.
Contract Rev. Bonds
(Commuter Fac.-Ser. 5), 7s,
7/1/12 Baa 2,822,188
1,600,000 NY City, Indl. Dev. Agcy.
Special Facs. Rev. Bonds
(American Airlines, Inc.
Project), 8s, 7/1/20 Baa 1,702,000
15,675,000 NY City, G.O. Bonds, Ser.
B, 7s, 10/1/13 A 16,831,031
1,000,000 NY City, VRDN, 2.95s,
8/15/23 A 1,000,000
7,850,000 NY State Dorm. Auth. Rev.
Bonds (State U. Edl.
Facs.), Ser. A, 6-3/4s,
5/15/21 Baa 8,693,875
3,200,000 NY State Med. Care Fac.
Fin. Agcy. Rev. Bonds
(Hosp. & Nursing Home),
Ser. C, 6.65s, 8/15/32 Aa 3,244,000
$7,300,000 NY State Pwr. Auth. Rev.
and General Purpose Bonds,
Ser. AA, 6-1/4s, 1/1/23 AA $ 7,336,500
48,652,519
Ohio (2.9%)
5,000,000 Cleveland, Parking., Fac.
Rev. Bonds, 8.1s,
9/15/22 BBB/P 5,318,750
2,000,000 OH State Air Qlty. Dev.
Auth. Poll. Control Rev.
Bonds (Ohio Edison Co.),
Ser. B, FGIC, 7.1s, 6/1/18 AAA 2,157,500
7,476,250
Oklahoma (0.5%)
1,250,000 Oklahoma City, Indl. &
Cultural Fac. Rev. Bonds
(Hosp.-Hillcrest), Ser. B,
6.45s, 8/1/20 A 1,182,813
Pennsylvania (5.7%)
3,000,000 Allegheny Cnty., Hosp. Dev.
Auth. Rev. Bonds
(Magee-Womens Hosp.), FGIC,
6s,
10/1/13 AAA 2,936,250
4,895,000 Beaver Cnty., Indl. Dev.
Auth. Poll. Control Rev.
Bonds (OH Edison Co.-Beaver
Valley), Ser. A, 10-1/2s,
10/1/15 Baa 5,353,906
5,000,000 Dauphin Cnty., Gen. Auth.
Hosp. Rev. Bonds
(Hapsco-Western PA Hosp.
Project), Ser. A, MBIA,
6-1/2s, 7/1/12 AAA 5,093,750
<PAGE>
$1,000,000 Delaware Cnty., Indl. Dev.
Auth. Arpt. Fac. Variable
Certif. of Participation
(United Parcel Service
Project), 3.1s, 12/1/15 Aaa $ 1,000,000
14,383,906
South Carolina (2.0%)
5,000,000 Piedmont, Muni. Pwr. Agcy.
Elec. Rev. Bonds, MBIA,
6.3s, 1/1/22 AAA 4,962,500
Tennessee (1.5%)
4,000,000 Metro. Nashville & Davidson
Cnty., Hlth. & Edl. Fac.
Board Rev. Bonds
(Vanderbilt U.), Ser. A,
6s, 10/1/22 AA 3,910,000
Texas (7.0%)
3,000,000 Dallas-Fort Worth, Intl.
Arpt. Fac. Impt. Corp. Rev.
Bonds (American Airlines,
Inc.), 7-1/4s, 11/1/30 Baa 2,985,000
Harris Cnty., Certif. of
Participation
3,000,000 6s, 12/15/11 AA 3,000,000
2,000,000 6s, 12/15/10 AA 2,000,000
4,000,000 Northeast Hosp. Auth. Rev.
Bonds (Northeast Med. Ctr.
Hosp.), Ser. B, FGIC,
7-1/4s, 7/1/22 Baa 3,980,000
TX Hsg. Agcy. Single Fam.
Mtge. Rev. Bonds
4,465,000 Ser. 85 A, 9-3/8s, 9/1/16 Aa 4,704,994
1,185,000 Ser. B, 9-3/8s, 9/1/15 Aa 1,235,363
17,905,357
Virginia (6.7%)
Fairfax Cnty., Wtr. Auth.
Rev. Bonds
7,000,000 6s, 4/1/22 AA 6,746,250
8,000,000 5-3/4s, 4/1/29 AA 7,300,000
$3,000,000 Richmond, Metro Auth.
Expressway Rev. Bonds, Ser.
B, FGIC, 6-1/4s, 7/15/22 AAA $ 2,981,250
17,027,500
Washington (0.5%)
1,500,000 WA State Hlth. Care Fac.
Auth. Rev. Bonds (Multicare
Med. Ctr.-Tacoma), FGIC,
5-3/4s, 8/15/22 AAA 1,366,875
Total Investments
(cost $250,210,552)(d) $ 252,266,006
</TABLE>
Notes
(a) Percentages indicated are based on total net assets of $254,025,031. Net
assets available to common shareholders are $191,025,031, which correspond to
a net asset value per common share of $14.30.
(b) The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at April 30, 1994 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 ratings the
agencies would ascribe to these securities at April 30, 1994. Securities
rated by Putnam are indicated by "/P" and are not publicly rated. Ratings are
not covered by the Report of Independent Accountants.
(c) A portion of this security was pledged to cover margin requirements for
future contracts at April 30, 1994. The market value segregated with the
custodian for transactions in futures contracts was $952,500.
(d) The aggregate identified cost for federal income tax purposes is
$250,210,552, resulting in gross unrealized appreciation and depreciation of
$5,921,211 and $3,865,757, respectively, or net unrealized appreciation of
$2,055,454.
The rates shown on Variable Rate Demand Notes (VRDN) and Residual Interest
Bonds (RIBS) are the current interest rates at April 30, 1994, which are
subject to change based on the terms of the security.
<PAGE>
The Fund had the following industry group concentrations greater than 10% on
April 30, 1994 (as a percentage of net assets):
<TABLE>
<CAPTION>
<S> <C>
Utilities 25.0%
Hospitals/Healthcare 19.5
Transportation 14.6
Notes
</TABLE>
The Fund had the following insurance group concentration greater than 10% on
April 30, 1994 (as a percentage of net assets):
AMBAC 10.7%
Futures Contracts Outstanding at April 30, 1994
<TABLE>
<CAPTION>
Total Aggregate Expiration Unrealized
Value Face Value Date Appreciation
<S> <C> <C> <C> <C>
US Treasury
Bond Futures
(Sell) $16,929,000 $17,204,536 Jun/94 $275,536
US Treasury
Note Futures
(Sell) 13,164,060 13,585,488 Jun/94 421,428
$696,964
</TABLE>
<PAGE>
Statement of
assets and liabilities
April 30, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Assets Investments in securities, at value (identified cost $250,210,552) (Note 1) $252,266,006
Cash 1,227,560
Interest and other receivables 4,462,479
Unamortized organization expenses (Note 1) 18,972
Variation margin on futures contracts 62,144
Total assets 258,037,161
Liabilities Distributions payable to shareholders $1,257,544
Payable for securities purchased 2,269,434
Payable for compensation of Manager (Note 4) 441,905
Payable for investor servicing and custodian fees (Note 4) 34,218
Payable for administrative services (Note 4) 5,955
Other accrued expenses 3,074
Total liabilities 4,012,130
Net assets $254,025,031
Represented by Series A and B remarketed preferred shares, without par
value; 1,260 shares authorized (1,260 shares issued at
$50,000 per share liquidation preference) (Note 3) $ 63,000,000
Common shares, without par value; unlimited shares
authorized; 13,357,092 shares outstanding 186,311,373
Undistributed net investment income 2,098,061
Accumulated net realized loss on transactions (136,821)
Net unrealized appreciation of investments and futures transactions 2,752,418
Net assets $254,025,031
Computation of Remarketed preferred shares at liquidation preference $ 63,000,000
net asset value
Net assets available to common shares:
Net asset value per share $14.30 ($191,025,031 divided by
13,357,092 shares) 191,025,031
Net assets $254,025,031
</TABLE>
<PAGE>
Statement of
operations
For the year ended April 30, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Tax exempt investment income $18,010,462
Expenses:
Compensation of Manager (Note 4) $1,872,768
Investor servicing and custodian fees (Note 4) 228,094
Compensation of Trustees (Note 4) 11,499
Reports to shareholders 9,709
Auditing 48,886
Legal 13,511
Postage 7,087
Administrative services (Note 4) 10,476
Exchange listing fees 29,350
Amortization of organization expenses (Note 1) 5,304
Preferred share remarketing agent fees 89,845
Other 4,822
Total expenses 2,331,351
Net investment income 15,679,111
Net realized gain on investments (Notes 1 and 5) 518,202
Net gain on futures (Notes 1 and 5) 520,946
Net unrealized depreciation of investments and
futures during the year (9,883,736)
Net loss on investment transactions (8,844,588)
Net increase in net assets resulting from operations $ 6,834,523
</TABLE>
<PAGE>
Statement of
changes in net assets
<TABLE>
<CAPTION>
For the period
For the November 27, 1992
year (commencement
ended of operations) to
April 30 April 30
1994 1993
<S> <S> <C> <C>
Increase in net assets Operations:
Net investment income $ 15,679,111 $ 5,889,316
Net realized gain on investments 518,202 --
Net gain on futures 520,946 --
Net unrealized appreciation/depreciation of investments (9,883,736) 12,636,154
Net increase in net assets resulting from operations 6,834,523 18,525,470
Distributions to remarketed preferred shareholders from:
Net investment income (2,012,609) (358,483)
Capital gains (147,491) --
Net increase in net assets resulting from operations applicable
to common shareholders (excluding cumulative undeclared dividends
on remarketed preferred shares of $0 and $38,058, respectively) 4,674,423 18,166,987
Distributions to common shareholders from:
Net investment income (12,823,202) (4,276,072)
Net realized gains (1,028,478) --
Increase from capital share transactions
Issuance of remarketed preferred shares (Note 3) -- 63,000,000
Issuance of common shares (Note 2) -- 187,719,714
Underwriting commissions and offering costs on remarketed
preferred shares (Notes 2 and 3) (185,652) (1,322,689)
Total increase (decrease) in net assets (9,362,909) 263,287,940
Net assets Beginning of period 263,387,940 100,000
End of year (including undistributed net investment income of
$2,098,061 and $1,254,761, respectively) $254,025,031 $263,387,940
Number of fund shares Common shares outstanding at beginning of period (Note 2) 13,357,092 7,092
Common shares issued in public offering (Note 2) -- 13,350,000
Common shares outstanding at end of period 13,357,092 13,357,092
Remarketed preferred shares at beginning of period 1,260 --
Remarketed preferred shares issued in public offering (Note 3) -- 1,260
Remarketed preferred shares outstanding at end of period 1,260 1,260
</TABLE>
<PAGE>
Financial Highlights
(For a share outstanding
throughout the period)
<TABLE>
<CAPTION>
For the period
November 27, 1992
For the year (commencement of
ended operations) to
April 30 April 30
1994 1993
<S> <C> <C>
Net Asset Value, Beginning of Period $ 15.00 $ 14.06*
Investment operations:
Net Investment Income 1.16 .44(a)
Net Realized and Unrealized Gain/Loss on Investments (.66) .95
Total from Investment Operations .50 1.39
Less Distributions from:
Net Investment Income:
to Preferred Shareholders (.15) (.03)**
to Common Shareholders (.96) (.32)
Net Realized Gain on Investments:
to Preferred Shareholders (.01) --
to Common Shareholders (.08) --
Total Distributions (1.20) (.35)
Preferred Share Offering Costs -- (.10)
Net Asset Value, End of Period (common shares) $ 14.30 $ 15.00
Market Value, End of period (common shares) $ 13.25 $ 14.63
Total Investment Return at Market Value (common
shares)(%)(b) (2.81) (0.88)(c)
Net Assets, End of Period (in thousands) $254,025 $263,388
Ratio of Expenses to Average Net Assets (%)(d) 1.14 .64(a)(c)
Ratio of Net Investment Income to Average Net Assets (%)(d) 6.66 6.85(a)(c)
Portfolio Turnover Rate (%) 32.27 4.65(e)
</TABLE>
* Represents initial net asset value of $14.10 less offering expenses of
approximately $0.04.
** Preferred shares were issued on February 18, 1993. (See Note 3).
(a) Reflects a waiver of the management fee for the period November 27, 1992
to February 19, 1993. As a result of the waiver, expenses of the Fund for the
period ended April 30, 1993 reflect a reduction of $0.02 per share.
(b) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(c) Annualized
(d) Ratios reflect net assets available to common shares only; net investment
income ratio also reflects reduction for dividend payments to preferred
shareholders.
(e) Not annualized.
<PAGE>
Notes to
financial statements
April 30, 1994
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
portfolio of investment grade municipal securities that the Fund's Manager
believes does not involve undue risk to income or principal.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A) Security valuation Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the Trustees, which
uses information with respect to transactions in bonds, quotations from bond
dealers, market transactions in comparable securities and various
relationships between securities in determining value. The fair value of
restricted securities is determined by the Manager following procedures
approved by the Trustees, and such valuations and procedures are reviewed
periodically by Trustees.
B) Determination of net asset value Net asset value of the common shares is
determined by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses),
undeclared dividends on remarketed preferred shares and the liquidation value
of any outstanding remarketed preferred shares, by the total number of common
shares outstanding.
C) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
D) Futures A futures contract is an agreement between two parties to buy and
sell a 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
tax-exempt securities equal to the minimum "initial margin" requirements of
the futures exchange. 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
<PAGE>
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 the underlying securities may not correspond to the change in value
of the futures contracts.
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.
F) Distributions to shareholders Distributions to common and preferred
shareholders are recorded by the Fund on the ex-dividend date. Dividends on
each share of remarketed preferred shares will accumulate from its Date of
Original Issue and will be payable, when, as and if declared by the Trustees,
on the applicable Dividend Payment Dates. Each dividend period for the
remarketed preferred shares was generally a 28-day period until February 17,
1994 for Series A. Dividends are fixed on Series B from date of issue to
January 5, 1995. The applicable dividend rates for the remarketed preferred
shares on April 30, 1994 were: Series A 3.26%; Series B 3.95% per annum until
January 4, 1995. On February 17, 1994 a special dividend period began with
respect to Class A preferred. The next dividend reset date for those shares
is May 17, 1994.
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, stepped-coupon bonds
and original issue discount bonds is accreted according to the effective
yield method.
H) Unamortized organization expenses Expenses incurred by the Fund in
connection with its organization aggregated $26,528. These expenses are being
amortized on a straight-line basis over a five-year period.
<PAGE>
Note 2
Initial
capitalization
and offering
of shares
The Fund was established as a Massachusetts business trust under the laws of
Massachusetts on October 2, 1992.
During the period October 2, 1992 to November 26, 1992 the Fund had no
operations other than those related to organizational matters, including the
initial capital contribution of $100,000, and the issuance of 7,092 shares to
Putnam Mutual Funds Corp. on November 12, 1992.
On November 27, 1992, the Fund completed the initial offering of 11,700,000
of its common shares for which it received net proceeds of $164,970,000
before deducting $700,938 of initial offering expenses (such offering
expenses and the Fund's organizational expenditures were paid initially by
Putnam Investment Management, Inc., the Fund's Manager, and the Fund has
reimbursed the Manager for such costs). Regular investment operations
commenced on November 27, 1992.
On January 5, 1993, the Fund completed a supplemental offering 1,650,000
shares for which is received net proceeds of $23,265,000.
Note 3
Remarketed
preferred
shares
On February 18, 1993, the Fund issued 630 shares of Series A Remarketed
Preferred and 630 shares of Series B Remarketed Preferred. Proceeds to the
Fund, before deducting underwriting expenses of $1,102,500 and offering
expenses of $220,189, amounted to $63,000,000. These expenses were charged
against net assets of the Fund available to common shareholders. Both the
Series A and Series B 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.
There were no undeclared dividends on preferred shares at April 30, 1994.
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 divi-
<PAGE>
dends to common shareholders or may be required to redeem certain of the
remarketed preferred shares. At April 30, 1994, there were no such
restrictions on the Fund.
Note 4
Management fee,
administrative
services, and
other transactions
Compensation of Putnam Investment Management, Inc. "Putman Management" the
Fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc., for
management, investment advisory and administrative service is paid quarterly
based on the average net assets of the Fund. Such fee, in the aggregate, is
based on the annual rate of 0.70% of the first $500 million of the average
net asset value of the Fund, 0.60% of the next $500 million, 0.55% of the
next $500 million, and 0.50% of any excess over 1.5 billion of such average
net asset value.
If dividends payable on remarketed preferred shares during any dividend
payment period plus any expenses attributable to remarketed preferred shares
for the period exceed the Fund's net income attributable to the proceeds of
the remarketed preferred shares during that period, then the fee payable to
Putnam Management for that period will be reduced by an agreed upon formula.
See "Administration Services Contract".
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. For the year ended
April 30, 1994, the Fund paid $10,476 for these services.
Trustees of the Fund receive an annual Trustee's fee of $820 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. Fees paid for these investor servicing and custodial
functions for the year ended April 30, 1994 amounted to $228,094.
Investor servicing and custodian fees reported in the Statement of operations
for the year ended April 30, 1994 have been reduced by credits allowed by
PFTC.
<PAGE>
Note 5
Purchases
and sales
of securities
During the year ended April 30, 1994, purchases and sales of investment
securities other than short-term investments aggregated $83,825,045 and
$84,036,122, respectively. Purchases and sales of short-term municipal
obligations aggregated $48,900,000 and $47,000,000, respectively. In
determining the net gain or loss on securities sold, the cost of securities
has been determined on the identified cost basis.
The following is a summary of futures contracts activity during the year:
<TABLE>
<CAPTION>
Sales of Futures Contracts
Number of Aggregate
Contracts Face Value
<S> <C>
Contracts opened 435 $ 46,908,764
Contracts closed (148) (16,118,740)
Contracts open end of year 287 $ 30,790,024
</TABLE>
<PAGE>
Selected
quarterly
data*
(Unaudited)
<TABLE>
<CAPTION>
For the period
November 27, 1992
Three months ended (commencement of
operations) to
April 30 January 31 October 31 July 31 April 30 January 31
1994 1994 1993 1993 1993** 1993
<S> <C> <C> <C> <C> <C> <C>
Total investment
income
Total $ 4,465,489 $ 4,493,152 $ 4,502,557 $ 4,549,264 $ 4,263,930 $ 2,135,465
Per Share+ $ .32 $ .33 $ .34 $ .34 $ .32 $ .16
Net investment income
available to common
shareholders
Total $ 3,462,613 $ 3,354,369 $ 3,364,230 $ 3,485,290 $ 3,405,029 $ 2,125,804
Per Share+ $ .25 $ .25 $ .25 $ .26 $ .25 $ .16
Net realized and
unrealized gain/loss
on investments
Total $(20,108,472) $ 1,794,399 $ 5,375,345 $ 4,094,140 $ 6,103,593 $ 6,532,561
Per Share+ $ (1.50) $ .13 $ .40 $ .31 $ .46 $ .49
Net increase
(decrease) in net
assets available to
common shareholders
resulting from
operations
Total $(16,645,859) $ 5,148,768 $ 8,739,575 $ 7,579,430 $ 9,508,622 $ 8,658,365
Per Share+ $ (1.25) $ .38 $ .65 $ .57 $ .71 $ .65
Net assets available
to common
shareholders at end
of period
Total $191,025,031 $211,000,835 $210,288,241 $204,723,557 $200,349,882 $195,409,512
Per Share+ $ 14.30 $ 15.80 $ 15.74 $ 15.33 $ 15.00 $ 14.63
<FN>
+ Per common share.
* In connection with the initial offering of shares of the Fund, Putnam Management agreed to waive its management fee for the
period November 27, 1992 to February 19, 1993.
** Preferred shares were issued on February 18, 1993.
</TABLE>
<PAGE>
Fund
performance
supplement
Putnam Investment Grade Municipal Trust II is a portfolio managed for high
current income free from federal income tax, consistent with preservation of
capital.
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 from the fund.
The Consumer Price Index is a commonly used measure of inflation; it does not
represent an investment return.
The fund performance supplement has been prepared by Putnam Management to
provide additional information about the fund and the indexes used for
performance comparisons. The information is not part of the portfolio of
investments owned or the financial statements.
Federal tax
information
The Fund has designated all distributions paid from net investment income
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 1995 will tell you the tax status of any distributions
paid to your account in calendar 1994, if any. The income distributions from
each state will also be reported to you at this time. The Fund also paid
short term capital gains distribution of .0880 per share on January 3, 1994.
This amount was previously reported to you on Form 1099 in January 1994.
<PAGE>
Your
Trustees
George Putnam
Chairman
Chairman and President,
The Putnam Funds
William F. Pounds
Vice Chairman
Professor of Management,
Alfred P. Sloan
School of Management,
Massachusetts Institute of
Technology
Jameson Adkins Baxter
President
Baxter Associates, Inc.
Hans H. Estin
Vice Chairman,
North American
Management Corporation
John A. Hill
Principal and
Managing Director,
First Reserve Corp.
Elizabeth T. Kennan
President,
Mount Holyoke College
Lawrence J. Lasser
President and
Chief Executive Officer,
Putnam Investments, Inc.
Robert E. Patterson
Executive Vice President,
Cabot Partners
Limited Partnership
Donald S. Perkins
Director of various
corporations
George Putnam, III
President, New Generation
Research, Inc.
A.J.C. Smith
Chairman of the Board
and Chief Executive Officer,
Marsh & McLennan
Companies, Inc.
W. Nicholas Thorndike
Director of various
corporations
<PAGE>
Putnam
Investment
Grade
Municipal
Trust II
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
Investor servicing agent
Putnam Investor Services
Mailing address:
P.O. Box 41203
Providence, RI 02940-1203
1-800-225-1581
Custodian
Putnam Fiduciary
Trust Company
Legal counsel
Ropes & Gray
Independent accountants
Coopers & Lybrand
(DALBAR LOGO)
Putnam Investor Services
has received the DALBAR
award each year since the
award's 1990 inception.
In more than 10,000 tests
of 38 shareholder
service components,
Putnam outperformed
the industry standard
in every category.
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
John R. Verani
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Thomas Goggins
Vice President
and Fund Manager
William N. Shiebler
Vice President
John D. Hughes
Vice President
and Treasurer
Paul O'Neil
Vice President
Beverly Marcus
Clerk and
Assistant Treasurer
Call 1-800-225-1581 weekdays from
9 a.m. to 5 p.m. Eastern Time for
up-to-date information about the
fund's NAV or to request Putnam's
quarterly Closed-End Fund
Commentary.
IG2-12424
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
Paid
Boston, MA
Permit No. 53749
<PAGE>
APPENDIX TO FORM ARS FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS:
(1) Bold and italic typefaces are displayed in normal type.
(2) Headers (e.g., the name of the fund) are omitted.
(3) Certain tabular and columnar headings and symbols are displayed
differently in this filing.
(4) Bullet points and similar graphic signals are omitted.
(5) Page numbering is omitted.
(6) Pound sterling symbol replaced with (pound); Japanese yen replaced
with (yen).
