Putnam
Investment
Grade
Municipal
Trust II
ANNUAL REPORT
April 30, 1995
[GRAPHIC OF SCALES]
BOSTON (BULLET) LONDON (BULLET) TOKYO
<PAGE>
Performance highlights
>"Some investment advisers say municipal bonds may look more attractive in
coming months because of a relative scarcity of issues. New issue volume has
fallen sharply this year, and a huge volume of issues is scheduled for
redemption or maturity in June and July."
--The Wall Street Journal, May 8, 1995.
>Performance should always be considered in light of a fund's investment
strategy. Putnam Investment Grade Municipal Trust II is designed for
investors seeking high current income free from federal income tax,
consistent with preservation of capital.
FISCAL 1995 RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Market
Total return NAV price
(change in value during
period plus reinvested distributions)
12 months ended 4/30/95 6.77% 5.39%
<S> <C> <C> <C> <C> <C>
Market
Share value (common shares) NAV price
4/30/94 $14.30 $ 13.250
4/30/95 13.94 12.750
Distributions No. Income Capital gains((1)) Total
Common shares 12 $ 0.9600 $ .2038 $ 1.1638
Preferred shares
Series A (630 shares) $1407.83 $335.16 $1742.99
Series B (630 shares) $1778.08 $335.16 $2113.24
Current return NAV Market
End of period
Current dividend rate((2)) 6.89% 7.53%
Taxable equivalent((3)) 11.41 12.47
</TABLE>
Performance data represent past results and are no indication of future
performance. For performance over longer periods, see page 8.
((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.
<PAGE>
From the Chairman
[photo of George Putnam]
(C)Karsh, Ottawa
Dear Shareholder:
Many of the gathering signs of hope that sustained municipal bond investors
during the darkest days of the 1994 market decline began manifesting
themselves in earnest over the early months of 1995. Although the market
exhibited volatility toward the end of Putnam Investment Grade Municipal
Trust II's fiscal year, the prevailing mood was appreciably more upbeat at
the fiscal year's end on April 30, 1995, than at its beginning.
The economy continued to march at a brisk stride, though the pace since
January has slowed considerably from the levels that prevailed during the
rest of the fiscal year. Investors took this moderation as a sign that the
economy was responding favorably to the Federal Reserve Board's strategy of
raising short-term rates to rein in growth and thereby hold inflation in
check. The consensus in the markets seems to be that the Fed's series of
interest-rate increases may be near an end.
Fund Manager Michael Bouscaren, who has rejoined Putnam after a seven-year
stint at Salomon Brothers Asset Management in New York, has been at your
fund's helm for most of fiscal 1995. He had previously been at Putnam from
1980 to 1986. In the following report, Mike discusses the fund's performance
in the fiscal year just ended and prospects for the year ahead.
Respectfully yours,
/s/ GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 21, 1995
<PAGE>
Report from the Fund Manager
Michael F. Bouscaren
Is the party over? As the current rally in the municipal bond market briefly
lost momentum in late April, this question was certainly on the minds of most
municipal bond investors. Although 1994's disappointments may have led to a
great deal of skepticism in the bond market, we believe shareholders of
Putnam Investment Grade Municipal Trust II will find that great strength and
potential remains in the municipal bond market.
Your fund has certainly shared in the solid performance of municipal bonds in
the first few months of 1995. For the fiscal year ended April 30, 1995, the
fund had a total return of 6.77% at net asset value (5.39% at market price).
This can certainly be considered a dramatic turnaround in comparison to
results at the fiscal year's midpoint on October 31, 1994, -0.91% total
return at NAV (-8.92% at market price).
>MARKET FALTERS BUT RETAINS STRONG FUNDAMENTALS
In late April, municipal bond market investors' concern about the possible
effects of the flat-tax proposal now being considered by Congress spooked the
$1.2 trillion market out of a dramatic recovery. In its purest form, a flat
tax would deprive municipal bonds of their exclusivity as tax-exempt
investments. The flat-tax plan now headed for congressional hearings is only
one of many tax-reform proposals that will be discussed, dissected, and
debated in Washington before any legislation is passed.
In our opinion, the market has reacted to the perceived effects of
flat-tax rhetoric and not to any hard facts. Even as we were preparing this
report, analysts had begun to look beyond the flat tax to a more broad income
tax revision. According to The Wall Street Journal (May 5, 1995), "[analysts]
say that any such [tax
<PAGE>
law] changes are far off in the future--1997 at the earliest--and that
overhauling the current tax system is a far more difficult task than many
investors now believe. As a result, they argue, there's a buying opportunity
in municipals."
One key reason we agree with this analysis is the current supply and demand
imbalance. New municipal-bond issuance is expected to shrink to $125 billion
this year from $150 billion last year and $300 billion in 1993 (see chart
below). Additionally, with $80 billion in bonds due to mature or to be called
in by their issuers in July, the resulting demand should support the prices
of existing municipal bonds.
>PROTECTING CALENDAR 1995 GAINS
Over the past six months, we have adjusted your fund's portfolio to lock in
gains achieved during stronger market conditions. We have done this by
incrementally shortening the portfolio's duration. Duration is a measure of a
bond or bond fund's sensitivity to interest rates.
We realize, however, that it is impossible to predict the exact direction of
the economy. Therefore, we are also preparing the fund for any unexpected
economic downturn by taking profits on
[Tabluar representation of graph "A Decline in Supply"]
Month Volume
1/94 977.00
2/94 961.00
3/94 1056.00
4/94 782.00
5/94 986.00
6/94 1008.00
7/94 751.00
8/94 865.00
9/94 774.00
10/94 867.00
11/94 870.00
12/94 868.00
1/95 584.00
2/95 573.00
3/95 687.00
4/95 609.00
Chart shows monthly volume of new municipal bond issues. Source: Securities
Data Co. Used by permission.
<PAGE>
some of the fund's health-care issues and acquiring BBB-rated utilities
bonds. These bonds, which carry the lowest rating in the investment-grade
spectrum, offer relatively low interest-rate sensitivity along with the
potential for solid gains in a rising market.
Our effort to protect the portfolio from any sudden changes is also evident
in the portfolio's overall credit-quality makeup. Holdings are positioned
with high-quality AAA-rated bonds representing one side of the
investment-grade spectrum and, on the opposite side, higher-yielding,
higher-risk BBB-rated bonds. In the event of an unexpected market selloff,
the AAA-rated bonds could be sold more rapidly than lower-rated bonds. This
occurs because their greater likelihood of timely payment of principal and
interest makes them more desirable in a period of uncertainty.
The fund also continues to employ leverage. In order to take advantage of
yield differentials between short-and long-term interest rates, a leveraged
closed-end fund will issue preferred shares with dividends based on
short-term interest rates and invest the proceeds in longer-term bonds paying
higher rates. Our stress tests indicate that leverage will continue to be
desirable even if municipal short-term rates rise unexpectedly. For a
long-term investor, leverage may offer added upside potential and can
potentially outperform unleveraged funds. At the end of the period,
approximately 25% of the portfolio was leveraged.
>SEIZING MARKET OPPORTUNITIES
The fund also benefited from some opportunities involving specific holdings.
One example was the fund's investment in Denver International Airport bonds.
Problems with the facility's automated baggage system, as well as various
other delays, caused many investors to ignore what we believe is a valuable
project for a major Western air-traffic hub. Our investment in these bonds
enabled the fund to realize some profits following their rally in February,
just prior to the airport's long-awaited opening.
The fund's investments in California and New York also proved rewarding. The
California municipal bond market bounced back from a dismal 1994 as
institutional investors took advantage of buying opportunities following the
Orange County bankruptcy filing. In New York, your fund's holdings in
state-appropriated
<PAGE>
[Tabular representation of graph "Credit Quality Profile*"]
Bond Percent
AAA 23.7
AA 19.3
A 15.3
BBB-Baa 35.1
BB-Ba 4.0
*As a percentage of net assets. A bond rated BBB or higher is considered
investment grade. All ratings reflect Standard & Poor's(R) descriptions, unless
noted otherwise. This chart refers only to long-term holdings. Holdings will
vary over time.
debt have also benefited with the possibility of more cost-effective
municipal services--a development that could improve the value of existing
bonds.
>LOOKING AHEAD
The municipal bond market's landscape has certainly changed from the
difficult times we reported at the end of fiscal 1994. Trends we began to
spot a year ago are now being backed up by hard data and, so far, the market
has responded accordingly.
As it appears that the Federal Reserve Board may be near the end of its
short-term interest-rate tightening cycle, we continue to have a positive
outlook on the municipal bond market through the end of calendar 1995. We
will, however, monitor the economic and political landscape for anything that
may affect your fund. And, of course, we will continue to rely on our
extensive in-house research capabilities to identify the bonds that we
believe hold the most long-term potential.
The views expressed throughout the report are exclusively those of Putnam
Management. They are not meant as investment advice. Although the described
holdings were viewed favorably as of 4/30/95, there is no guarantee the fund
will continue to hold these securities in the future.
<PAGE>
Performance summary
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares changed
over time, assuming you held the shares through the entire period and
reinvested all distributions back into the fund. We show total return in two
ways: on a cumulative long-term basis and on average how the fund might have
grown each year over varying periods.
TOTAL RETURN FOR PERIODS ENDED 4/30/95
<TABLE>
<CAPTION>
Lehman Bros.
Municipal
NAV Market price Bond Index CPI
<S> <C> <C> <C> <C>
1 year 6.77% 5.39% 6.65% 3.05%
Life of fund
(since 11/27/92) 19.01 2.04 15.31 6.97
Annual average 7.43 0.83 6.04 2.81
</TABLE>
TOTAL RETURN FOR PERIODS ENDED 3/31/95
most current calendar quarter
<TABLE>
<CAPTION>
NAV Market price
<S> <C> <C>
1 year 6.75% 4.38%
Life of fund
(since 11/27/92) 18.95 1.40
Annual average 7.70 0.60
</TABLE>
Performance data represent past results and are not indicative of future
performance. Investment returns, 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. Fund performance data do not take into account any
adjustment for taxes payable on reinvested distributions.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, the liquidation preference and cumulative undeclared dividends
paid on the remarketed preferred shares, divided by the number of outstanding
common shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York
Stock Exchange.
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, includes bonds different from those in the fund, and may pose
different risks than the fund.
Consumer Price Index (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
<PAGE>
Report of Independent Accountants
For the Fiscal Year Ended April 30, 1995
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, 1995, the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the two years in the period then ended, and the "Financial Highlights" for
each of the periods indicated therein. These financial statements and
"Financial Highlights" are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
"Financial Highlights" based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
"Financial Highlights" are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of April 30, 1995 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and "Financial Highlights" referred
to above present fairly, in all material respects, the financial position of
Putnam Investment Grade Municipal Trust II as of April 30, 1995, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and the "Financial
Highlights" for each of the periods indicated therein, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
June 14, 1995
<PAGE>
Portfolio of investments owned
April 30, 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (97.8%)*
PRINCIPAL AMOUNT RATINGS** VALUE
Arizona (1.0%)
$2,235,000 Gila Cnty., Indl. Dev. Auth. Poll. Control Rev.
Bonds, Ser. 85, 8.9s, 7/1/06 Baa $ 2,424,975
California (8.1%)
5,000,000 CA State U. Rev. Bonds, AMBAC, 7s, 11/1/21 AAA 5,293,750
1,490,000 Fountain Valley, Agcy. for Cmnty. Dev. Tax
Alloc. Rev. Bonds (Indl. Area Redev.
Project), 9.1s, 1/1/16 BBB 1,527,250
5,875,000 Los Angeles, Regl. Arpts. Impt. Corp. Lease
Rev. Bonds (Western Air Lines, Inc.--Delta
Air Lines, Inc.), 11-1/4s, 11/1/25 Ba 6,198,125
4,000,000 Santa Rosa, Kaiser Permanente Rev. Bonds, Ser.
A, 9s, 12/1/15 AA 4,165,000
2,755,000 Stanislaus, Solid Waste Fac. Rev. Bonds (Ogden
Martin Syst. Inc. Project), 7-5/8s, 1/1/10 BBB 2,885,863
20,069,988
Colorado (13.1%)
Denver, City & Cnty. Arpt. Rev. Bonds
5,000,000 Ser. A, 8-3/4s, 11/15/23 Baa 5,543,750
2,500,000 Ser. A, 8-1/2s, 11/15/23 Baa 2,715,625
1,670,000 Ser. A, 8s, 11/15/25 Baa 1,774,375
1,000,000 Ser. A, 8s, 11/15/25 Baa 1,056,250
1,675,000 Ser. A, 8s, 11/15/17 Baa 1,721,063
1,000,000 Ser. D, 7-3/4s, 11/15/13 Baa 1,097,500
4,985,000 Ser. D, 7s, 11/15/25 Baa 4,879,070
9,000,000 Denver, City & Cnty. Special Fac. Arpt. Rev.
Bonds (United Air Lines, Inc. Project), Ser.
A, 6-7/8s, 10/1/32 Baa 8,538,750
5,250,000 SCA Tax Exempt Trust, Multi-Fam. Mtge. Rev.
Bonds (Thorton Co. Newport Village Project),
Ser. A-8, FSA, 7.1s, 1/1/30 AAA 5,387,813
32,714,196
Florida (5.8%)
5,000,000 Port Everglades Auth. Port Impt. Rev. Bonds,
Ser. A, 5s, 9/1/16 BBB 4,143,750
9,725,000 Tampa, Cap. Impt. Rev. Bonds, Ser. B, 8-3/8s,
10/1/18 BBB 10,296,340
14,440,090
Georgia (1.3%)
3,150,000 Appling Cnty., Dev. Auth. Poll. Control Rev.
Bonds (Hatch Project), 10.6s, 10/1/15 A 3,283,875
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Illinois (3.1%)
$ 8,000,000 Central Lake Cnty., Joint Action Wtr. Agcy.
Rev. Bonds, 6s, 2/1/19 Aa $ 7,700,000
Indiana (5.7%)
10,000,000 Evansville, Hosp. Auth. Rev. Bonds
(Daughters of Charity--St. Mary's Med.),
10-1/8s, 11/1/15 Aa 10,450,000
3,500,000 Petersburg, Indl. Poll. Control Rev. Bonds
(Indianapolis Pwr. & Lt. Co.), 9-5/8s,
9/1/12 AA 3,618,125
14,068,125
Louisiana (1.7%)
500,000 St. Charles Parish, Poll. Control Rev. Bonds
(LA Pwr. & Lt.), 8-1/4s, 6/1/14 Baa 539,375
West Feliciana Parish, Poll. Control Rev.
Bonds (Gulf States Utils. Co. Project),
1,500,000 8s, 12/1/24 Ba 1,561,875
2,000,000 Ser. III, 7.7s, 12/1/14 Ba 2,067,500
4,168,750
Massachusetts (8.8%)
1,000,000 MA State G.O. VRDN, Ser. B, 5.15s,
12/1/97 VMIG1 1,000,000
11,000,000 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds,
AMBAC, 6.55s, 6/23/22 AAA 11,495,000
2,000,000 MA State Hlth. & Edl. Facs. Auth. IFB
(Boston U.), Ser. L, MBIA, 8.736s,
10/1/31 AAA 2,145,000
2,000,000 MA State Indl. Fin. Agcy. Rev. Bonds (1st
Mtge. Brookhaven), Ser. A, 7s, 1/1/09 BBB/P 1,980,000
3,000,000 MA State Port Auth. Rev. Bonds, 13s, 7/1/13 AAA 5,328,750
21,948,750
Michigan (2.0%)
2,000,000 Pontiac, Hosp. Fin. Auth. Rev. Bonds, 6s,
8/1/18 Baa 1,685,000
3,460,000 St. Clair Shores, Econ. Dev. Corp. Rev.
Bonds (Bon Secours Hlth. Syst.), FSA, 6s,
8/15/27 AAA 3,334,575
5,019,575
Minnesota (2.4%)
5,500,000 St. Paul, Hsg. & Redev. Auth. Hosp. Rev.
Bonds (Healtheast Project), Ser. B,
9-3/4s, 11/1/17 Baa 5,995,000
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 6,817,500
Nevada (2.0%)
5,000,000 Clark Cnty., Passenger Fac. Arpt. Rev. Bonds
(Las Vegas-McCarran Intl. Arpt.), Ser. A,
AMBAC, 6s, 7/1/22 AAA 4,887,500
<PAGE>
New York (9.7%)
$ 6,370,000 Babylon, Indl. Dev. Agcy. Resource Recvy.
Rev. Bonds (Ogden Martin Syst.), Ser. A,
8-1/2s, 1/1/19 Baa $ 6,927,375
2,750,000 Metro. Tran. Auth. Svcs. Contract Rfdg. Rev.
Bonds (Commuter Fac.), Ser. 5, 7s, 7/1/12 Baa 2,870,313
New York City, G.O. Bonds 7s,
2,100,000 Ser. H, 2/1/18 A 2,131,500
6,000,000 6/1/16 A 6,120,000
5,000,000 2/1/16 A 5,075,000
1,140,000 NY State Dorm. Auth. Rev. Bonds (State U.
Edl. Facs.), Ser. B, 5-3/4s, 5/15/24 Baa 1,041,675
24,165,863
North Carolina (7.9%)
11,000,000 NC Eastern Muni. Pwr. Agcy. Rev. Bonds, Ser.
B, 6s, 1/1/05 A 10,890,000
NC Muni. Pwr. Agcy. Rev. Bonds (No. 1,
Catawba Elec.),
3,000,000 7-1/2s, 1/1/17 A 3,146,250
6,000,000 5-3/4s, 1/1/15 A 5,505,000
19,541,250
Pennsylvania (6.1%)
3,000,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(Magee-Women's Hosp.), FGIC, 6s, 10/1/13 AAA 2,992,500
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 5,158,106
5,000,000 Dauphin Cnty., Auth. Hosp. Rev. Bonds
(Hapsco-Western PA Hosp. Project),
Ser. A, MBIA, 6-1/2s, 7/1/12 AAA 5,162,500
1,800,000 Lehigh Cnty., Gen. Purp. Auth. Rev. Bonds
(Hosp. Healtheast Inc.), Ser. A, 9s,
7/1/15 A 1,962,000
15,275,106
South Carolina (3.1%)
5,000,000 Piedmont, Muni. Pwr. Agcy. Elec. Rev. Bonds,
MBIA, 6.3s, 1/1/22 AAA 5,093,750
2,610,000 SC State Pub. Svc. Auth. Elec. Rev. Bonds
(Elec. Syst. Expansion), Ser. A, 7-7/8s,
7/1/21 AA 2,717,663
7,811,413
Tennessee (1.6%)
4,000,000 Metro. Nashville & Davidson Cnty., Hlth. &
Edl. Fac. Board Rev. Bonds (Vanderbilt
U.), Ser. A, 6s, 10/1/22 AA 3,990,000
Texas (5.4%)
2,000,000 Alliance Arpt. Auth. Special Fac. Rev. Bonds
(American Airlines, Inc. Project), 7-1/2s,
12/1/29 Baa 2,032,500
<PAGE>
Texas (continued)
$ 3,500,000 North Central TX Hlth. Fac. Dev. Corp. Rev.
Bonds (Presbyterian Hlth. Syst.), MBIA,
6.547s, 6/22/21 AAA $ 3,587,500
4,000,000 Northeast Hosp. Auth. Rev. Bonds (Northeast
Med. Ctr. Hosp.), Ser. B, 7-1/4s, 7/1/22 Baa 3,930,000
TX Hsg. Agcy. Single Fam. Mtge. Rev. Bonds
3,500,000 Ser. A, 9-3/8s, 9/1/16 Aa 3,587,500
415,000 Ser. B, 9-3/8s, 9/1/15 Aa 426,413
13,563,913
Virginia (1.2%)
3,000,000 Richmond, Metro. Auth. Expressway Rev.
Bonds, Ser. B, FGIC, 6-1/4s, 7/15/22 AAA 3,033,750
Washington (5.1%)
1,500,000 WA State Hlth. Care Fac. Auth. Rev. Bonds
(Multicare Med. Ctr.--Tacoma), FGIC,
5-3/4s, 8/15/22 AAA 1,383,750
13,000,000 WA State Pub. Pwr. Supply Syst. Rev. Bonds
(Nuclear Project No. 3), Ser. C, 5-3/8s,
7/1/15 AA 11,423,750
12,807,500
Total Investments (cost $243,080,764)*** $243,727,119
</TABLE>
<TABLE>
<CAPTION>
Key to Abbreviation of Municipal Instruments
<S> <C>
IFB --Inverse Floating Bonds
G.O. Bonds--General Obligation Bonds
VRDN --Variable Rate Demand Notes
Key to Abbreviation of Insurers
AMBAC --American Municipal Bond Assurance Corporation
FGIC --Federal Guaranty Insurance Corporation
FSA --Financial Security Assurance
MBIA --Municipal Bond Investors Assurance Corporation
</TABLE>
<PAGE>
NOTES
* Percentages indicated are based on net assets of $249,223,282. Net assets
available to common shareholders are $186,209,621, which correspond to a
net asset value per common share of $13.94.
** The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at April 30, 1995 for the securities
listed. Ratings are generally ascribed to securities at the time of
issuance. While the agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings do not necessarily
represent what the agencies would ascribe to these securities at April
30, 1995. 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 for federal income tax purposes is
$243,080,764, resulting in gross unrealized appreciation and depreciation
of $5,177,107 and $4,530,752, respectively, or net unrealized
appreciation of $646,355.
The fund had the following industry group concentrations greater than 10% on
April 30, 1995 (based on net assets):
<TABLE>
<CAPTION>
<S> <C>
Utilities 24.8%
Hospitals/Health Care 23.3
Transportation 20.3
</TABLE>
The rates shown on Variable Rate Demand Notes (VRDN) and Inverse Floating
Bonds (IFB) are the current interest rates at April 30, 1995, which are
subject to change based on the terms of the security.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of assets and liabilities
April 30, 1995
<TABLE>
<CAPTION>
Assets
<S> <C>
Investments in securities, at value (identified cost $243,080,764) (Note 1) $243,727,119
Cash 1,612,171
Interest receivable 5,501,548
Unamortized organization expenses (Note 1) 13,669
Total assets 250,854,507
Liabilities
Distributions payable to shareholders 1,153,844
Payable for compensation of Manager (Note 3) 421,283
Payable for investor servicing and custodian fees (Note 3) 40,021
Payable for administrative services (Note 3) 791
Payable for compensation of Trustees (Note 3) 114
Other accrued expenses 15,172
Total liabilities 1,631,225
Net assets $249,223,282
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 2) $ 63,000,000
Common shares, without par value; unlimited shares authorized; 13,357,092
shares outstanding 186,311,373
Undistributed net investment income 2,572,511
Distributions in excess of net realized gains (3,306,957)
Net unrealized appreciation of investments 646,355
Net assets $249,223,282
Computation of net asset value
Remarketed preferred shares at liquidation preference $ 63,000,000
Cumulative undeclared dividends on remarketed preferred shares 13,661
Net assets allocated to remarketed preferred shares at liquidation
preference 63,013,661
Net assets available to common shares: Net asset value per share $13.94
($186,209,621 divided by 13,357,092 shares) 186,209,621
Net assets $249,223,282
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of operations
For the year ended April 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Tax exempt interest income $17,607,801
Expenses:
Compensation of Manager (Note 3) 1,740,831
Investor servicing and custodian fees (Note 3) 256,142
Compensation of Trustees (Note 3) 11,501
Reports to shareholders 38,216
Auditing 54,852
Legal 11,307
Postage 33,118
Administrative services (Note 3) 9,672
Exchange listing fees 24,500
Registration fees 1,458
Amortization of organization expenses (Note 1) 5,303
Preferred share remarketing agent fees 183,374
Other 6,901
Total expenses 2,377,175
Net investment income 15,230,626
Net realized loss on investments (Notes 1 and 4) (1,897,162)
Net realized loss on written options (Notes 1 and 4) (719,223)
Net realized gain on futures contracts (Note 1) 2,656,827
Net unrealized depreciation of investments, written options and
futures contracts during the year (2,106,063)
Net loss on investment transactions (2,065,621)
Net increase in net assets resulting from operations $13,165,005
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Year ended April 30
1995 1994
<S> <C> <C>
Decrease in net assets
Operations:
Net investment income $ 15,230,626 $ 15,679,111
Net realized gain on investments, written options and
futures contracts 40,442 1,039,148
Net unrealized depreciation of investments, written options
and futures contracts (2,106,063) (9,883,736)
Net increase in net assets resulting from operations 13,165,005 6,834,523
Distributions to remarketed preferred shareholders from:
Net investment income (1,993,465) (2,012,609)
In excess of net realized gains (422,307) (147,491)
Net increase in net assets resulting from operations
applicable to common shareholders (excluding cumulative
undeclared dividends on remarketed preferred shares of
$13,661 and $0, respectively) 10,749,233 4,674,423
Distributions to common shareholders from:
Net investment income (12,828,891) (12,823,202)
In excess of net realized gains (2,722,091) (1,028,478)
Underwriting commissions and offering costs on remarketed
preferred shares (Note 2) -- (185,652)
Total decrease in net assets (4,801,749) (9,362,909)
Net assets
Beginning of year 254,025,031 263,387,940
End of year (including undistributed net investment income
of $2,572,511 and $2,098,061, respectively) $249,223,282 $254,025,031
Number of fund shares
Common shares outstanding at beginning of year 13,357,092 13,357,092
Common shares outstanding at end of year 13,357,092 13,357,092
Remarketed preferred shares outstanding at beginning of year 1,260 1,260
Remarketed preferred shares outstanding at end of year 1,260 1,260
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial Highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
November 27, 1992
(commencement of
operations) to
Year ended April 30 April 30
1995 1994 1993
<S> <C> <C> <C>
Net asset value, beginning of period $ 14.30 $ 15.00 $ 14.06*
Investment operations:
Net investment income 1.14 1.16 .44(a)
Net realized and unrealized gain (loss) on
investments (.16) (.66) .95
Total from investment operations .98 .50 1.39
Less distributions from:
Net investment income:
To preferred shareholders (.15) (.15) (.03)**
To common shareholders (.96) (.96) (.32)
Net realized gain on investments
To preferred shareholders -- (.01) --
To common shareholders -- (.08) --
In excess of net realized gain on investments
To preferred shareholders (.03) -- --
To common shareholders (.20) -- --
Total distributions (1.34) (1.20) (.35)
Preferred share offering costs -- -- (.10)
Net asset value, end of period (common shares) $ 13.94 $ 14.30 $ 15.00
Market value, end of period (common shares) $ 12.75 $ 13.25 $ 14.63
Total investment return at market value (common
shares) (%) 5.39 (2.81) (0.88)(c)
Net assets, end of period (in thousands) $249,223 $254,025 $263,388
Ratio of expenses to average net assets (%) (b) 1.28 1.14 .27(a)(c)
Ratio of net investment income to average net
assets (%) (b) 7.10 6.66 2.89(a)(c)
Portfolio turnover rate (%) 85.63 32.27 4.65(c)
</TABLE>
* Represents initial net asset value of $14.10 less offering expenses of
approximately $0.04.
**Preferred shares were issued on February 18, 1993
(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) Ratios reflect net assets available to common shares only; net investment
income ratio also reflects reduction for dividend payments to preferred
shareholders.
(c) Not annualized.
<PAGE>
Notes to financial statements
April 30, 1995
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as amended,
as a diversified, closed-end management investment company. The fund's
investment objective is to 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 and
unpaid 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 The fund may purchase and sell financial futures contracts to
hedge against changes in the values of tax exempt municipal securities the
fund owns or expects to purchase.
A futures contract is an agreement between two parties to buy or sell units
of a particular index or a certain amount of a U.S. government security at a
set price on a future date.
Upon entering into such a contract the fund is required to pledge to the
broker an amount of cash or 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 to the contract. Such receipts
or payments are known as "variation margin", and are recorded by the fund as
unrealized gains or losses. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The potential risk to the fund is that the change in value of the futures
contracts primarily corresponds with the value of underlying instruments
which may not correspond to the change in value of the hedged instruments. In
addition, there is a risk that the fund
<PAGE>
may not be able to close out its futures positions due to an illiquid
secondary market.
E. Option accounting principles The fund may, to the extent consistent with
its investment objectives and policies, seek to increase its current returns
by writing covered call and put options on securities it owns or in which it
may invest. When the fund writes a call or put option, an amount equal to the
premium received by the fund is included in the fund's "Statement of Assets
and Liabilities" as an asset and an equivalent liability. The amount of the
liability is subsequently "marked-to-market" to reflect the current market
value of the option written. The current market value of an option is the
last sale price or, in the absence of a sale, the last offering price. If an
option expires on its stipulated expiration date, or if the fund enters into
a closing purchase transaction, the fund realizes a gain (or loss if the cost
of a closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is
extinguished. If a written call option is exercised, the fund realizes a gain
or loss from the sale of the underlying security and the proceeds of the sale
are increased by the premium originally received. If a written put option is
exercised, the amount of the premium originally received reduces the cost of
the security which the fund purchases upon exercise of the option.
The fund writes covered call options; that is, options for which it holds the
underlying security or its equivalent. Accordingly, the risk in writing a
call option is that the fund relinquishes the opportunity to profit if the
market price of the underlying security increases and the option is
exercised. In writing a put option, the fund assumes the risk of incurring a
loss if the market price of the underlying security decreases and the option
is exercised.
The premium paid by the fund for the purchase of a call or put option is
included in the fund's "Statement of Assets and Liabilities" as an investment
and subsequently "marked-to-market" to reflect the current market value of
the option. If an option which the fund has purchased expires on the
stipulated expiration date, the fund realizes a loss in the amount of the
cost of the option. If the fund enters into a closing sale transaction, the
fund realizes a gain or loss, depending on whether the proceeds from the
closing sale transaction are greater or less than the cost of the option. If
the fund exercises a call option, the cost of the security acquired by
exercising the call is increased by the premium paid to buy the call. If the
fund exercises a put option, it realizes a gain or loss from the sale of the
underlying security and the proceeds from such sale are decreased by the
premium originally paid.
F) 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.
G) 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,
<PAGE>
when, as and if declared by the Trustees, on the applicable Dividend Payment
Dates. Each dividend period for the remarketed preferred shares is generally
a 30-day period until May 18, 1995 for series A and used to be until January
5, 1995 for series B. It then became a 28 day period. This can change from
period to period. The applicable dividend rates for the remarketed preferred
shares on April 30, 1995 were: Series A 3.25%; Series B 4.24% per annum until
May 18, 1995.
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 post-October loss
deferrals. 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 April 30, 1995, the fund reclassified $66,180 to increase
undistributed net investment income and $66,180 to increase accumulated net
realized loss on transactions. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.
H) 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.
I) 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.
Note 2
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.
Dividends declared but not yet paid on Preferred Shares at April 30, 1995
amounted to $13,661.
Under the Investment Company Act of 1940, the fund is required to maintain
asset coverage of at least 200% with respect to the remarketed preferred
shares as of the last business day of each month in which any such shares are
outstanding. Additionally, the fund is required to meet more stringent asset
coverage requirements under the terms of the remarketed preferred shares and
the shares' rating agencies. Should these requirements not be met, or should
dividends accrued on the remarketed preferred shares not be paid, the fund
may be restricted in its ability to declare dividends to common shareholders
or may be required to redeem certain of the remarketed preferred shares. At
April 30, 1995, there were no such restrictions on the fund.
<PAGE>
Note 3
Management fee, administrative services, and other transactions
Compensation of Putnam Investment Management, Inc. ("Putnam Management"), the
fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc., for
management and investment advisory services is paid quarterly based on the
average net assets of the fund. Such fee is based on the annual rate of 0.70%
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,
pursuant to the "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.
Trustees of the fund receive an annual Trustee's fee of $800 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
Investor servicing and custodian fees reported in the Statement of operations
for the year ended April 30, 1995 have been reduced by credits allowed by
PFTC.
Note 4
Purchases and sales of securities
During the year ended April 30, 1995, purchases and sales of investment
securities other than short-term investments aggregated $234,699,530 and
$204,613,384 respectively. Purchases and sales of short-term municipal
obligations aggregated $189,141,500 and $190,775,000, respectively. In
determining the net gain or loss on securities sold, the cost of securities
has been determined on the identified cost basis.
Written option transactions during the year are summarized as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
<S> <C> <C>
Outstanding at beginning of year -- $ --
Options written 965,000 1,870,699
Options closed (965,000) (1,870,699)
Written options outstanding at end of year -- $ --
</TABLE>
<PAGE>
Selected quarterly data
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
April 30 January 31 October 31 July 31
1995 1995 1994 1994
<S> <C> <C> <C> <C>
Total Investment income
Total $ 4,427,510 $ 4,413,648 $ 4,350,562 $ 4,416,081
Per Share+ $ 0.33 $ 0.33 $ 0.33 $ 0.33
Net investment income
available to common
shareholders
Total $ 3,288,376 $ 3,556,470 $ 3,139,962 $ 3,238,692
Per Share+ $ 0.25 $ 0.26 $ 0.24 $ 0.24
Net realized and unrealized
gain (loss) on investments
to common shareholders
Total $ 3,839,966 $ 2,384,896 $ (9,964,779) $ 1,251,989
Per Share+ $ 0.28 $ 0.18 $ (0.75) $ 0.10
Net increase (decrease)
in net assets available to
common shareholders
resulting from operations
Total $ 7,128,342 $ 5,941,366 $ (6,824,817) $ 4,490,681
Per Share+ $ 0.53 $ 0.44 $ (0.51) $ 0.34
Net assets available to
common shareholders at
end of period
Total $186,209,621 $181,868,068 $182,278,470 $192,309,284
Per Share+ $ 13.94 $ 13.62 $ 13.65 $ 14.40
</TABLE>
+ Per common share.
<PAGE>
Selected quarterly data (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
April 30 January 31 October 31 July 31
1994 1994 1993 1993
<S> <C> <C> <C> <C>
Total Investment income
Total 4,465,489 $ 4,493,152 $ 4,502,557 $ 4,549,264
Per Share+ $ .32 $ .33 $ .34 $ .34
Net investment income
available to common
shareholders
Total $ 3,462,613 $ 3,354,369 $ 3,364,230 $ 3,485,290
Per Share+ $ .25 $ .25 $ .25 $ .26
Net realized and unrealized
gain (loss) on investments
to common shareholders
Total $(20,108,472) $ 1,794,399 $ 5,375,345 $ 4,094,140
Per Share+ $ (1.50) $ .13 $ .40 $ .31
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
Per Share+ $ (1.25) $ .38 $ .65 $ .57
Net assets available to
common shareholders at
end of period
Total $191,025,031 $211,000,835 $210,288,241 $204,723,557
Per Share+ $ 14.30 $ 15.80 $ 15.74 $ 15.33
</TABLE>
+ Per common share.
<PAGE>
Federal tax information
The fund has designated distributions paid from net investment income during
the period as exempt-interest dividends. Thus, 100% of these distributions
are exempt from federal income tax. The fund has designated long term capital
gains dividends of $0.204 per common share and $321.10 per preferred share.
The Form 1099 you will receive in January 1996 will tell you the tax status
of any distributions paid to your account in calendar 1995. The income
distributions from each state will also be reported to you at this time.
<PAGE>
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary Coburn
Vice President
James E. Erickson
Vice President
Blake E. Anderson
Vice President
Michael F. Bouscaren
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
<PAGE>
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for
up-to-date information about the fund's NAV or to request Putnam's quarterly
Closed-End Fund Commentary.
<PAGE>
Bulk Rate
U.S. Postage
PAID
Boston, MA
Permit No. 53749
18337/183
Putnam Investments
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
APPENDIX TO FORM N-30D 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) Trademark symbol replaced with (TM)
