Putnam
Investment
Grade
Municipal
Trust II
[GRAPHIC OMITTED: ARTWORK]
SEMIANNUAL REPORT
October 31, 1995
[LOGO: BOSTON * LONDON * TOKYO]
* "One investor's worry is another's opportunity. That's the moral of
the story of the municipal bond market now, where fears of a flat tax
have made munis extremely attractive."
-- "Fear Makes Munis Cheap," Fortune, September 4, 1995
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
10 Portfolio holdings
14 Financial statements
From the Chairman
[GRAPHIC OMITED:
photo of
George Putnam]
(C) Karsh, Ottawa
Dear Shareholder:
The period encompassing the first half of Putnam Investment Grade
Municipal Trust II's fiscal year followed one of the most severe bond
market downturns on record and ended in the midst of one of the market's
strongest rallies.
The benefits of the market's upturn during the six months ended October
31, 1995, were dampened somewhat for tax-exempt bond investors. Talk of
a flat tax ignited concern that the tax advantage long enjoyed by
municipal securities would be lost. As is so often the case, however,
the market overreacted, and by the fiscal year's midpoint it had
recognized the fact.
Fund Manager Michael Bouscaren believes that prospects of a flat tax
being enacted anytime soon are slim. Furthermore, the Federal Reserve
Board's success in slowing the pace of the economy has contributed to a
favorable environment for bonds. Mike believes low inflation and
relatively stable bond yields point to a continuation of these positive
conditions through the second half of your fund's fiscal year.
Respectfully yours,
/s/George Putnam
George Putnam
Chairman of the Trustees
December 20, 1995
Report from the Fund Manager
Michael F. Bouscaren
It appears that the long-desired soft-landing scenario has, in fact,
materialized. Early in July, the Federal Reserve Board lowered short-
term interest rates from 6% to 5.75% -- a signal that the economy had
slowed sufficiently to hold inflation at bay. Consequently, every sector
of the fixed-income market has strengthened significantly. Shareholders
of Putnam Investment Grade Municipal Trust II have benefited from the
rally and from Putnam's ability to seize market opportunities. For the
semiannual period ended October 31, 1995, the fund's common shares
provided a total return of 5.85% at net asset value (11.75% at market
price).
* RELATIVE VALUE IN THE MUNICIPAL-BOND MARKET
Most investors in the municipal-bond market returned from their summer
vacations ready to revive the listless market. The market's resurgence
was sparked mainly by an increase in demand for municipal-bond mutual
funds. Mutual funds, which are considered to be the fastest-growing
segment of the municipal-bond market, controlled more than 17% of
existing municipal bonds. This increase in demand was complemented by
what continues to be the ongoing decline in municipal-bond issuance;
down 22% from 1994 levels.
Municipal bonds continue to offer attractive relative value. Most high-
grade bonds currently yield about 90% of comparable U.S. Treasury bonds.
Municipal bonds are generally considered attractive when they yield
between 82% and 86% of their taxable counterparts.
* FLAT-TAX CONCERNS CREATE OPPORTUNITIES
Tax reform, however, continues to be a question. Investors' fears of
the effects of the current flat-tax proposal being considered by
Congress jarred the municipal-bond market out of its dramatic recovery.
A flat tax in its purest form would deprive municipal bonds of their
advantage as a tax-exempt investment.
In our opinion, the market has reacted to the perceived effects of the
flat-tax rhetoric and not to hard facts. By May, investors were starting
to look beyond the flat tax to the likelihood of a more broad-based
income tax revision in the distant future. In fact, we believe the
short-term downturn in the market was not grounded in reality and,
therefore, it actually created more possibilities than it quashed.
Moving into the presidental election of 1996, we believe the flat-tax
proposals cannot garner enough popular appeal to become a crucial issue
in the election. Nevertheless, flat-tax rhetoric may continue to hinder
the market's progress over the near term. Looking farther ahead,
however, we believe investors will recognize the relative value of
municipal bonds, especially as alternative investments become regarded
as overvalued and if the economic environment remains favorable for
bonds.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS*
showing:
Hospitals 15.15%
Water and Sewerage 15.48%
Airport/Transportation 15.07%
Investor owned 9.68%
Municipal utilities 18.8%
Footnote reads:
*Based on net assets as of 10/31/95. Holdings may vary in the future.]
* SHREWD SECTOR SELECTION: AIR TRANSPORT SOARS
Many of the sectors that suffered the most during the poor market
conditions of 1994 recovered dramatically during your fund's semiannual
period. Through intensive credit research, your fund was able to benefit
from a sharp rebound in the airline and airport sectors. Contrary to
popular opinion at the time, our analysis indicated that by late 1994,
years of cost cutting and industry consolidation had sown the seeds for
improved stability and healthier financial conditions among airline
companies. Consequently, despite a less-than-favorable market perception
of the sector, we selectively added to the fund's holdings of municipal
bonds issued on behalf of airlines.
The strategy proved worthwhile. As investors recognized the improving
fundamentals of the airline business, demand for these high-yielding,
relatively liquid issues soared. Prices on airline-backed bonds have
appreciated dramatically since the beginning of calendar 1995, producing
double-digit returns for the fund.
The generous income and favorable call protection offered by the bonds
of Denver International Airport explain why it remains a core holding
for your fund. After the facility opened last February, these bonds
continued their price appreciation until the date of this report. As an
added bonus, Denver International Airport's rating was recently upgraded
by Standard & Poor's, a nationally recognized rating agency.
We also expect to make gradual shifts in emphasis to bonds in states
that show more robust economic activity. We are looking for
opportunities to increase exposure to general obligation bonds in
California -- a state economy that is recovering faster than nearly all
others -- as well as in Texas and Florida.
[GRAPHIC OMITTED: pie chart Credit Quality Breakdown
showing:
BBB=28.83%
A= 4.95%
AA=14.20%
BB= 2.45%
AAA=49.57%
Footnote reads:
As a percentage of net assets. A bond rated BBB or higher is considered
investment grade. All ratings reflect Standard & Poor's(registered
trademark) descriptions, unless noted otherwise. This chart refers only
to long-term holdings. Holdings will vary over time.]
* OUTLOOK FOR MUNICIPALS CONSTRUCTIVE
We believe moderate but stable economic growth and relatively low
inflation bode well for fixed-income investing. Careful bond selection
and credit analysis will remain of supreme importance in providing our
shareholders with attractive tax-free income and favorable total
returns.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described
holdings were viewed favorably as of 10/31/95, there is no guarantee the
fund will continue to hold these securities in the future.
Performance summary
This section provides, at a glance, information about the performance of
your common shares. 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.
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.
TOTAL RETURN FOR PERIODS ENDED 10/31/95
NAV Market price
- -----------------------------------------------------------------------
6 months 5.85% 11.75%
1 year 14.06 29.32
- -----------------------------------------------------------------------
Life-of-fund (since 11/27/92) 25.98 14.03
Annual average 8.20 4.58
- -----------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR
PERIODS ENDED 10/31/95
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- -----------------------------------------------------------------------
6 months 6.76% 1.19%
1 year 14.84 2.81
- -----------------------------------------------------------------------
Life-of-fund (since 11/27/92) 23.10 8.24
Annual average 7.35 2.74
- -----------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 9/30/95
(most recent calendar quarter)
NAV Market price
- -----------------------------------------------------------------------
1 year 9.62% 21.76%
- -----------------------------------------------------------------------
Life-of-fund (since 11/27/92) 23.76 12.34
Annual average 7.80 4.18
- -----------------------------------------------------------------------
Performance data represent past results of common shares, do not reflect
future performance, and 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
6 months ended 10/31/95
NAV Market price
- -----------------------------------------------------------------------
Distributions:
- -----------------------------------------------------------------------
No. 6 6
- -----------------------------------------------------------------------
Income $0.48 $0.48
- -----------------------------------------------------------------------
Capital gains1
- -----------------------------------------------------------------------
Long-term 0.00 0.00
- -----------------------------------------------------------------------
Short-term 0.00 0.00
- -----------------------------------------------------------------------
Total 0.48 0.48
- -----------------------------------------------------------------------
Preferred shares Series A (630 shares) Series B (630 shares)
- -----------------------------------------------------------------------
Total $1 $1
- -----------------------------------------------------------------------
Share value:
- -----------------------------------------------------------------------
4/30/95 $13.94 $12.750
- -----------------------------------------------------------------------
10/31/95 $14.24 13.750
- -----------------------------------------------------------------------
Current return
- -----------------------------------------------------------------------
End of period
- -----------------------------------------------------------------------
Current dividend rate2 6.74% 6.98%
- -----------------------------------------------------------------------
Taxable equivalent3 11.16 11.56
- -----------------------------------------------------------------------
1Capital 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.
2Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
3Assumes maximum 39.6% federal tax rate. Results for investors subject
to lower tax rates would not be as advantageous.
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, the liquidation preference and cumulative undeclared
dividends paid on the remarketed preferred shares, divided by the number
of outstanding common shares.
Market price is the current trading price of one share of the fund.
Market prices are set by transactions between buyers and sellers on the
New York Stock Exchange.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index does not take into account brokerage
commissions or other costs, may include bonds different from those in
the fund, and may pose different risks than the fund.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Portfolio of investments owned
October 31, 1995 (Unaudited)
<TABLE>
Portfolio of investments owned
October 31, 1995 (Unaudited)
<CAPTION>
MUNICIPAL BONDS AND NOTES (97.7%)
PRINCIPAL AMOUNT RATINGS** VALUE
Arizona (1.0%)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
$2,235,000 Gila Cnty., Indl. Dev. Auth. Poll Control Rev. Bonds
Ser. 85, 8.9s, 7/1/06 Baa $2,438,944
California (10.5%)
- ------------------------------------------------------------------------------------------------------
7,500,000 Beverly Hills Pub. Fin. Auth. Lease Rev. Bonds
5.65s, 6/1/15 AAA 7,481,250
CA State G.O. Bonds
3,315,000 5 1/2s, 3/1/10 A 3,277,706
1,000,000 5.1s, 10/1/08 A 983,750
2,500,000 CA State U. IFB, AMBAC, 9.575s, 11/1/2
(acquired 9/2/24, cost $2,681,272) (RES) AAA 3,050,000
1,490,000 Fountain Valley, Agcy. for Cmnty. Dev. Tax Alloc.
Rev. Bonds (Indl. Area Redev. Project), 9.1s, 1/1/16 BBB 1,521,216
5,875,000 Los Angeles, Regl. Arpts. Impt. Corp.
Lease Rev. Bonds (Western Airlines, Inc. Delta Airlines Inc.)
11 1/4s, 11/1/25 Ba 6,220,861
4,000,000 Santa Rosa Kaiser Permanente Rev. Bonds, Ser A,
9s, 12/1/15 AA 4,092,960
-------------
26,627,743
Colorado (10.2%)
- ------------------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds Baa 5,831,250
5,000,000 8 3/4s, 11/15/23
2,500,000 8 1/2s, 11/15/23 Baa 2,834,375
1,670,000 8s, 11/15/25 Baa 1,847,438
1,000,000 8s, 11/15/25 Baa 1,106,250
2,175,000 8s, 11/15/17 Baa 2,305,500
1,000,000 7 3/4s, 11/15/13 Baa 1,180,000
4,985,000 7s, 11/15/25 Baa 5,122,088
5,250,000 SCA Tax Exempt Trust, Multi-Fam. Mtge. Rev. Bonds
(Thornton Co. Newport Village Project)
Ser. A-8, FSA, 7.1s, 1/1/30 AAA 5,715,938
-------------
25,942,839
Connecticut (1.8%)
- ------------------------------------------------------------------------------------------------------
4,500,000 CT Hlth. & Edl. Fac. Auth. IFB (Yale U.),
7.742s, 6/10/30 AAA 4,606,875
Florida (7.8%)
- ------------------------------------------------------------------------------------------------------
5,000,000 FLA Tpk. Auth. Dept. Transn. Rev Bonds,
Ser. A, FGIC, 5 1/2s, 7/1/14 AAA 4,956,250
5,000,000 Port Everglades Auth. Port Impt. Rev. Bonds,
Ser. A, 5s, 9/1/16 BBB 4,337,500
9,725,000 Tampa Cap. Impt. Rev. Bonds, Ser. B, 8 3/8s, 10/1/18 BBB 10,357,125
-------------
19,650,875
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Georgia (3.0%)
- ------------------------------------------------------------------------------------------------------
6,340,000 Burke Cnty., Dev. Auth. Control Rev. Bonds AAA 7,584,225
(Oglethorp Pwr. Co. Vogtle Proj.), MBIA, 8s, 1/1/22
Illinois (4.1%)
- ------------------------------------------------------------------------------------------------------
8,000,000 Central Lake Cnty., Joint Action Wtr. Agcy. Rev. Bonds
6s, 2/1/19 Aa 8,140,000
2,125,000 Chicago, O'Hare Intl. Arpt. Special. Fac. Rev. Bonds
8.2s, 5/1/18 Baa 2,300,313
-------------
10,440,313
Indiana (2.3%)
- ------------------------------------------------------------------------------------------------------
2,000,000 Marion Cnty. Ind. Convention & Rectl. Facs. Auth.
Rev. Bonds 7s, 6/1/21 AAA 2,192,500
3,500,000 Petersburg, Indl. Poll. Control Rev. Bonds
(Indianapolis Pwr. & Lt. Co.), 9 5/8s, 9/1/12 AA 3,585,225
-------------
5,777,725
Kansas (1.1%)
- ------------------------------------------------------------------------------------------------------
2,600,000 Burlington Poll. Control Rev. Bonds 7s, 6/1/31 AAA 2,905,500
Louisiana (0.2%)
- ------------------------------------------------------------------------------------------------------
500,000 St. Charles Parish Poll. Control Rev. Bonds
(L.A. Pwr. & Lt.), 8 1/4s, 6/1/14 Baa 550,625
Massachusetts (8.8%)
- ------------------------------------------------------------------------------------------------------
3,100,000 MA State G.O. Bonds VRDN, Ser. B, 3.7s, 12/1/97 VMIGI 3,100,000
11,000,000 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
AMBAC, 6.55s, 6/23/22 AAA 11,728,750
2,000,000 MA State Hlth. & Edl. Facs. Auth. IFB, AAA 2,275,000
(Boston U.) Ser. L, MBIA, 9.183s, 10/1/31
3,000,000 MA State Port Auth. Rev. Bonds, GNMA Col1., 3s, 7/1/13 AAA 5,002,500
-------------
22,106,250
Michigan (5.5%)
- ------------------------------------------------------------------------------------------------------
1,000,000 Grand Rapids Wtr. Supply Syst.
FGIC, 2.1s, 1/1/20 VMIGI 1,000,000
3,445,000 Greater Detroit Res. Recovery Rev. Bonds,
Ser. H, 9 1/4s, 12/13/08 BBB 3,562,199
8,000,000 MI State Stragetic Fund Ltd. Obligation Rev. Bonds
(Detroit Edison Co.), MBIA, 6.4s, 9/1/25 AAA 8,400,000
1,000,000 MI, Stragetic Fund Poll. Control Rev. Bonds
(General Motors Corp.), 6.2s, 9/1/20 A 1,012,500
-------------
13,974,699
Minnesota (3.6%)
- ------------------------------------------------------------------------------------------------------
5,500,000 St. Paul, Hsg. & Redev. Auth. Hosp. Rev. Bonds
(Healtheast Project), Ser. B, 9 3/4s, 11/1/17 Baa 5,960,625
3,000,000 Western MN Muni. Pwr. Agcy. Supply Rev. Bonds
7s, 1/1/13 A 3,138,750
-------------
9,099,375
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
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 6,930,000
Nevada (1.4%)
- ------------------------------------------------------------------------------------------------------
3,625,000 Nevada State # 49 & 50 G.O. Bonds 5 1/2s, 11/1/17 AA 3,498,125
New York (9.2%)
- ------------------------------------------------------------------------------------------------------
6,370,000 Babylon, Indl. Dev. Agcy. Resource Recvy. Rev. Bonds
(Ogden Martin Syst.), Ser. A, 8 1/2s, 1/1/19 AAA 7,221,988
2,750,000 Metro. Tran. Auth. Svcs Contract Rev. Bonds
(Commuter Fac.), Ser. 5, 7s, 7/1/12 Baa 2,976,875
6,000,000 NY City, Hsg. Dev. Corp. Multi-Family Hsg.
Rev. Bonds, Ser. B, 5/85s, 5/1/26 AA 5,835,000
1,400,000 NY City, VRDN, Ser. B, FGIC, 4s, 10/1/21 VMIGI 1,400,000
2,000,000 NY City, Muni. Wtr. Fin. Auth. VRDN,
Ser. G, FGIC, 3.9s. 6/15/24 VMIGI 2,000,000
2,000,000 NY State Energy Research. & Dev. Auth. Elec. Facs.
Rev. Bonds (Cons. Edison Co. Project),
Ser. A, 7 3/4s, 1/1/24 A 2,157,500
1,600,000 NY State Energy Research & Dev. Auth. Poll. Control
VRDN (NY State Elec. & Gas Co.),
Ser. C, 3.43s, 6/1/29 VMIGI 1,600,000
-------------
23,191,363
Pennsylvania (4.1%)
- ------------------------------------------------------------------------------------------------------
3,000,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(Magee-Womens Hosp.), FGIC, 6s, 10/1/13 AAA 3,082,500
5,000,000 Dauphin Cnty., Auth. Hosp. Rev. Bonds
(Hapsco-Western PA Hosp. Project),
Ser. A, MBIA, 6 1/2s, 7/1/12 AAA 5,306,250
1,800,000 Lehigh Cnty., Gen. Purp. Auth. Rev. Bonds
(Hosp. Healtheast Inc.), Ser. A, 9s, 7/1/15 A 1,971,000
-------------
10,359,750
South Carolina (3.1%)
- ------------------------------------------------------------------------------------------------------
5,000,000 Piedmont, Muni. Pwr. Agcy. Elec. Rev. Bonds,
MBIA, 6.3s, 1/1/22 AAA 5,250,000
2,610,000 SC State Pub. Svc. Auth. Elec. Rev. Bonds
(Elec. Syst. Expansion), Ser. A, 7 7/8s, 7/1/21 AA 2,678,900
-------------
7,928,900
Tennessee (8.0%)
- ------------------------------------------------------------------------------------------------------
8,300,000 Metro. Gov't Nashville & Davidson Cnty.,
Tenn. Wtr. & Swr. IFB, AMBAC
8.054s. 1/1/22 AAA 8,590,500
11,500,000 Metro. Nashville & Davidson Cnty. Rev. Bonds
(Water & Sewer Rev.), AMBAC, 6.075s, 1/1/22 AAA 11,672,500
-------------
20,263,000
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Texas (7.3%)
- ------------------------------------------------------------------------------------------------------
2,000,000 Alliance Arpt. Auth. Special. Fac. Rev. Bonds
(American Airlines, Inc. Project), Baa 2,117,500
7 1/2s, 12/1/29
3,815,000 Dallas Independent Schl. Dist Rev. Bonds
zero %, 8/15/07 AAA 2,050,563
3,500,000 North Central TX Hlth. Fac. Dev. Corp. Rev. Bonds
(Presbyterian Hlth. Systems), MBIA,
6.547s, 6/15/21 AAA 3,648,750
2,500,000 Northeast Hosp. Auth. Rev. Bonds
(Northeast Med. Ctr. Hosp.),
Ser. B, 7 1/4s, 7/1/22 Baa 2,575,000
4,850,000 San Antonio Elec. & Gas. Rev. Bonds 5s, 2/1/17 AA 4,431,688
TX Hsg. Agcy. Single Fam. Mtge. Rev. Bonds
3,285,000 Ser. A, 9 3/8s, 9/1/16 Aa 3,366,928
340,000 Ser. B, 9 3/8s, 9/1/15 Aa 349,874
-------------
18,540,303
Virginia (1.2%)
- ------------------------------------------------------------------------------------------------------
3,000,000 Richmond, Metro. Auth. Expressway Rev. Bonds,
Ser. B, FGIC, 6 1/4s, 7/15/22 AAA 3,097,500
Washington (0.8%)
- ------------------------------------------------------------------------------------------------------
2,100,000 WA State Hlth. Care Facs. Auth. VRDN
(Sisters of Providence), Ser. D, 3.8s, 10/1/05 VMIGI 2,100,000
- ------------------------------------------------------------------------------------------------------
Total Investments (cost $242,952,439) *** $ 247,614,929
- ------------------------------------------------------------------------------------------------------
NOTES
- ------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $253,377,675.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings
available at October 31, 1995 for the securities listed. Ratings are generally ascribed to securities at
the time of issuance. While that 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 at October 31, 1995. Securities rated by Putnam are indicated by and are not publicly rated.
Ratings are not covered by the Report of Independent Accountants.
++ Restricted as to public resale. At the date of acquisition these
securities were valued at cost. There were no outstanding securities of
the same class as those held. Total market value of restricted securities
owned at April 30, 1995 was $3,050,000 of 1.2% of net assets.
*** The aggregate identified cost on a tax basis is $242,952,439, resulting in gross unrealized appreciation
and depreciation of $7,444,541and $2,782,051 respectively, or net unrealized appreciation of $4,662,490.
The fund had the following industry group concentrations greater
than 10% on October 31, 1995 (based on net assets):
Utilities 18.8%
Water & Sewage 15.48%
Hospitals/Health Care 15.15%
Airport/Transportation 15.07%
The rates shown on Variable Rate Demand Notes (VRDN) and
Inverse Floating Bonds (IFB) are the current interest rates at
October 31, 1995, which are subject to change based on the
terms of the security.
Total Aggregate Expiration Unrealized
Value Face Value Date Depreciation
---------------------------------------------------------------------------------------------------
Municipal Bond Futures Outstanding
at October 31, 1995 $7,257,875 $7,161,468 December 1995 $96,407
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
October 31, 1995 (Unaudited)
<S> <C>
Assets
- -------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $242,952,439) (Note 1) $ 247,614,929
- -------------------------------------------------------------------------------------------------------------
Cash 471,084
- -------------------------------------------------------------------------------------------------------------
Receivable for securities sold 10,286,328
- -------------------------------------------------------------------------------------------------------------
Interest Receivable 5,548,230
- -------------------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 10,995
- -------------------------------------------------------------------------------------------------------------
Total assets 263,931,566
Liabilities
- -------------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,068,523
- -------------------------------------------------------------------------------------------------------------
Payable for securities purchased 8,978,978
- -------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 3) 450,914
- -------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 3) 75
- -------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 3) 721
- -------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 3) 12,178
- -------------------------------------------------------------------------------------------------------------
Payable for variation margin on short futures (Note 1) 11,625
- -------------------------------------------------------------------------------------------------------------
Other accrued expenses 30,877
- -------------------------------------------------------------------------------------------------------------
Total liabilities 10,553,891
- -------------------------------------------------------------------------------------------------------------
Net assets $ 253,377,675
Represented by
- -------------------------------------------------------------------------------------------------------------
Series A and B remarketed preferred shares, without par value; 1,260 shares authorized
(1,260 shares issued at $50,000 per 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 2,691,651
- -------------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions (3,191,432)
- -------------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments 4,566,083
- -------------------------------------------------------------------------------------------------------------
Net assets $ 253,377,675
Computation of net asset value
- -------------------------------------------------------------------------------------------------------------
Remarketed preferred shares at liquidation preference $ 63,000,000
- -------------------------------------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 153,942
- -------------------------------------------------------------------------------------------------------------
Net asset allocated to remarketed preferred shares at liquidation preference 63,153,942
- -------------------------------------------------------------------------------------------------------------
Net assets available to common shares: Net asset value
per share $14.24 ($190,223,733 divided by 13,357,092 shares) 190,223,733
- -------------------------------------------------------------------------------------------------------------
Net assets $ 253,377,675
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
For the six months ended October 31, 1995 (Unaudited)
<S> <C>
Investment Income
- -----------------------------------------------------------------------------------------------------------
Interest $ 8,742,099
- -----------------------------------------------------------------------------------------------------------
Total investment income 8,742,099
Expenses:
- -----------------------------------------------------------------------------------------------------------
Compensation of Manager (Note 3) 894,567
- -----------------------------------------------------------------------------------------------------------
Investor Servicing and custodian fees (Note 3) 102,506
- -----------------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 3) 6,101
- -----------------------------------------------------------------------------------------------------------
Reports to shareholders 32,813
- -----------------------------------------------------------------------------------------------------------
Auditing 26,702
- -----------------------------------------------------------------------------------------------------------
Legal 7,473
- -----------------------------------------------------------------------------------------------------------
Postage 26,437
- -----------------------------------------------------------------------------------------------------------
Registration Fees 564
- -----------------------------------------------------------------------------------------------------------
Exchange listing fees 10,194
- -----------------------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 68,906
- -----------------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 3) 2,673
- -----------------------------------------------------------------------------------------------------------
Administrative services (Note 3) 4,388
- -----------------------------------------------------------------------------------------------------------
Other expenses 4,825
- -----------------------------------------------------------------------------------------------------------
Total expenses 1,188,149
- -----------------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (69,294)
- -----------------------------------------------------------------------------------------------------------
Net expenses 1,118,855
- -----------------------------------------------------------------------------------------------------------
Net investment income 7,623,244
- -----------------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 4) 115,525
- -----------------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments, written options and futures contracts 3,919,728
- -----------------------------------------------------------------------------------------------------------
Net gain on investments 4,035,253
- -----------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 11,658,497
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
October 31, 1995
<S> <C> <C>
Six months ended Year ended
October 31 April 30
1995* 1994
Increase in net assets
- -----------------------------------------------------------------------------------------------------------------------
Operations:
Net investment income $ 7,623,244 $ 15,230,626
- -----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and options 115,525 40,442
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments and options 3,919,728 (2,106,063)
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations 11,658,497 13,165,005
- -----------------------------------------------------------------------------------------------------------------------
Distributions to remarketed preferred shareholders from:
- -----------------------------------------------------------------------------------------------------------------------
Net investment income (1,092,974) (1,993,465)
- -----------------------------------------------------------------------------------------------------------------------
Capital gains -- (422,307)
- -----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations applicable to common
shareholders (excluding cumulative undeclared dividends on remarketed
preferred shares of $153,942 and $13,661, respectively) 10,565,523 10,749,233
- -----------------------------------------------------------------------------------------------------------------------
Distributions to common shareholders
From net investment income (6,411,130) (12,828,891)
From net realized gains -- (2,722,091)
- -----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 4,154,393 (4,801,749)
Net Assets
- -----------------------------------------------------------------------------------------------------------------------
Beginning of period 249,223,282 254,025,031
- -----------------------------------------------------------------------------------------------------------------------
End of period (including accumulated net investment
income of $2,691,651 and $2,572,511, respectively) $ 253,377,675 $ 249,223,282
- -----------------------------------------------------------------------------------------------------------------------
Number of fund shares
- -----------------------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning and end of period 13,357,092 13,357,092
Remarketed preferred shares outstanding at beginning and end of period 1,260 1,260
- -----------------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
Financial highlights
(For a share outstanding throughout the period)
<CAPTION>
For the period
November 27,1992
Six months (commencement of
ended operations) to
October 31 Year ended April 30 April 30
- ---------------------------------------------------------------------------------------------------------------------------
1995+ 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $13.94 $14.30 $15.00 $14.06*
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .57 1.14 1.16 .44(a)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .30 (.16) (.66) .95
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .87 .98 .50 1.39
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investments income:
To preferred shareholders (.09) (.15) (.15) (.03)**
- ---------------------------------------------------------------------------------------------------------------------------
To common shareholders (.48) (.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 (.57) (1.34) (1.20) (.35)
- ---------------------------------------------------------------------------------------------------------------------------
Preferred share offering costs -- -- -- (.10)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period (common shares) $14.24 $13.94 $14.30 $15.00
- ---------------------------------------------------------------------------------------------------------------------------
Market value, end of period (common shares) $13.75 $12.75 $13.25 $14.63
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at market value (common shares) (%)(b) 11.75(c) 5.39 (2.81) (0.38)(c)
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $253,378 $249.223 $254,025 $263.388
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) (d)(e) 1.77(c) 1.28 1.14 .27(a)(c)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) (d) 6.32(c) 7.10 6.66 2.89(a)(c)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 143.31(c) 85.63 32.27 4.65(c)
- ---------------------------------------------------------------------------------------------------------------------------
+ Unaudited
* Represents initial net asset value of $14.10 less offering expenses if 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) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Not 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) The ratio of expenses to average net assets for the six months ended October 31, 1995 includes amounts paid through expense
offset arrangements. Prior periods ratios exclude these amounts.
</TABLE>
Notes to financial statements
October 31, 1995 (Unaudited)
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 Putnam Investment Management, Inc. ("Putnam Management") fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc., 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 Putnam Management
following procedures approved by the Trustees, and such valuations and
procedures are reviewed periodically 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 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 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 income taxes It is the policy of the fund to distribute all
of its income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held 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 remarketed preferred shares become payable when, as and if declared
by the Trustees. Each dividend period for the remarketed shares is
generally a 28 day period. The applicable dividend rate for the
remarketed preferred shares on October 31, 1995 were: Series A - 3.74%,
Series B - 3.82%. 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.
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, its registration with the Securities
and Exchange Commission and with various states and the initial public
offering of its shares were $26,528. These expenses are being amortized
on a straight-line basis over a five-year period. The fund will
reimburse Putnam Management for the payment of these expenses.
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 October 31, 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
October 31, 1995, there were no such restrictions on the fund.
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 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 aggregated amount of all such
reimbursements is determined annually by the Trustees.
Trustees of the fund receive an annual Trustees fee of $810 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 Trustess receive additional fees for attendence at certain meetings.
During the six months ended October 31, 1995, 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 the fund
or in other Putnam funds until distribution in accordance with the Plan.
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 six months ended October 31, 1995, fund expenses were reduced by
$69,294 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 the assets utilized in connection
with the expense offset arrangements in an income-producing asset if it
had not entered into such arrangements.
Note 4
Purchases and sales of securities
During the six months ended October 31, 1995, purchases and sales of
investment securities other than short-term investments aggregated
$143,487,766 and $156,623,400 respectively. Purchases and sales of
short-term municipal obligations aggregated $101,800,000 and
$90,553,750, respectively. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
<TABLE>
<CAPTION>
Selected quarterly data*
(Unaudited)
Net realized and Net increase in
Investment Net investment unrealized gain (loss) net assets
income income on investments from operations
- ---------------------------------------------------------------------------------------------------------------
Quarter Per Per Per Per
Ended Total Share* Total Share* Total Share* Total Share*
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <>
10-31-95 $4,301,942 $.32 $3,132,120 $.24 $ 3,858,522 $ .29 $ 6,990,642 $ .53
7-31-95 $4,440,157 $.33 $3,257,869 $.24 $ 176,731 $ .01 $ 3,434,600 $ .25
4-30-95 $4,427,510 $.33 $3,288,376 $.25 $ 3,839,966 $ .28 $ 7,128,342 $ .53
1-31-95 $4,413,648 $.33 $3,556,470 $.26 $ 2,384,896 $ .18 $ 5,941,366 $ .44
10-31-94 $4,350,562 $.33 $3,139,962 $.24 $(9,964,779) $(.75) $(6,824,817) $(.51)
7-31-94 $4,416,081 $.33 $3,238,692 $.24 $ 1,251,989 $ .10 $ 4,490,681 $ .34
* Per common share.
</TABLE>
Results of October 5, 1995
shareholder meeting
An annual meeting of shareholders of the fund was held on October 5,
1995. At the meeting, each of the nominees for Trustees was elected, as
follows:
Votes for Votes withheld
Jaemson Adkins Baxter 12,515,531 167,165
Hans H. Estin 12,516,238 166,464
Elizabeth T. Kennan 12,512,487 170,209
Lawrence J. Lasser 12,520,324 162,372
Donald S. Perkins 12,517,175 165,521
William F. Pounds 12,520,475 162,221
George Putnam 12,552,251 160,445
George Putnam, III 12,518,975 163,721
E. Shapiro 12,507,002 175,695
A.J.C. Smith 12,523,785 158,911
W. Nicholas Thorndike 12,514,736 167,961
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as
auditors for the fund was approved as follows: 12,445,877 votes for,
and 47,580 votes against, with 189,239 abstentions and broker non-votes.
A proposal to fix the number of Trustees at 13 was approved as follows:
34,351,246 for, and 773,771 against. All tabulations have been rounded
to the nearest whole number.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
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
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
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.
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The Putnam Funds
One Post Office Square
Boston Massachusetts, 02109
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Putnam
Investments
21707-183 12/95
