Putnam
Investment Grade
Municipal Trust II
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
4-30-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
For income-oriented investors, including investors in tax-free municipal
bonds, low interest rates over the period posed a dilemma. While low rates
generally reflected a low-inflation environment, they also presented a
challenge in terms of generating current income.
Richard Wyke, who manages Putnam Investment Grade Municipal Trust II,
addresses the challenge of generating maximum current income primarily
through careful selection of portfolio holdings. Putnam's edge in this
regard is its extensive credit research capability, which allows Rick to
choose higher-yielding securities from the lower tiers of the
investment-grade spectrum with a high degree of confidence in the safety
of these selections. There can never be ironclad guarantees against bond
defaults, of course, but diligent, in-depth research has proven to be an
effective tool for minimizing such unpleasant situations.
In the following report, Rick reviews your fund's performance during the
fiscal year that ended on April 30, 1999, and discusses his current
thinking about prospects for the fiscal year that has just begun.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
June 16, 1999
Report from the Fund Manager
Richard P. Wyke
All the ingredients for positive municipal bond performance have been
available some time now: robust economic growth, negligible inflation, and
strong municipal balance sheets. The only drawback has been a slight rise
in long-term interest rates. Nevertheless, thanks to careful security
selection and well-placed sector bets, Putnam Investment Grade Municipal
Trust II was able to deliver solid results for the 12 months ended April
30, 1999.
Total return for 12 months ended 4/30/99
Net asset value Market price
- -----------------------------------------------------------------
5.45% 15.08%
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Past performance is no indication of future results. Performance
information for longer periods begins on page 6.
* MUNICIPAL MARKET EXHIBITS RELATIVE STABILITY
In a financial world where market highs and lows seem to be making
headlines daily, the municipal market has unquestionably been one of the
calmest. Municipal bond yields -- which rise as bond prices fall -- have
moved up less than 20 basis points since the beginning of the year, while
Treasury yields rose more in February than in any other single month in 10
years. While this means that municipal yields are heading back toward more
traditional ratios, municipal yields are still quite attractive at 90% of
comparable Treasuries.
As expected, with the slight rise in yields, the new supply of municipal
bonds has tapered off. The calendar of new issues shows that about 20% to
30% fewer bonds came to market compared with the level for the same period
last year. This lower supply was an important factor in sustaining
municipal prices in late 1998 and early 1999 when Treasury prices fell so
much. On the demand side, cash flow into municipal bonds has decreased
over the past several months due to the stock market's astounding
advances. Nevertheless, with supply still so low, the current
supply/demand relationship remains positive for municipal bonds.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Transportation 19.5%
Hospitals/
health care 18.0%
Utilities 9.9%
Education 5.5%
Waste
management 4.5%
Footnote reads:
*Based on net assets as of 4/30/99. Holdings will vary over time.
Concerns are gradually beginning to surface about the possible effects of
Y2K and Medicare reform proposals on certain sectors of the municipal bond
market. Such concerns are one reason why we have always considered
security selection and credit analysis as part of the fundamental
investment strategy for this fund. Opportunity comes from choosing issues
correctly, rather than overall sector performance. Security and credit
research becomes even more important when we invest in bonds that carry
ratings at the lower end of the investment-grade market. These are the
bonds that can add tremendously to a fund's income level, but they also
mean greater credit risk and require the most meticulous research efforts.
* CALL PROTECTION STILL TOP PRIORITY
While interest rates have been low, one of the key challenges we faced is
delivering an attractive level of income while maintaining high credit
quality. Although yields on municipal securities have risen slightly over
the past several months, these yields are still much lower than the yields
provided by many of the portfolio's older bond holdings. As these older
bonds reach their call dates, we continue to seek new holdings to maintain
the fund's income stream. Our goal is to select bonds with the longest
call dates so as to maximize the length of time these bonds will generate
income for the fund while minimizing the possibility that they will be
called by the issuer and refinanced at a lower interest rate.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
AA/Aa -- 7.4%
A/A -- 20.1%
BBB/Baa -- 19.7%
BB/Ba and below -- 3.7%
VMIG1/A-1 -- 0.1%
AAA/Aaa -- 49.0%
Footnote reads:
*As a percentage of portfolio market value as of 4/30/99. A bond rated Baa
or higher is considered investment grade. All ratings reflect Standard &
Poor's and Moody's descriptions unless noted otherwise; percentages may
include unrated bonds considered by Putnam Management to be of comparable
quality. Ratings will vary over time.
For the most part, individual securities selection remains our key
strategy for generating income for the fund. Once again New York City
general obligation bonds were top performers, earning a credit upgrade as
sustained economic growth, strong financial operations, and a sustained
record of accurate revenue forecasts buoyed their creditworthiness.
"The credit quality of municipal bond issuers is the highest it has been in a
decade."
-- Tax Angles, April 1999
In selecting holdings, we have identified two industry sectors where
taking on a little more credit risk can have rewarding results:
transportation and utilities. The economy's strength continues to provide
solid underpinnings for the transportation industry -- especially airlines
and air freight. Bonds backed by American Airlines and used to finance
terminal expansion at La Guardia and John F. Kennedy airports posted
strong returns. American Airlines reported record earnings in 1998 as fuel
prices remained low and passenger demand stayed high. The fund also holds
Alliance Airport Authority revenue bonds issued on behalf of Federal
Express Corp. Federal Express took advantage of the strong economy,
turning in impressive revenues and profitability. Fed Ex also reached a
five-year labor contract with its pilots, which adds to the security of
these bonds.
In the utility sector, we believe that while deregulation and
restructuring are still in the early stages, the prices of many municipal
electric utility bonds have already been fully discounted and now
represent significant value. We continue to hold bonds from issuers with
low cost structures, attractive business strategies, and adequate
resources for recovering costs incurred during the era of regulation. The
fund's strong-performing Consolidated Edison holdings received a boost in
creditworthiness as ConEd completed a profitable sale of its final bundle
of power generation facilities. Two Nevada revenue bond issues, Southwest
Gas Company and Nevada Power Company, contributed to the fund's positive
performance as well. Nevada Power has a strong service territory with a
concentration of non-nuclear power assets. The proposed merger of
Southwest Gas with ONEOK would create the largest independent gas
distributor in the United States.
* LOW INTEREST RATES INCREASED VALUE OF LEVERAGING
Low interest rates were advantageous for the fund's leveraging strategy,
which historically has been useful in enhancing current income. In
leveraging, the fund issues and sells preferred shares to institutional
short-term investors at low rates and reinvests the proceeds in
longer-term, higher-paying bonds. After earnings from the bonds are used
to pay dividends to the preferred shareholders, the surplus is used to
enhance income for the common shareholders. With the Federal Reserve Board
lowering short-term interest rates three times last fall and long-term
interest rates edging up over the past several months, the spread between
short- and long-term rates widened, making leveraging an even more
successful income-generating strategy over the annual period.
With indications that inflation may be starting to rise, the consumer
price index is moving towards an annualized core inflation rate of
approximately 2%. Since inflation in 1998 was practically nonexistent, a
move to 2% may seem tremendous, but is actually still well below what has
been generally considered average (4%). And despite some signs of
inflation, we still live predominately in a deflationary world where many
prices are falling. Just look at online stock trading prices and the
discounts available from online bookstores for evidence of deflation.
It is important to keep inflation in mind when investors determine what
constitutes a good rate of return. Simply put, a yield of 6% with 2%
inflation is still a solid return, especially once the psychology of an
advancing stock market begins to shift. When that happens, a steady 4%
after-inflation yield looks very good in addition to the benefit of
substantially less volatility.
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 4/30/99, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its 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 4/30/99
Lehman Brothers
Market Municipal Bond Consumer
(common shares) NAV price Index price index
- ----------------------------------------------------------------------------
1 year 5.45% 15.08% 6.95% 2.28%
- ----------------------------------------------------------------------------
5 years 39.42 64.16 43.57 12.75
Annual average 6.87 10.42 7.50 2.43
- ----------------------------------------------------------------------------
Life of fund (11/27/92) 55.41 58.91 55.22 17.04
Annual average 7.11 7.48 7.10 2.48
- ----------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns, net asset value and market price will fluctuate so that an
investor's shares when sold may be worth more or less than their original
cost.
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 4/30/99
- -----------------------------------------------------------------------------
Distributions (common shares)
- -----------------------------------------------------------------------------
Number 12
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Income $0.96
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Capital gains1 --
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Total $0.96
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Preferred shares Series A Series B
(630 shares) (630 shares)
- -----------------------------------------------------------------------------
Income $1,740.50 $1,746.72
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Total $1,740.50 $1,746.72
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Share value (common shares) NAV Market price
- -----------------------------------------------------------------------------
4/30/98 $14.13 $14.125
- -----------------------------------------------------------------------------
4/30/99 13.94 15.250
- -----------------------------------------------------------------------------
Current return (common shares/end of period)
- -----------------------------------------------------------------------------
Current dividend rate2 6.89% 6.30%
- -----------------------------------------------------------------------------
Taxable equivalent3 11.41 10.43
- -----------------------------------------------------------------------------
1 Capital gains if any, are taxable for federal and, in most cases, state
tax purposes. For some investors, investment income may also be subject to
the federal alternative minimum tax. Investment income may be subject to
state and local taxes.
2 Income portion of most recent distribution, annualized and divided by
NAV or POP 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.
TOTAL RETURN FOR PERIODS ENDED 3/31/99 (most recent calendar quarter)
Market
(common shares) NAV price
- -----------------------------------------------------------------------------
1 year 4.04% 5.73%
- -----------------------------------------------------------------------------
5 years 38.87 58.72
Annual average 6.79 9.68
- -----------------------------------------------------------------------------
Life of fund (since 11/27/92) 54.74 54.18
Annual average 7.13 7.07
- -----------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns and principal value will fluctuate so that an investor's shares
when sold may be worth more or less than their original cost.
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities and the net assets allocated to 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 assumes reinvestment of all distributions
and interest payments and does not take in account brokerage fees or
taxes. Securities in the fund do no match those in the indexes and
performance of the fund will differ. It is not possible to invest directly
in an index.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
A guide to the financial statements
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values as
of the last day of the reporting period. Holdings are organized by asset
type and industry sector, country, or state to show areas of concentration
and diversification.
Statement of assets and liabilities shows how the fund's net assets and share
price is determined. All investment and non-investment assets are added
together. Any unpaid expenses and other liabilities are subtracted from this
total. The result is divided by the number of shares to determine the net
asset value per share, which is calculated separately for each class of
shares. (For funds with preferred shares, the amount subtracted from total
assets includes the net assets allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for the
reporting period. This is determined by adding up all the fund's earnings --
from dividends and interest income -- and subtracting its operating expenses.
This statement also lists any net gain or loss the fund realized on the sales
of its holdings and -- for holdings that remain in the portfolio -- any change
in unrealized gains or losses over the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of the
fund's shares. It lists distributions and their sources (net investment income
or realized capital gains) over the current reporting period and the most
recent fiscal year-end. The distributions listed here may not match the
amounts listed in the Statement of Operations because the distributions are
determined on a tax basis and may be paid in a different period from the one
in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also includes
the current reporting period. For open-ended funds, a separate table is
provided for each share class.
Report of independent accountants
For the fiscal year ended April 30, 1999
To the Trustees and Shareholders of
Putnam Investment Grade Municipal Trust II
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, except for bond ratings, and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position
of Putnam Investment Grade Municipal Trust II (the "fund") at April 30, 1999,
and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at April 30, 1999
by correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 14, 1999
<TABLE>
<CAPTION>
The fund's portfolio
April 30, 1999
KEY TO ABBREVIATIONS
AMBAC -- AMBAC Indemnity Corporation
CLI Insd. -- Connie Lee Insurance Insured
G.O. Bonds -- General Obligation Bonds
FGIC -- Financial Guaranty Insurance Company
FRB -- Floating Rate Bonds
FSA -- Financial Security Assurance
IFB -- Inverse Floating Rate Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
U.S. Govt. Coll.-- U.S. Government Collaterized
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (98.7%) (a)
PRINCIPAL AMOUNT RATING(RAT) VALUE
<S> <C> <C> <C>
Alaska (0.9%)
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$ 2,000,000 Valdez, Marine Term. Rev. Bonds (Sohio Pipeline),
7 1/8s, 12/1/25 AA+ $ 2,197,500
Arizona (1.8%)
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6,000,000 Maricopa Cnty., U. School Dist. No. 41 Gilbert Cap.
Appn. G.O. Bonds, FGIC, zero %, 1/1/07 Aaa 4,320,000
200,000 Pima Cnty., Indl. Dev. Auth. VRDN (Tucson Elec.
Pwr. Co.-Irvington), Ser. A, 3.35s, 10/1/22 VMIG1 200,000
--------------
4,520,000
California (4.9%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 CA Hlth. Fac. Fin. Auth. IFB (Catholic Healthcare
West), AMBAC, 6.786s, 7/1/17 Aaa 5,225,000
2,500,000 CA State U. IFB, AMBAC, 8.443s, 11/1/21
(acquired 9/2/94, cost $2,681,272) (RES) Aaa 2,868,750
1,250,000 CA Statewide Cmntys. Dev. Auth. (The Internext
Group), 5 3/8s, 4/1/30 BBB 1,226,563
3,500,000 Foothill/Eastern Trans. Corridor Agcy. Toll Rd.
Rev. Bonds, Sr. Lien, Ser. A, stepped-coupon
zero % (7s, 1/1/05), 2008 (STP) Baa 2,852,500
--------------
12,172,813
Colorado (7.8%)
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Denver, City & Cnty. Arpt. Rev. Bonds
3,675,000 Ser. A, 8 3/4s, 11/15/23 Baa1 4,093,031
1,325,000 Prerefunded, Ser. A, 8 3/4s, 11/15/23 Aaa 1,508,844
2,285,000 Ser. A, 8 1/2s, 11/15/23 Baa1 2,464,944
215,000 Prerefunded, Ser. A, 8 1/2s, 11/15/23 Aaa 234,888
1,525,000 Ser. A, 8s, 11/15/25 Baa1 1,633,656
735,000 Ser. A, 8s, 11/15/25 Baa1 792,881
265,000 Prerefunded, Ser. A, 8s, 11/15/25 Aaa 292,163
145,000 Prerefunded, Ser. A, 8s, 11/15/25 Aaa 157,325
1,000,000 Ser. D, 7 3/4s, 11/15/13 Baa1 1,258,750
5,250,000 SCA Tax Exempt Trust Multi-Fam. Mtge. Rev. Bonds
(Newport Village), Ser. A-8, FSA, 7.1s, 1/1/30 Aaa 5,814,375
1,275,000 Wheat Ridge, Indl. Dev. FRB (La Quinta
Motor Inns), 4.05s, 4/1/04 A-1+ 1,275,000
--------------
19,525,857
Florida (10.0%)
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Broward Cnty., Resource Recvy. Rev. Bonds
9,650,000 (SES Broward Cnty. LP South), 7.95s, 12/1/08 A3 10,146,686
1,045,000 (Waste-Energy LP North), 7.95s, 12/1/08 A3 1,098,786
1,000,000 FL State Board of Ed. Cap. Outlay G.O. Bonds,
Ser. A, 7 1/4s, 6/1/23 AA+ 1,059,670
5,000,000 Lee Cnty., Board of Directors Hosp. IFB
(Lee Memorial Hosp.), MBIA, 8.867s, 3/26/20 Aaa 5,843,750
1,625,000 Martin Cnty., Indl. Dev. Auth. Rev. Bonds
(Indian Cogeneration), Ser. A, 7 7/8s, 12/15/25 Baa3 1,736,719
5,000,000 Port Everglades, Auth. Rev. Bonds, Ser. A, 5s, 9/1/16 BBB 5,010,350
--------------
24,895,961
Georgia (3.0%)
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6,340,000 Burke Cnty., Dev. Auth. Poll. Control Rev. Bonds
(Oglethorpe Pwr. Co. Vogtle), MBIA, 8s, 1/1/22 (SEG) Aaa 7,401,950
Hawaii (2.6%)
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HI State Arpt. Syst. Rev. Bonds
2,000,000 AMBAC, 7.3s, 7/1/20 Aaa 2,110,000
4,000,000 FGIC, 7s, 7/1/10 Aaa 4,305,000
--------------
6,415,000
Illinois (5.6%)
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7,750,000 Central Lake Cnty., Joint Action Wtr. Agcy.
G.O. Bonds, 6s, 2/1/19 Aa 8,156,875
Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
1,955,000 (United Air Lines, Inc.), Ser. C, 8.2s, 5/1/18 Baa2 2,013,650
2,250,000 (American Airlines, Inc.), Ser. A, 7 7/8s, 11/1/25 Baa1 2,407,500
1,500,000 IL, Dev. Fin. Auth. Hosp. Rev. Bonds
(Adventist Hlth. Syst./Sunbelt Obligation),
5.65s, 11/15/24 Baa1 1,477,500
--------------
14,055,525
Indiana (0.9%)
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2,000,000 Marion Cnty., Ind. Convention & Rectl. Fac. Auth.
Rev. Bonds (Excise Tax Rev. Lease Rental),
Ser. A, AMBAC, 7s, 6/1/21 Aaa 2,150,000
Kansas (1.1%)
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2,600,000 Burlington, Poll. Control Rev. Bonds
(Kansas Gas & Electric Co.), MBIA, 7s, 6/1/31 Aaa 2,808,000
Kentucky (4.8%)
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5,030,000 Jefferson Cnty., Cap. Corp. Rev. Bonds,
MBIA, 5 1/2s, 6/1/28 Aaa 5,212,338
2,200,000 Jefferson Cnty., Hosp. Rev. Bonds IFB, Unrefunded,
6.436s, 10/1/14 Aaa 2,398,000
4,000,000 Kenton Cnty., Special Fac. Arpt. Rev. Bonds
(Delta Airlines), Ser. A, 7 1/2s, 2/1/12 Baa3 4,355,000
--------------
11,965,338
Louisiana (1.1%)
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2,000,000 Beauregard, Parish Rev. Bonds
(Boise Cascade Corp.), 7 3/4s, 6/1/21 Baa3 2,150,000
500,000 St. Charles Parish, Poll. Control Rev. Bonds
(LA Pwr. & Lt.), 8 1/4s, 6/1/14 Baa3 516,290
--------------
2,666,290
Massachusetts (6.9%)
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2,750,000 MA State Hlth. & Ed. Fac. Auth. Rev. Bonds
(Caritas Christian Oblig. Group),
Ser. A, 5 5/8s, 7/1/20 Baa2 2,715,625
MA State Hlth. & Edl. Fac. Auth. IFB
2,000,000 (Beth Israel-Deaconess Hosp.), AMBAC,
9.751s, 10/1/31 Aaa 2,322,500
5,500,000 (Med. Ctr. of Central MA), Ser. B, AMBAC,
9.52s, 6/23/22 Aaa 7,198,125
3,000,000 MA State Port Auth. Rev. Bonds, 13s, 7/1/13 Aaa 4,995,000
--------------
17,231,250
Michigan (1.0%)
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2,000,000 Detroit, Wtr. Supply Syst. IFB, FGIC, 9.729s, 7/1/22 Aaa 2,325,000
200,000 Ingham Cnty. Econ. Dev. Corp. Ltd. Rev. Bonds,
VRDN (Martin Luther Memorial Home, Inc.),
4.15s, 4/1/22 A-1+ 200,000
--------------
2,525,000
Nevada (2.1%)
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3,000,000 Clark Cnty., Indl. Dev. Rev. Bonds
(Southwest Gas Corp.), Ser. B, 7 1/2s, 9/1/32 Baa2 3,288,750
2,000,000 Clark Cnty., Indl. Dev. Rev. Bonds (NV Pwr. Co.),
Ser. C, 5 1/2s, 10/1/30 BBB- 2,000,000
--------------
5,288,750
New Jersey (2.1%)
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4,645,000 NJ, Hlth. Care Fac. Fin. Auth. Rev. Bonds (Jersey
Shore Med. Ctr.), AMBAC, 6 3/4s, 7/1/19 Aaa 5,231,431
New York (15.8%)
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2,000,000 Long Island, Pwr. Auth. NY Elec. Syst. Rev. Bonds,
Ser. A, 5 1/4s, 12/1/26 A- 2,007,500
NY City, G.O. Bonds
2,900,000 Ser. B, 7 1/2s, 2/1/06 A- 3,197,250
1,100,000 Prerefunded, Ser. B, 7 1/2s, 2/1/06 A- 1,223,750
5,000,000 Ser. D, 5 1/4s, 8/1/21 A- 5,000,000
300,000 NY City, Hsg. Dev. Corp. Mtge. VRDN
(Multi-Fam. James Twr. Dev.), Ser. A, 3.8s, 7/1/05 A-1+ 300,000
6,250,000 NY City, Muni. Wtr. & Swr. Fin. Auth. Rev. Bonds,
Prerefunded Ser. A, MBIA, US Govt. Coll.
7s, 6/15/15 Aaa 6,867,188
NY State Dorm. Auth. Rev. Bonds
(State U. Edl. Fac.), Ser. A
6,500,000 7.7s, 5/15/12 Aaa 6,920,550
5,000,000 5 7/8s, 5/15/17 A- 5,525,000
5,000,000 NY State Energy Res. & Dev. Auth. Elec. Fac.
Rev. Bonds (Cons. Edison Co. of NY, Inc.),
Ser. A, 7 1/2s, 1/1/26 A+ 5,156,500
NY State Urban Dev. Corp. Rev. Bonds
(Syracuse U.)
1,440,000 6s, 1/1/07 Baa1 1,582,200
1,360,000 6s, 1/1/06 Baa1 1,487,500
--------------
39,267,438
Oklahoma (1.7%)
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3,555,000 Tulsa, Indl. Auth. Hosp. Rev. Bonds
(Hillcrest Med. Ctr.), CLI Insd., 6 1/4s, 6/1/10 AAA 4,114,913
Pennsylvania (5.5%)
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3,000,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(Magee-Womans Hosp. ), FGIC, 6s, 10/1/13 Aaa 3,225,000
2,000,000 Allegheny Cnty., Indl. Dev. Auth. Rev. Bonds
(Environmental Import USX), 6.7s, 12/1/20 Baa2 2,175,000
5,000,000 Dauphin Cnty., Auth. Hosp. Rev. Bonds
(Hapsco-Western PA Hosp.), Ser. A, MBIA,
6 1/2s, 7/1/12 Aaa 5,393,750
2,000,000 Delaware Cnty., Indl. Dev. Auth. Rev. Bonds,
Ser. A, 6.2s, 7/1/19 A- 2,070,000
2,700,000 PA State Higher Ed. Assistance Agcy. Rev. Bonds
(Student Loan IFB), Ser. A, 6 1/4s,
7/1/13 (acquired 5/1/96, cost $2,537,676)
(In Default) (NON) (RES) CCC 891,000
--------------
13,754,750
South Carolina (2.3%)
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5,000,000 Spartanburg Cnty. Solid Waste Disp. Rev. Bonds
(Bayerische Motoren Werke), 7.55s, 11/1/24 A/P 5,693,750
Tennessee (5.2%)
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3,000,000 Maury Cnty. Indl. Dev. Board Poll. Control
Rev. Bonds (Saturn Corp.), 6 1/2s, 9/1/24 A 3,307,500
8,300,000 Metropolitan Govt. Nashville & Davidson Cnty.,
Tenn. Wtr. & Swr. IFB, AMBAC, 8.783s, 1/1/22 Aaa 9,607,250
--------------
12,914,750
Texas (4.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,700,000 Alliance, Arpt. Auth. Rev. Bonds
(Federal Express Corp.), 6/38s, 4/1/21 Baa2 1,821,125
1,250,000 Dallas-Fort Worth, Intl. Arpt. Fac. Impt. Corp.
Rev. Bonds (American Airlines, Inc.),
7 1/2s, 11/1/25 Baa1 1,329,688
1,750,000 North Central Hlth. Fac. Dev. Corp. IFB
(Presbyterian Hlth. Care Syst.), Ser. C, MBIA,
10.595s, 6/22/21 Aaa 2,025,625
3,000,000 Nueces Cnty., Port of Corpus Christi Rev. Bonds
(Union Pacific), 5.65s, 12/1/22 Baa3 3,075,000
3,000,000 Titus Cnty., Fresh Wtr. Supply Dist. No. 1 Poll.
Rev. Bonds (Southwestern Elec. Pwr. Co.),
Ser. A, 8.2s, 8/1/11 A1 3,337,500
--------------
11,588,938
Utah (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 UT, State Board Regents Student Loan Rev. Bonds,
Ser. H, AMBAC, 6.7s, 11/1/15 Aaa 5,368,750
Washington (3.6%)
- --------------------------------------------------------------------------------------------------------------------------
6,000,000 King Cnty., G.O. Bonds, Ser. C, 6 1/4s, 1/1/32 AA+ 6,735,000
2,000,000 Tacoma, Elec. Syst. IFB, AMBAC, 9.448s, 1/2/15 Aaa 2,265,000
--------------
9,000,000
West Virginia (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 Mason Cnty., Poll. Ctrl. Rev. Bonds
(Appalachian Pwr. Co.), Ser. I, 6.85s, 6/1/22 Baa1 3,247,496
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $237,882,890) (b) $ 246,001,450
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $249,264,001.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at April 30,
1999 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, 1999. Securities rated by
Putnam are indicated by "/P" and are not publicly rated. Ratings are not covered by the Report of independent
accountants.
(b) The aggregate identified cost on a tax basis is $237,882,890, resulting in gross unrealized appreciation and
depreciation of $11,250,012 and $3,131,452, respectively, or net unrealized appreciation of $8,118,560.
(NON) Non-income producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at
April 30, 1999 was $3,759,750 or 1.5% of net assets.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures
contracts at April 30, 1999.
The rates shown on FRB, VRDN and IFB which are securities paying interest rates that vary inversely to changes in
the market interest rates, are the current interest rates at April 30, 1999.
The fund had the following industry group concentrations greater than 10% at April 30, 1999 (as a percentage of net
assets):
Transportation 19.5%
Hospitals/health care 18.0
The fund had the following insurance concentrations greater than 10% at April 30, 1999 (as a percentage of net
assets):
AMBAC 16.1%
MBIA 14.3
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at April 30, 1999
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
- -------------------------------------------------------------------------------
Muni Bond
Future (long) $17,246,250 $17,217,834 June 99 $28,416
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
April 30, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $237,882,890) (Note 1) $246,001,450
- -----------------------------------------------------------------------------------------------
Cash 196,870
- -----------------------------------------------------------------------------------------------
Interest receivable 4,779,167
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 50,000
- -----------------------------------------------------------------------------------------------
Total assets 251,027,487
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,068,481
- -----------------------------------------------------------------------------------------------
Payable for variation margin 179,375
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 438,233
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 23,377
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 11,649
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,050
- -----------------------------------------------------------------------------------------------
Other accrued expenses 40,321
- -----------------------------------------------------------------------------------------------
Total liabilities 1,763,486
- -----------------------------------------------------------------------------------------------
Net assets $249,264,001
Represented by
- -----------------------------------------------------------------------------------------------
Series A and B remarketed preferred shares, (1,260 shares
issued and outstanding at $50,000 per share) (Note 4) $ 63,000,000
- -----------------------------------------------------------------------------------------------
Paid-in capital -- common shares (unlimited shares authorized) (Note 1) 186,297,703
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (1,175,212)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (7,005,466)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 8,146,976
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $249,264,001
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Series A and B remarketed preferred shares $ 63,000,000
- -----------------------------------------------------------------------------------------------
Cumulative undeclared dividends on remarketed preferred shares 69,043
- -----------------------------------------------------------------------------------------------
Net assets allocated to remarketed preferred shares -- liquidation preference 63,069,043
- -----------------------------------------------------------------------------------------------
Net assets available to common shares 186,194,958
- -----------------------------------------------------------------------------------------------
Net asset value per common share ($186,194,958 divided by 13,357,092 shares) $13.94
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended April 30, 1999
<S> <C>
Tax exempt interest income: $15,716,082
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,760,226
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 232,009
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 11,301
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,260
- -----------------------------------------------------------------------------------------------
Reports to shareholders 23,041
- -----------------------------------------------------------------------------------------------
Auditing 40,204
- -----------------------------------------------------------------------------------------------
Legal 11,137
- -----------------------------------------------------------------------------------------------
Postage 23,028
- -----------------------------------------------------------------------------------------------
Preferred share remarketing agent fees 190,889
- -----------------------------------------------------------------------------------------------
Other 31,600
- -----------------------------------------------------------------------------------------------
Total expenses 2,329,695
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (26,109)
- -----------------------------------------------------------------------------------------------
Net expenses 2,303,586
- -----------------------------------------------------------------------------------------------
Net investment income 13,412,496
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (1,648,027)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 433,285
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures contracts during the year 220,454
- -----------------------------------------------------------------------------------------------
Net loss on investments (994,288)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $12,418,208
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended April 30
-------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 13,412,496 $ 14,218,035
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (1,214,742) 507,758
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 220,454 6,253,086
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 12,418,208 20,978,879
Distributions to remarketed preferred shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (2,196,948) (2,320,529)
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations
applicable to common shareholders (excluding cumulative
undeclared dividends on remarketed preferred shares of
$69,043 and $76,159, respectively) 10,221,260 18,658,350
- ---------------------------------------------------------------------------------------------------------------
Distributions to common shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (12,821,751) (12,821,881)
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (2,600,491) 5,836,469
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 251,864,492 246,028,023
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of net
investment income and undistributed net investment
income of $1,175,212 and $412,576, respectively) $249,264,001 $251,864,492
- ---------------------------------------------------------------------------------------------------------------
Number of fund shares
- ---------------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning and end of year 13,357,092 13,357,092
- ---------------------------------------------------------------------------------------------------------------
Remarketed preferred shares outstanding at beginning
and end of year 1,260 1,260
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended April 30
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period (common shares) $14.13 $13.70 $13.79 $13.94 $14.30
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 1.00 1.06 1.07 1.09 1.14
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.07) .50 (.03) (.10) (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .93 1.56 1.04 .99 .98
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.16) (.17) (.17) (.18) (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.96) (.96) (.96) (.96) (.96)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments
- ------------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders -- -- -- -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
To common shareholders -- -- -- -- (.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.12) (1.13) (1.13) (1.14) (1.34)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period
(common shares) $13.94 $14.13 $13.70 $13.79 $13.94
- ------------------------------------------------------------------------------------------------------------------------------------
Market value, end of period
(common shares) 15.25 $14.125 $14.250 $13.875 $12.750
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at market
value (common shares) (%)(a) 15.08 5.63 9.86 16.62 5.39
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(total fund) (in thousands) $249,264 $251,864 $246,028 $247,234 $249,223
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b)(c) 1.23 1.26 1.26 1.24 1.28
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(b) 5.93 6.26 6.51 6.41 7.10
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 17.07 25.71 45.48 160.28 85.63
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Ratios reflect net assets available to common shares only; net investment income ratio also reflects reduction for
dividend payments to preferred shareholders.
(c) The ratio of expenses to average net assets for the period ended April 30, 1996 and thereafter, includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
</TABLE>
Notes to financial statements
April 30, 1999
Note 1
Significant accounting policies
Putnam Investment Grade Municipal Trust II (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"), the 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
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
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 Putnam Management,
following procedures approved by the Trustees, and such valuations and
procedures are reviewed periodically by the Trustees.
B) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
C) Futures 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. 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. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
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.
D) 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, as amended. Therefore, no provision has been made
for federal taxes on income, capital gains or unrealized appreciation on
securities held nor for excise tax on income and capital gains.
At April 30, 1999, the fund had a capital loss carryover of approximately
$5,130,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------- --------------
$2,203,000 April 30, 2004
2,651,000 April 30, 2005
243,000 April 30, 2006
33,000 April 30, 2007
E) Distributions to shareholders Distributions to common and preferred
shareholders are recorded by the fund on the ex-dividend date. Dividends
on remarketed preferred shares become payable when, as and if declared by
the Trustees. Each dividend period for the remarketed preferred shares is
generally a 28-day period. The applicable dividend rate for the remarketed
preferred shares on April 30, 1999 was Series A-3.22%, Series B-3.27%. 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 temporary and permanent differences of
post-October loss deferrals, defaulted bond interest, unrealized gains and
losses on certain futures contracts, market discounts, capital loss
carryover and straddle 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, 1999, the fund reclassified
$18,415 to decrease distributions in excess of net investment income and
$5 to increase paid-in-capital, with an increase to accumulated net
realized losses of $18,420. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.
F) Determination of net asset value Net asset value of the common shares
is determined by dividing the value of all assets of the fund, less all
liabilities and the liquidation preference of any outstanding remarketed
preferred shares, by the total number of common shares outstanding.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on zero coupon bonds and
original issue discount are accreted according to the yield to maturity
basis.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 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, 0.50% of any amount thereafter.
If dividends payable on remarketed preferred shares during any dividend
payment period plus any expenses attributable to remarketed preferred
shares for that period exceed the fund's gross 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 the
amount of the excess (but not more than 0.70% of the liquidation
preference of the remarketed preferred shares outstanding during the
period).
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended April 30, 1999, fund expenses were reduced by $26,109
under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the
Statement of operations exclude these credits. The fund could have
invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered
into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $470 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
Note 3
Purchase and sales of securities
During the year ended April 30, 1999, purchases and sales of investment
securities other than short-term investments aggregated $42,251,818 and
$43,216,837, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost
basis.
Note 4
Remarketed preferred shares
The Series A (630 shares) and B (630 shares) 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.
It is anticipated that dividends paid to holders of remarketed preferred
shares will be considered tax-exempt dividends under the Internal Revenue
Code of 1986. To the extent that the fund earns taxable income and capital
gains by the conclusion of a fiscal year, it will be required to apportion
to the holders of the remarketed preferred shares throughout that year
additional dividends as necessary to result in an after-tax equivalent to
the applicable dividend rate for the period.
Under the Investment Company Act of 1940, the fund is required to maintain
asset coverage of at least 200% with respect to the remarketed preferred
shares as of the last business day of each month in which any such shares
are outstanding. Additionally, the fund is required to meet more stringent
asset coverage requirements under terms of the remarketed preferred shares
and the shares' rating agencies. Should these requirements not be met, or
should dividends accrued on the remarketed preferred shares not be paid,
the fund may be restricted in its ability to declare dividends to common
shareholders or may be required to redeem certain of the remarketed
preferred shares. At April 30, 1999, no such restrictions have been placed
on the fund.
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
The Form 1099 you receive in January 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
Results of October 1, 1998 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on October 1, 1998.
At the meeting, each of the nominees for Trustees was elected, as follows:
Common Shares Preferred Shares
Votes Votes
Votes for withheld Votes for withheld
Jameson Adkins Baxter 9,219,878 148,850 732 2
Hans H. Estin 9,213,117 155,611 732 2
Ronald J. Jackson 9,213,486 155,242 732 2
Paul L. Joskow 9,217,132 151,596 732 2
Elizabeth T. Kennan 9,208,750 159,878 732 2
Lawrence J. Lasser 9,213,945 154,783 732 2
John H. Mullin III 9,216,835 151,893 732 2
Donald S. Perkins 9,210,700 158,028 732 2
William F. Pounds 9,201,137 167,591 732 2
George Putnam 9,206,276 162,452 732 2
George Putnam, III 9,220,771 147,957 732 2
A.J.C. Smith 9,214,086 154,642 732 2
W. Thomas Stephens 9,214,803 153,925 732 2
W. Nicholas Thorndike 9,213,418 155,310 732 2
A proposal to ratify the selection of PricewaterhouseCoopers LLP as the
independent auditors of your fund was approved as follows:
Common Shares -- 9,206,162 votes for, and 63,653 votes against, with
98,913 abstentions.
Preferred Shares -- 733 votes for, and 0 votes against, with 1 broker
non-vote.
A proposal to approve an amendment to the fund's fundamental investment
restriction with respect to making loans was approved as follows:
Common Shares -- 7,137,996 votes for, and 474,736 votes against, with
1,755,996 abstentions and broker non-votes.
Preferred Shares -- 548 votes for, and 184 votes against, with 2
abstentions.
A proposal to approve an amendment to the fund's fundamental policy
concerning the purchase of bonds paying interest subject to the Federal
Alternative Minimum Tax was approved as follows:
Common Shares -- 7,169,153 votes for, and 472,534 votes against, with
1,727,041 abstentions and broker non-votes.
Preferred Shares -- 648 votes for, and 84 votes against, with 2
abstentions.
Fund information
WEB SITE
www.putnaminv.com
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
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jerome J. Jacobs
Vice President
Richard P. Wyke
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit
our Web site (www.putnaminv.com) any time for up-to-date information about
the fund's NAV.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
52514 183 6/99
