Putnam
Investment
Grade
Intermediate
Municipal Trust
[picture of watch]
ANNUAL REPORT
April 30, 1995
[Putnam scale logo]
BOSTON (bullet) LONDON (bullet) TOKYO
<PAGE>
>"Some investment advisers say municipal bonds may look more attractive in
coming months because of a relative scarcity of issues. New issue volume has
fallen sharply this year, and a huge volume of issues is scheduled for
redemption or maturity in June and July."
--The Wall Street Journal, May 8, 1995.
>Performance should always be considered in light of a fund's investment
strategy. Putnam Investment Grade Intermediate Municipal Trust seeks as high
a level of current income exempt from federal income tax as Putnam
Investment Management believes is consistent with preservation of capital
through investments in intermediate-term bonds.
FISCAL 1995 RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Market
Total return NAV price
<S> <C> <C> <C> <C> <C>
(change in value during period
plus reinvested distributions)
12 months ended 4/30/95 5.09% 10.06%
Market
Share value NAV price
4/30/94 $13.64 $12.375
4/30/95 13.55 12.875
Capital
Distributions No. Income gains((1)) Total
12 $0.690 -- $ 0.690
Market
Current return NAV price
End of period
Current dividend rate((2)) 5.09% 5.36%
Taxable equivalent((3)) 8.43 8.87
</TABLE>
Performance data represent past results. For performance over longer periods,
see page 8.
((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 market price at end of period. ((3))Assumes
maximum 39.6% federal tax rate. Results for investors subject to lower tax
rates would not be as advantageous.
<PAGE>
From the Chairman
[photo of George Putnam]
(C)Karsh, Ottawa
Dear Shareholder:
Many of the gathering signs of hope that sustained municipal bond investors
during the darkest days of the 1994 market decline began manifesting
themselves in earnest in the early months of 1995. Although the market
exhibited volatility toward the end of Putnam Investment Grade Intermediate
Municipal Trust's fiscal year, the market's mood was appreciably more upbeat
when the period ended on April 30, 1995, than when it began.
As your fund moves into fiscal 1996, it will be guided by a new fund manager.
Michael Bouscaren has rejoined Putnam after a seven-year stint at Salomon
Brothers Asset Management in New York. He had previously been at Putnam, from
1980 to 1986. As he writes in the following report, Mike believes prospects
for municipal bonds are now much improved over a few months ago.
As a final note, you may have received a proxy statement soliciting your vote
on the merger of your fund with Putnam Intermediate Tax Exempt Fund, an
open-end fund with a similar investment strategy. If you have not done so
already, please give this matter your prompt attention by marking, signing,
and returning your proxy card.
Respectfully yours,
[signature of George Putnam]
George Putnam
Chairman of the Trustees
June 21, 1995
<PAGE>
Report from the fund manager
Michael F. Bouscaren
If the National Weather Service tracked the municipal bond market, it would
have described April as "partly cloudy with intermittent periods of sun." In
April, many investors in tax-free securities went running for cover as the
current rally in the municipal bond market briefly lost some momentum.
Although 1994's disappointments may have led to a great deal of skepticism in
the bond market, we believe shareholders of Putnam Investment Grade
Intermediate Municipal Trust should have no doubts about the strength and
potential of the current market.
Your fund also shared in the solid performance of municipal bonds in the
first few months of 1995. For the fiscal year ended April 30, 1995, the fund
had a total return of 5.09% at net asset value (10.06% at market price). This
can certainly be considered a dramatic turnaround in comparison with the
fund's -0.44% total return at NAV (-3.36% at market price) at the close of
the semiannual period on October 31, 1994.
Your fund continues to succeed in fulfilling its primary objective of
providing attractive tax-free income. A taxable investment for an investor
paying the maximum federal income tax rate of 39.6% would have had to provide
a current return of 8.43% to equal the fund's 5.09% current dividend rate at
net asset value. Investors in lower tax brackets may also benefit from
tax-exempt investing, but not to the same extent.
> MARKET FALTERS BUT RETAINS STRONG FUNDAMENTALS
In late April, investors' fears of the effects of the current flat-tax
proposal being considered by Congress jarred the $1.2 trillion municipal bond
market out of a dramatic recovery. A flat tax, which is one of many
tax-reform proposals being discussed in Washington, would deprive municipal
bonds of their exclusivity as a tax-exempt investment.
<PAGE>
In our opinion, the market has reacted to the perceived effects of the
flat-tax rhetoric and not to any hard facts. As this report was being
written, analysts were already beginning to look beyond the flat tax to a
more broad income tax revision in the distant future. A report in The Wall
Street Journal (May 5, 1995) suggested that any such tax law changes "are far
off in the future--1997 at the earliest--and that overhauling the current tax
system is a far more difficult task than many investors now believe. As a
result, they argue, there's a buying opportunity in municipals."
Despite the recent downturn which we attribute primarily to the flat-tax
discussions, we continue to believe in the municipal bond market potential
because of a strong supply and demand scenario.
New municipal-bond issuance is expected to shrink to $125 billion this year
from $150 billion last year and $300 billion in 1993 (see chart below for
monthly issuance statistics). Additionally, with $80 billion in bonds due to
mature or to be called in by their issuers in July, the resulting demand
should support the prices of existing municipal bonds.
> BENEFITS OF INTERMEDIATES SHOWCASED
The current interest-rate landscape favors intermediate municipal bonds. As
of April 30, 1995, the average 10-year AAA general obligation bond yielded
5.28%, compared with the 5.91% yield of
[Tabular representation of graph "A DECLINE IN SUPPLY*"]
Month Volume
1/94 977.00
2/94 961.00
3/94 1056.00
4/94 782.00
5/94 986.00
6/94 1008.00
7/94 751.00
8/94 865.00
9/94 774.00
10/94 867.00
11/94 870.00
12/94 868.00
1/95 584.00
2/95 573.00
3/95 687.00
4/95 609.00
*Chart shows monthly volume of new municipal bond issues. Source: Securities
Data Co. Used by permission.
<PAGE>
a 30-year municipal bond of similar quality. Additionally, intermediate
portfolios historically have carried half the interest-rate risk of long-term
bond portfolios. So, while there can be no guarantees, in some circumstances
an intermediate-term bondholder may be receiving as much as 90% of the return
available from 30-year bonds, with the possibility of less risk.
We believe this evidence proves the inherent advantages of owning
intermediate-term bonds. In addition, intermediate portfolios have
historically not appreciated as greatly as long-term portfolios, but offer
the ability to cushion market declines in times of rising interest rates.
> PROTECTING GAINS AFTER MARKET UPTURN
Over the past six months, we have adjusted your fund's portfolio to preserve
gains following this year's market upturn. We have done this by incrementally
shortening the portfolio's duration. Duration is a measure of a bond or bond
fund's sensitivity to interest rates. The shorter the duration, the less
volatility you can expect from the portfolio as a result of changes in
interest rates.
We realize, however, that it is impossible to predict the exact direction of
the economy. Therefore, we are also preparing the fund for any unexpected
economic downturn by spreading assets on opposite ends of the credit-quality
spectrum. Holdings are concentrated in high-quality AAA bonds and, on the
opposite side, in higher-risk BBB bonds. The latter, which carry the lowest
rating in the investment grade spectrum, historically have less price
sensitivity than higher-grade issues in a declining market and have the
potential to post solid gains in a rising market.
On a state allocation basis, the fund also benefited from its investments in
California and New York bonds. The California municipal bond market bounced
back from a dismal 1994 as institutional investors took advantage of buying
opportunities following the Orange County bankruptcy filing. In New York, the
Pataki administration's plan to create more cost-efficient municipal services
could potentially benefit your fund's holdings in state-appropriated debt
because it would likely reduce the amount of new debt coming to market.
<PAGE>
[Representation of graph "CREDIT QUALITY PROFILE*"]
36.29% AAA
12.81% AA
8.09% A
39.18% BBB
3.63% BB and below
*As of 4/30/95
A bond rated BBB or higher is considered investment grade. All ratings
reflect Standard & Poor's(R) descriptions, unless otherwise noted. Holdings
will vary over time.
> MUNICIPAL BOND MARKET OUTLOOK REMAINS
POSITIVE FOR BALANCE OF YEAR
The climate of the municipal bond market has certainly changed from the
difficult times we reported at the end of fiscal 1994. Trends we began to
spot a year ago are now being backed up by hard data and, so far, the market
has responded positively.
As it appears that the Federal Reserve Board may be near the end of its
short-term interest-rate tightening cycle, we continue to have a positive
outlook on the municipal bond market through the end of calendar 1995. We
will, however, monitor the economic and political landscape for anything that
may effect your fund. And, of course, we will continue to rely on our
extensive in-house research capabilities to identify the bonds that we
believe hold the most long-term potential.
The views expressed throughout the report are exclusively those of Putnam
Management. They are not meant as investment advice. Although the described
holdings were viewed favorably as of 4/30/95, there is no guarantee the fund
will continue to hold these securities in the future.
<PAGE>
Performance summary
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares changed
over time, assuming you held the shares through the entire period and
reinvested all distributions back into the fund. We show total return in two
ways: on a cumulative long-term basis and on average how the fund might have
grown each year over varying periods.
TOTAL RETURN FOR PERIODS ENDED 4/30/95
<TABLE>
<CAPTION>
Lehman Bros.
Municipal
NAV Market price Bond Index CPI
<S> <C> <C> <C> <C>
1 year 5.09% 10.06% 6.65% 3.05%
Life of fund
(since
5/28/93) 6.39 -5.38 8.35 5.34
Annual average 3.28 -2.84 4.26 2.75
</TABLE>
TOTAL RETURN FOR PERIODS ENDED 3/31/95
(most recent calendar quarter)
<TABLE>
<CAPTION>
Lehman Bros.
Municipal
NAV Market price Bond Index CPI
<S> <C> <C> <C> <C>
1 year 5.87% 3.76% 7.43% 2.85%
Life of fund
(since
5/28/93) 6.71 -6.71 8.22 4.99
Annual average 3.59 -3.71 4.39 2.68
</TABLE>
Performance data represent past results and are no indication of future
results. Investment returns, net asset value and market price will fluctuate
so an investor's shares, when sold, may be worth more or less than their
original cost. Fund performance data do not take into account any adjustment
for taxes payable on reinvested distributions.
<PAGE>
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding 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.
<PAGE>
Report of independent accountants
For the fiscal year ended April 30, 1995
To the Trustees and Shareholders of
Putnam Investment Grade Intermediate Municipal Trust
We have audited the accompanying statement of assets and liabilities of
Putnam Investment Grade Intermediate Municipal Trust, including the portfolio
of investments owned, as of April 30, 1995, the related statement of
operations for the year then ended, the statement of changes in net assets
and the "Financial Highlights" for the year then ended and for the period May
28, 1993 (commencement of operations) to April 30, 1994. These financial
statements and "Financial Highlights" are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and "Financial Highlights" based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
"Financial Highlights" are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of April 30, 1995 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and "Financial Highlights" referred
to above present fairly, in all material respects, the financial position of
Putnam Investment Grade Intermediate Municipal Trust as of April 30, 1995,
the results of its operations for the year then ended, the changes in its net
assets and the "Financial Highlights" for the year then ended and for the
period May 28, 1993 (commencement of operations) to April 30, 1994, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
June 15, 1995
<PAGE>
Portfolio of investments owned
April 30, 1995
Key to Abbreviations
COP: --Certificate of Participation
IFB: --Inverse Floating Bonds
G.O. Bonds: --General Obligation Bonds
VRDN: --Variable Rate Demand Notes
AMBAC: --American Municipal Bond Assurance Corporation
FGIC: --Federal Guaranty Insurance Corporation
MBIA: --Municipal Bond Insurance Association
FNMA: --Federal National Mortgage Association
GNMA: --Government National Mortgage Association
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (97.6%)*
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C>
Arizona (2.2%)
$1,000,000 Maricopa Cnty. COP, 5-5/8s, 6/1/00 Baa $ 993,750
California (8.8%)
2,500,000 Los Angeles Cnty., COP (Marina Del Rey),
Ser. A, 6-1/4s, 7/1/03 BBB/P 2,487,500
1,200,000 Oro Loma San Dist. Swr. Rev. Bonds Ser. A,
AMBAC, 8.55s, 10/1/06 AAA 1,416,000
3,903,500
Colorado (7.6%)
Denver, City & Cnty. Arpt. Rev. Bonds
800,000 Ser. A, 7-1/2s, 11/15/06 Baa 836,000
1,000,000 Ser. A, 7.4s, 11/15/05 Baa 1,042,500
1,500,000 Ser. B, 7s, 11/15/01 Baa 1,501,875
3,380,375
Connecticut (3.6%)
1,600,000 CT State Dev. Auth Hlth. Care Rev. Bonds
(Alzheimer Res. Ctr.), Class A, 6-7/8s,
8/15/04 BB/P 1,606,000
Florida (1.2%)
500,000 Escambia Cnty. Hsg. Fin. Auth. Single Fam.
Mtge. Rev. Bonds (Multi. Cnty. Project)
GNMA/FNMA Coll. 6.6s, 10/1/12 AAA 516,875
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C>
Illinois (8.5%)
$4,000,000 Chicago, School Fin. Auth. IFB FGIC,
(acquired 6/1/93 cost $3,860,000) 4-1/4s,
6/1/05++ AAA $3,765,000
Louisiana (3.7%)
1,500,000 New Orleans Pub. Imp. G.O. Bonds FSA,
8-1/8s, 10/1/03 AAA 1,640,625
Massachusetts (14.8%)
3,000,000 MA Muni. Wholesale Elec. Co. IVRC Trust IFB
Ser. 93D, AMBAC 5.077s, 4/30/03
(acquired 6/11/93 cost $2,840,340)++ AAA/P 2,636,250
MA State Hlth. & Edl. Facs. Auth. Rev. Bonds
1,000,000 (Central New England Hlth. Syst.), Ser. A,
5-3/4s, 8/1/03 Baa 977,500
1,680,000 (MA Eye & Ear Infirmary), Ser. A, 7s, 7/1/01 Baa 1,650,600
1,170,000 South Essex Swr. Dist. G.O. Bonds Ser. B,
MBIA 7-1/2s, 6/1/04 AAA 1,338,188
6,602,538
Michigan (4.2%)
1,800,000 Dickinson Cnty. Mem. Hosp. Rev. Bonds
7-5/8s, 11/1/05 Ba 1,849,500
Nevada (2.3%)
1,000,000 Washoe Cnty., Sch. Dist. Rev. Bonds MBIA,
5.9s, 8/1/05 AAA 1,016,250
New York (16.7%)
1,900,000 NY City Hlth. & Hosp. Corp. Rev. Bonds Ser.
A, 6s, 2/15/05 Baa 1,793,125
1,340,000 NY State Hsg. Fin. Agcy. Rev. Bonds Ser. A,
8s, 11/1/08 Baa 1,492,425
1,000,000 NY State Mtge. Agcy., Home Mtge., Rev. Bonds
Ser. 44 6.8s, 10/1/05 Aa 1,063,750
2,000,000 New York City G.O. Bonds 7s, 8/15/06 A 2,090,000
1,000,000 New York City, VRDN Ser. B, FGIC, 5.3s,
10/1/20 VMIG1 1,000,000
7,439,300
Oklahoma (4.7%)
Tulsa, Indl. Auth. Hosp. Rev. Bonds (Tulsa
Regl. Med. Ctr.)
1,080,000 Ser. A, 7-5/8s, 6/1/06 BBB 1,116,450
1,000,000 7s, 6/1/06 BBB 987,500
2,103,950
Pennsylvania (3.3%)
1,500,000 McKeesport, Hosp. Auth. Rev. Bonds
(McKeesport Hosp. Project), 6-1/4s, 7/1/03 Baa 1,447,500
Puerto Rico (1.5%)
600,000 Cmnwlth. of Puerto Rico, Urban Renewal &
Hsg. Corp. G.O. Bonds (Cmnwlth.
Appropriation) 7-7/8s, 10/1/04 Baa 666,000
<PAGE>
Texas (8.3%)
$1,725,000 Amarillo Independent School Dist. Rev. Bonds
7.85s, 2/1/04 AA $ 1,847,906
1,460,000 Dallas Cnty. Flood Control Dist. #1 Rev.
Bonds 9-1/4s, 4/1/10 Aaa 1,866,975
3,714,881
Washington (6.2%)
3,000,000 WA State IFB 5.67s, 5/1/08 AA 2,763,750
Total Investments (cost $43,099,662)*** $43,409,794
</TABLE>
* Percentages indicated are based on net assets of $44,479,179 which
correspond to a net asset value per share of $13.55.
** The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at April 30, 1995 for the securities
listed. Ratings are generally ascribed to securities at the time of
issuance. While the agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings do not necessarily
represent what the agencies would ascribe to these securities at April
30, 1995. Securities rated by Putnam are indicated by "/P" and are not
publicly rated. Ratings are not covered by the Report of Independent
Accountants.
*** The aggregate identified cost for federal income tax purposes is
$43,154,891, resulting in gross unrealized appreciation and depreciation
of $842,666 and $587,763, respectively, or net unrealized appreciation of
$254,903.
++ Restricted as to public resale. At the date of acquistion 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 $6,401,250 or 14.4% of net assets.
The fund had the following industry group concentrations greater than 10% of
net assets at April 30,1995:
Hospitals/Health Care 29.8%
Utilities 12.4
The rates shown on Variable Rate Demand Notes (VRDN) and Inverse Floating
Bonds (IFB) which are securities paying variable interest rates that vary
inversely to changes in market interest rates, are the current interest rates
at April 30, 1995, which are subject to change based on the terms of the
security.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of assets and liabilities
April 30, 1995
<TABLE>
<CAPTION>
Assets
<S> <C>
Investments in securities, at value (identified cost $43,099,662) (Note 1) $43,409,794
Cash 442,858
Interest receivable 959,761
Unamortized organization expenses (Note 1) 17,408
Total assets 44,829,821
Liabilities
Distributions payable to shareholders 188,372
Payable for compensation of Manager (Note 2) 75,492
Payable for compensation of Trustees (Note 2) 79
Payable for investor servicing and custodian fees (Note 2) 4,695
Payable for administrative services (Note 2) 489
Payable to affiliate for offering and organization costs (Note 2) 72,614
Other accrued expenses 8,901
Total liabilities 350,642
Net assets $44,479,179
Represented by
Paid-in capital (Note 1) $46,052,954
Undistributed net investment income (Note 1) 575,954
Accumulated net realized loss on investment transactions (Note 1) (2,459,861)
Net unrealized appreciation of investments 310,132
Net assets $44,479,179
Computation of net asset value
Net assets available per share ($44,479,179 divided by 3,282,073 shares) $ 13.55
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of operations
For the year ended April 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Tax exempt interest income $ 2,816,583
Expenses:
Compensation of Manager (Note 2) 307,233
Investor servicing and custodian fees (Note 2) 38,746
Compensation of Trustees (Note 2) 6,663
Reports to shareholders 20,862
Auditing 22,541
Legal 5,863
Postage 5,400
Administrative services (Note 2) 5,236
Amortization of organization expenses (Note 1) 5,800
Other 1,756
Total expenses 420,100
Net investment income 2,396,483
Net realized loss on investments (Notes 1 and 3) (2,084,709)
Net realized loss on written options (Notes 1 and 3) (109,254)
Net realized gain on futures contracts (Note 3) 32,076
Net unrealized appreciation of investments during the period 1,749,455
Net loss on investments (412,432)
Net increase in net assets resulting from operations $ 1,984,051
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
For the period
May 28, 1993
Statement of changes in net assets (commencement of
Year ended operations) to
April 30 April 30
1995 1994
<S> <C> <C>
Increase (decrease) in net assets
Operations:
Net investment income $ 2,396,483 $ 2,139,961
Net realized loss on investments, written options
and futures (2,161,887) (140,557)
Net unrealized appreciation (depreciation) on
investments 1,749,455 (1,439,323)
Net increase in net assets resulting from operations 1,984,051 560,081
Distributions to shareholders from:
Net investment income (2,262,382) (1,698,429)
Net realized gain on investments -- (157,539)
Increase from capital share transactions -- 49,060,313
Offering costs charged to paid in capital -- (3,106,916)
Total increase (decrease) in net assets (278,331) 44,657,510
Net assets
Beginning of year 44,757,510 100,000
End of year (including undistributed net investment
income of $575,954 and $441,853, respectively) $44,479,179 $44,757,510
Common shares outstanding at beginning of year 3,282,073 7,073
Shares issued in public offering -- 3,275,000
Common shares outstanding at end of year 3,282,073 3,282,073
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial Highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
May 28, 1993
(commencement of
Year ended operations) to
April 30 April 30
1995 1994
<S> <C> <C>
Net asset value, beginning of period $ 13.64 $ 14.04*
Investment operations:
Net investment income .73 .65(a)
Net realized and unrealized loss on investments (.13) (.48)
Total from investment operations .60 .17
Distributions to shareholders from:
Net investment income: (.69) (.52)
Net realized gain on investments -- (.05)
Total distributions (.69) (.57)
Net asset value, end of period $ 13.55 $ 13.64
Market value, end of period $12.875 $12.375
Total investment return at market value (%) 10.06 (14.03)(b)(c)
Net assets, end of period (in thousands) $44,479 $44,758
Ratio of expenses to average net assets (%) .97 .95(a)(c)
Ratio of net investment income to average net assets (%) 5.52 4.54(a)(c)
Portfolio turnover rate (%) 141.25 43.07(c)
</TABLE>
* Represents initial net asset value of $14.14 less offering expenses of
approximately $0.10.
(a) Reflects a waiver of the management fee for the period May 28, 1993 to
June 13, 1993. As a result of the waiver, expenses of the fund for the
period ended April 30, 1994 reflect a reduction of less than $0.01 per
share.
(b) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(c) Not annualized.
<PAGE>
Notes to Financial Statements
April 30, 1995
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as amended,
as a non-diversified, closed-end management investment company. The fund's
investment objective is to provide as high a level of current income exempt
from federal income tax as is believed to be consistent with preservation of
capital. The fund intends to achieve its objective by investing in a
portfolio of investment grade municipal securities that the fund's Manager
believes does not involve undue risk to income or principal.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A) Security valuation Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the Trustees, which
uses information with respect to transactions in bonds, quotations from bond
dealers, market transactions in comparable securities and various
relationships between securities in determining value. The fair value of
restricted securities is determined by the Manager following procedures
approved by the Trustees, and such valuations and procedures are reviewed
periodically by Trustees.
B) 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) Option accounting principles The fund may, to the extent consistent with
its investment objective and policies, seek to increase its current returns
by writing covered call and put options on securities it owns or in which it
may invest. When a fund writes a call or put option, an amount equal to the
premium received by the fund is included in the fund's "Statement of assets
and liabilities" as an asset and an equivalent liability. The amount of the
liability is subsequently "marked-to-market" to reflect the current market
value of an option written. The current market value of an option is the last
sale price or, in the absence of a sale, the last offering price. If an
option expires on its stipulated expiration date, or if the fund enters into
a closing purchase transaction, the fund realizes a gain (or loss if the
closing purchase transaction exceeds the premium received when the option was
written) without regard to and unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished. If a
written call option is exercised, the fund realizes a gain or loss from the
sale of the underlying security and the proceeds of the sale are increased by
the premium originally received. If a written put option is exercised, the
amount of the premium originally received reduces the cost of the security
that the fund purchases upon exercise of the option.
The risk in writing a call option is that the fund relinquishes the
opportunity to profit if the market price of the underlying security
increases and the option is exercised. In writing a put option, the fund
assumes the risk of incurring a loss if the market price of the underlying
security decreases and
<PAGE>
the option is exercised. In addition, there is the risk the fund may not be
able to enter into a closing transaction because of an illiquid secondary
market.
The fund may also, to the extent consistent with its investment objectives
and policies, buy put options to protect its portfolio holdings in an
underlying security against a decline in market value. The fund may buy call
options to hedge against an increase in the price of the securities that the
fund ultimately wants to buy. These funds may also buy and sell combinations
of put and call options on the same underlying security to earn additional
income. The premium paid by a fund for the purchase of a put or call option
is included in the fund's "Statement of assets and liabilities" as an
investment and is subsequently "marked-to-market" to reflect the current
market value of the option. If an option the fund has purchased expires on
the stipulated expiration date, the fund realizes a loss in the amount of the
cost of the option. If the fund enters into a closing sale transaction, the
fund realizes a gain or loss, depending on whether proceeds from the closing
sale transaction are greater or less than the cost of the option. If the fund
exercises a call option, the cost of securities acquired by exercising the
call is increased by the premium paid to buy the call. If the fund exercises
a put option, it realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are decreased by the premium
originally paid. The risk associated with purchasing options is limited to
the premium originally paid.
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. Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation of securities held and excise tax on
income and capital gains.
At April 30, 1995, the fund had a capital loss carryover of approximately
$1,014,064 which expires April 30, 2003. This capital carryover may be
available to offset realized gains, if any, to the extent provided by
regulations.
E) Distributions to shareholders Income dividends are declared and
distributed monthly by the fund. Capital gains distributions, if any are
recorded on the ex-dividend date and paid annually.
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 capital loss
carryovers. Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution (or available capital
loss carryovers) under income tax regulations. For the year ended April 30,
1995, the fund had no such reclassifications.
F) Amortization of bond premium and accretion of bond discount Any premium
resulting from the pur-
<PAGE>
chase 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.
G) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization aggregated $29,008. These expenses are being
amortized on a straight-line basis over a five-year period.
Note 2
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 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, and
0.50% of any excess over $1.5 billion of such average net asset value.
The fund also reimburses the Manager for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
The fund has agreed to reimburse the offering and organizational costs paid
on its behalf by Putnam Management.
Trustees of the fund receive an annual Trustee's fee of $500 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
Investor servicing and custodian fees reported in the Statement of operations
for the year ended April 30, 1995 have been reduced by credits allowed by
PFTC.
Note 3
Purchases and sales of securities
During the year ended April 30, 1995, purchases and sales of investment
securities other than short-term investments aggregated $62,362,782 and
$60,596,256 respectively. Purchases and sales of short-term municipal
obligations aggregated $16,300,000 and $15,800,000, respectively. In
determining the net gain or loss on securities sold, the cost of securities
has been determined on the identified cost basis.
Written options transactions during the year are summarized as follows:
<TABLE>
<CAPTION>
Contract Premiums
amount received
<S> <C> <C>
Contracts outstanding at beginning of the year $ -- $ --
Options written 18,200,000 381,299
Options closed 18,200,000 381,299
Written options outstanding at the end of the year $ -- $ --
</TABLE>
<PAGE>
Selected Quarterly Data
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
April 30 January 31 October 31 July 31
1995 1995 1994 1994
<S> <C> <C> <C> <C>
Total Investment income
Total $ 689,894 $ 717,411 $ 711,309 $ 697,969
Per Share $ .21 $ .22 $ .22 $ .21
Net investment income
Total $ 609,044 $ 618,212 $ 584,391 $ 584,836
Per Share $ .18 $ .19 $ .18 $ .18
Net realized and unrealized gain (loss) on investments
Total $ 1,125,766 $ (68,136) $(1,829,757) $ 359,695
Per Share $ .34 $ (.02) $ (.55) $ .10
Net increase (decrease) in net assets resulting from operations
Total $ 1,734,810 $ 550,076 $(1,245,366) $ 944,531
Per Share $ .52 $ .17 $ (.37) $ .28
Net assets at end of period
Total $44,479,179 $43,310,495 $43,324,336 $45,135,847
Per Share $ 13.55 $ 13.20 $ 13.20 $ 13.75
For the period
May 28, 1993
Three months ended (commencement
of operations)
to
April 30 January 31 October 31 July 31
1994 1994 1993 1993*
Total Investment income
Total $ 725,352 $ 710,220 $ 705,625 $ 444,419
Per Share $ .22 $ .16 $ .28 $ .13
Net investment income
Total $ 611,890 $ 575,733 $ 585,631 $ 366,707
Per Share $ .18 $ .13 $ .23 $ .11
Net realized and unrealized gain (loss) on investments
Total $(3,826,674) $ 662,908 $ 1,123,177 $ 460,709
Per Share $ (1.15) $ .24 $ .29 $ .14
Net increase (decrease) in net assets resulting from operations
Total $(3,214,784) $ 1,238,641 $ 1,708,808 $ 827,416
Per Share $ (.97) $ .37 $ .52 $ .25
Net assets at end of period
Total $44,757,510 $48,538,426 $48,042,558 $46,899,916
Per Share $ 13.64 $ 14.79 $ 14.64 $ 14.29
</TABLE>
* In connection with the initial offering of shares of the fund, Putnam
Management agreed to waive its management fee for the period May 28, 1993
to June 13, 1993. As a result of such waiver, expenses of the fund reflect
a reduction of less than $.01 per share.
<PAGE>
Tax Information
The fund has designated all distributions from investment income during the
fiscal year as tax exempt-interest dividends. Thus, 100% of these
distributions are exempt from federal income tax.
The Form 1099 you receive in January 1996 will show the tax status of any
taxable distributions paid to your account in calendar 1995.
<PAGE>
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Blake 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.
<PAGE>
Bulk Rate
U.S. Postage
PAID
Boston, MA
Permit No. 53749
18342/583
Putnam Investments
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS:
(1) Bold and italic typefaces are displayed in normal type.
(2) Headers (e.g., the name of the fund) are omitted.
(3) Certain tabular and columnar headings and symbols are displayed
differently in this filing.
(4) Bullet points and similar graphic signals are omitted.
(5) Page numbering is omitted.
(6) Trademark symbol replaced with (TM)
