-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PpkQk1EnT+Cd0P14ffznoe6byaa2SeDBJzudhYgZukz49L8l5H3AUF13CSfoT1IQ bPcnntJYxj2DfXpzSfO5fw== 0000928816-97-000029.txt : 19970220 0000928816-97-000029.hdr.sgml : 19970220 ACCESSION NUMBER: 0000928816-97-000029 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970203 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUTNAM INVESTMENT GRADE MUNICIPAL TRUST CENTRAL INDEX KEY: 0000855048 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 046629611 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-05901 FILM NUMBER: 97516468 BUSINESS ADDRESS: STREET 1: ONE POST OFFICE SQUARE CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6172921000 MAIL ADDRESS: STREET 1: ONE POST OFFICE SQU CITY: BOSTON STATE: MA ZIP: 02109 N-30D 1 PUTNAM INVESTMENT GRADE MUNICIPAL TRUST Putnam Investment Grade Municipal Trust ANNUAL REPORT November 30, 1996 [LOGO: BOSTON * LONDON * TOKYO] Fund highlights * "Not only can bond funds serve as an offset to the capital-gains tax that equity-fund investors are sure to be socked with next year, munis also can provide an excellent hedge against the volatility of stocks." -- Barron's, December 16, 1996 * "Although we expect discussion of broader tax reform to continue, it is our belief that the flat tax will not be an issue in the near future and that the municipal market will tend to maintain its current valuation level relative to the taxable markets. These valuations have strengthened recently as investor confidence has increased." -- Richard P. Wyke, manager Putnam Investment Grade Municipal Trust CONTENTS 4 Report from Putnam Management 9 Fund performance summary 13 Portfolio holdings 21 Financial statements 29 Results of October 31, 1996 shareholder meeting From the Chairman [GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM] (copyright) Karsh, Ottawa Dear Shareholder: The fiscal year that closed on November 30, 1996, certainly represented a study in contrasts for shareholders of Putnam Investment Grade Municipal Trust. The year opened amidst a flat-tax flurry in the presidential primary campaign that threw the municipal bond market into a sustained state of uncertainty. It proceeded in the wake of a succession of further market worries over the state of the economy and the course of interest rates. Finally, as the second half unfolded, the municipal bond market began to develop a degree of serenity, closing the year in an almost upbeat mood. Toward the end of fiscal '96, Richard Wyke was appointed your fund's manager. Rick has 14 years of investment experience and has been managing municipal bond portfolios at Putnam since 1987. In the report that follows, Rick discusses the events and strategies that drove your fund's performance during the fiscal year just ended and takes a look at prospects for the year that has just begun. Respectfully yours, /S/George Putnam George Putnam Chairman of the Trustees January 15, 1997 Report from the Fund Manager Richard P. Wyke Putnam Investment Grade Municipal Trust finished its 1996 fiscal year with positive momentum, thanks in part to the municipal bond market's gradual shift toward a more favorable environment. For much of the year, as the fixed-income market enjoyed one of its strongest advances in recent memory, the municipal bond sector was left far behind. Tax-reform proposals with the potential to change -- or even end -- the tax advantages of municipal bond investing kept investors out of the market, and dampened performance. During the year's second half, however, flat-tax fears declined. Your fund was able to benefit from a relatively flat interest-rate environment and a strategic shift in emphasis toward intermediate-term bonds, completing the 12 months ended November 30, 1996, with total returns of 3.91% at net asset value and 8.65% at market value. Additional information is shown in the performance tables that begin on page 9. * SUPPLY/DEMAND BALANCE SHIFT NOW FAVORS GROWING SUPPLY Although we expect discussions of broader tax reform to continue, it is our belief that the flat tax will not be an issue in the near future and that the municipal market will tend to maintain its current valuation level relative to the taxable markets. These valuations have strengthened recently as investor confidence has increased. Demand benefited from strong retail investor interest as well as from insurance companies. Those two sectors, along with the mutual fund sector, represent almost all of the current demand for municipal bonds. While the mutual fund sector saw negligible cash inflow and outflow during the period, there was sufficient demand from the other two sectors to support prices in the municipal market. On the supply side, approximately $170 billion worth of new-issue municipal bonds is expected to reach the market by the end of calendar 1996. While that is still much lower than the market's peak (roughly $295 billion in 1993), it represents an increase over last year's new- issue level. This large amount of new-issue bonds means that earlier concerns about vanishing municipal bond supply have not materialized. One aspect of municipal bond demand we have discussed in past reports has been the large number of prerefunded bonds awaiting redemption. Historically, prerefundings have allowed us to know the exact point at which the bonds would be retired and thus enabled us to plan effectively for reinvestment of the assets. With the passing of 1996, we expect to see fewer bonds redeemed through prerefunding. Instead, we believe the cash flows into the retail, insurance company, and mutual fund sectors of the market will be the primary sources of demand. * SHIFT TO BULLETED STRUCTURE INTENDED TO BOOST INCOME There are basically five variables with which we work in terms of your fund's portfolio structure and strategy: First and most important is duration -- a measure of sensitivity to interest-rate changes. A longer duration can mean a more volatile portfolio if rates rise. But a longer duration is also more likely to provide greater capital appreciation if rates decline. Conversely a shorter duration can help preserve portfolio value when interest rates rise. During the fiscal year, the fund's net interest-rate sensitivity has roughly coincided with the average duration for the long-term municipal bond fund universe. This means that your fund's exposure to interest-rate risk is neither more nor less than that of the average long-term municipal bond fund in the market today. [GRAPHIC BAR CHART OMITTED: TOP INDUSTRY SECTORS] TOP INDUSTRY SECTORS* Utilities 22.7% Housing 13.8% Transportation 13.2% Hospital/health care 10.2% Water and sewerage 6.3% Footnote reads: *Based on net assets as of 11/30/96. Holdings will vary over time. The second important variable in terms of fund performance is the portfolio's yield curve positioning. During the period, we reallocated the fund's assets from a barbell maturity structure to a bulleted maturity structure. By this we mean that we moved from a portfolio structure in which assets were roughly positioned at both the short-term and the long-term ends of the interest-rate spectrum to a concentration of holdings with midrange maturities between 15 and 25 years. That strategy is intended to generate a higher-yielding portfolio. * CREDIT AND SECTOR SELECTION STRATEGIES PROVE REWARDING The fund's credit quality structure and sector selection make up the third performance variable. In our opinion, it is more advantageous in today's market to allocate some portion of the portfolio to Baa-rated bonds. While your fund's portfolio has an average credit quality of AA, the fund is underweighted in AA-rated and A-rated bonds. Its AA credit quality average comes from a mixture of AAA-rated and Baa-rated bonds. A look at the fund's sector selection reveals that transportation- related bonds, in particular, those bonds issued to support the Denver International Airport, remain key holdings. These bonds continue to offer attractive financial performance and are rated as investment grade by both major rating agencies. In our view, these bonds are worthwhile holdings because of their potential for generating a high level of income with periodic opportunities to provide attractive market price returns. In the health-care sector, we believe the opportunities offered by corporate mergers and taxable buyouts have been fully priced into the market. We now view this sector as more of a trading market in which the focus is on buying bonds that have lagged a rally or selling bonds that have outperformed in a market correction. We anticipate that in coming months we will diversify the fund's sector risk further by shifting more assets into the airline, waste management, and nursing home sectors. [GRAPHIC PIE CHART OMITTED: PORTFOLIO QUALITY OVERVIEW] PORTFOLIO QUALITY OVERVIEW* Aaa --48.2% Aa--7.0% A--11.4% Baa--25.2% Ba and below--6.3% VMIG1--1.9% Footnote reads: *As a percentage of portfolio market value as of 11/30/96. A bond rated Baa or higher is considered investment grade. All ratings reflect Moody's Investors Service descriptions, unless noted otherwise; percentages may include unrated bonds considered by Putnam Management to be of comparable quality. Ratings will vary over time. * NONCALLABLE STRUCTURE AND FINANCIAL LEVERAGE PROVE BENEFICIAL The management of price volatility is the fourth variable affecting your fund's performance. Volatility is reflected in how much and how often the price of a security changes, up or down. Rapid, wide price swings indicate a high degree of volatility. We believe there are unique valuation opportunities that occur in the municipal bond market because of the way a bond's call structure works in conjunction with its coupon and the shape of the yield curve. We consider noncallable bonds to be currently undervalued in the municipal market and feel that they have been so for some time. Consequently the market may be underestimating their potential for rising volatility. We have attempted where possible to build a noncallable structure into the portfolio and to focus on other areas in which such potential, in our view, is being overlooked by the market. The last primary driver of your fund's performance is financial leverage. To enhance income stream, the fund issues preferred shares that pay dividends at prevailing short-term rates. These shares are sold to corporate and institutional investors; the resulting assets are then invested in longer-term bonds with higher yields. The difference between the dividend paid to holders of preferred shares and the income earned by the fund augments the flow of income to holders of common shares. Given the continuing prospect for low short-term interest rates in general, we believe the effects of leverage should continue to be positive over the near term. * OUTLOOK: UNDERVALUED MUNICIPAL BOND MARKET BODES WELL FOR FUND IN 1997 Fundamentally, given the growing prospect for slow growth in 1997 and the lack of evidence that wage pressures are pushing on general inflation rates, we believe interest-rate levels should continue to decline. That prospect, coupled with the seasonal bulge in the municipal market, should result in what we expect will be an undervalued municipal bond market. We expect that prices in the municipal bond market may move up over the near term, a situation that could bode well for your fund. Footnote reads: 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 11/30/96, there is no guarantee the fund will continue to hold these securities in the future. Performance summary Performance should always be considered in light of a fund's investment strategy. Putnam Investment Grade Municipal Trust is designed for investors seeking high current income free from federal income tax, consistent with preservation of capital. 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 in the fund. TOTAL RETURN FOR PERIODS ENDED 11/30/96 (common shares) Lehman Bros. Market Municipal Consumer NAV price Bond Index Price Index - ------------------------------------------------------------------------ 1 year 3.91% 8.65% 5.89% 3.26% - ------------------------------------------------------------------------ 5 years 53.77 70.09 45.83 15.09 Annual average 8.99 11.21 7.83 2.85 - ------------------------------------------------------------------------ Life of fund (since 10/26/89) 86.68 97.23 76.21 26.27 Annual average 9.19 10.04 8.33 3.34 - ------------------------------------------------------------------------ TOTAL RETURN FOR PERIODS ENDED 12/31/96 (most recent calendar quarter) (common shares) Market NAV price - ------------------------------------------------------------------------ 1 year 2.65% 5.69% - ------------------------------------------------------------------------ 5 years 48.87 58.61 Annual average 8.28 9.66 - ------------------------------------------------------------------------ Life of fund (since 10/26/89) 86.75 94.83 Annual average 9.09 9.73 - ------------------------------------------------------------------------ Footnote reads: Performance data represent past results, do not reflect future performance, and will differ for each share class. 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 11/30/96 - ------------------------------------------------------------------------ Distributions (number) (common shares) 12 - ------------------------------------------------------------------------ Income $0.96 - ------------------------------------------------------------------------ Capital gains1 - ------------------------------------------------------------------------ Long-term -- - ------------------------------------------------------------------------ Short-term -- - ------------------------------------------------------------------------ Total $0.96 - ------------------------------------------------------------------------ Preferred shares Series A (1400 shares) - ------------------------------------------------------------------------ Income $3,714.35 - ------------------------------------------------------------------------ Capital gains1 - ------------------------------------------------------------------------ Long-term -- - ------------------------------------------------------------------------ Short-term 32.17 - ------------------------------------------------------------------------ Total $3,746.52 - ------------------------------------------------------------------------ Share value (common shares) NAV Market price - ------------------------------------------------------------------------ 11/30/95 $12.37 $13.500 - ------------------------------------------------------------------------ 11/30/96 11.94 13.625 - ------------------------------------------------------------------------ Current return (common shares) NAV Market price - ------------------------------------------------------------------------ End of period - ------------------------------------------------------------------------ Current dividend rate2 8.04% 7.05% - ------------------------------------------------------------------------ Taxable equivalent3 13.31 11.67 - ------------------------------------------------------------------------ 1 Capital gains are taxable for federal and, in most cases, state tax purposes. For some investors, investment income may also be subject to the federal alternative minimum tax. Investment income may be subject to state and local taxes. 2 Income portion of most recent distribution, annualized and divided by NAV or market price at end of period. 3 Assumes maximum 39.6% federal tax rate. Results for investors subject to lower tax rates would not be as advantageous. TERMS AND DEFINITIONS Net asset value (NAV) is the value of all your fund's assets, minus any liabilities, and the liquidation preference on the remarketed preferred shares, divided by the number of outstanding common shares. Market price is the current trading price of one share of the fund. Market prices are set by transactions between buyers and sellers on the New York Stock Exchange. COMPARATIVE BENCHMARKS Consumer Price Index (CPI) is a commonly used measure of inflation; it does not represent an investment return. 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 is not leveraged, 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. The index assumes reinvestment of all distributions and interest payments. Performance of the fund will differ. It is not possible to invest directly in an index. Report of independent accountants To the Trustees and Shareholders of Putnam Investment Grade Municipal Trust In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments owned (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 (the "fund") at November 30, 1996, 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 November 30, 1996 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts January 10, 1997
Portfolio of investments owned November 30, 1996 Key to Abbreviations AMBAC --AMBAC Indemnity Corporation COP --Certificate of Participation FGIC --Financial Guaranty Insurance Company FSA --Financial Security Assurance GNMA Coll. --Government National Mortgage Association Collateralized G.O. Bonds --General Obligation Bonds IFB --Inverse Floating Rate Bonds MBIA --Municipal Bond Investors Assurance Corporation PSFG --Permanent School Fund Guaranteed VRDN --Variable Rate Demand Notes MUNICIPAL BONDS AND NOTES (98.4%) * PRINCIPAL AMOUNT RATING** VALUE Alabama (1.7%) - ------------------------------------------------------------------------------------------------------------------------------ $5,500,000 Gadsden East, Med. Clinic Board Rev. Bonds (Baptist Hosp. of Gadsden Inc.), Ser. A, 7.8s, 11/1/21 BBB $ 6,407,500 Arizona (1.1%) - ------------------------------------------------------------------------------------------------------------------------------ 4,000,000 Gila Cnty., Indl. Dev. Auth. Poll. Control Rev. Bonds (Asarco Inc.), Ser. 85, 8.9s, 7/1/06 Baa 4,209,840 California (12.0%) - ------------------------------------------------------------------------------------------------------------------------------ 1,000,000 CA Poll. Control Fin. Auth. VRDN (Shell Oil Co.), Ser. A, 3.85s, 10/1/07 VMIG1 1,000,000 4,650,000 CA State U. IFB, AMBAC, 10.05s, 11/1/21 (acquired various dates from 8/5/91 to 8/31/94,cost $4,659,603)(double dagger) Aaa 5,580,000 5,200,000 Central Valley Fin. Auth. Rev. Bonds (Carson Ice-Cogeneration), 6s, 7/1/09 BBB 5,343,000 3,000,000 Contra Costa Wtr. Dist. Rev. Bonds, Ser. G, MBIA, 5s, 10/1/24 Aaa 2,816,250 10,000,000 Foothill/Eastern Trans. Corridor Agcy. Rev. Bonds (CA Toll Rd.), Ser. A, zero %, 11/1/09 Baa 6,500,000 Los Angeles Cnty., Metro. Trans. Auth. Sales Tax Rev. Bonds 3,030,000 Second Tier Lien, Ser. A, MBIA, 5 5/8s, 7/1/11 Aaa 3,147,413 3,235,000 Ser. A, MBIA, 5 3/4s, 7/1/11 Aaa 3,392,706 2,800,000 Orange Cnty., Local Trans. Auth. Sales Tax Rev. Bonds, FGIC, 6.1s, 2/14/11 Aaa 2,884,000 2,550,000 Orange Cnty., Pub. Fac. Corp. COP (Solid Waste Management), 7 7/8s, 12/1/13 Baa 2,699,813 4,625,000 San Diego, Pub. Facs. Fin. Auth. Swr. Rev. Bonds, FGIC, 5s, 5/15/25 Aaa 4,307,031 3,000,000 Southern CA Public Pwr. Auth. VRDN (Transmission), AMBAC, 3.4s, 7/1/19 VMIG1 3,000,000 5,000,000 U. of CA Rev. Bonds (UCSD Med. Ctr. Satellite Med. Fac.), 7.9s, 12/1/19 (acquired 3/2/92, cost $5,229,150)(double dagger) BBB/P 5,468,750 ------------ 46,138,963 Colorado (8.0%) - ------------------------------------------------------------------------------------------------------------------------------ Denver, City & Cnty. Arpt. Rev. Bonds 1,000,000 Ser. A, 8 3/4s, 11/15/23 Baa 1,192,500 4,775,000 Ser. A, 8 1/2s, 11/15/23 Baa 5,521,094 4,900,000 Ser. A, 8 1/4s, 11/15/12 Baa 5,622,750 5,200,000 Ser. A, 8s, 11/15/25 Baa 5,915,000 8,000,000 Ser. D, 7 3/4s, 11/15/21 Baa 8,910,000 3,000,000 Ser. D, 7 3/4s, 11/15/13 Baa 3,671,250 ------------ 30,832,594 Connecticut (1.9%) - ------------------------------------------------------------------------------------------------------------------------------ 4,825,000 CT State Dev. Auth. Poll. Control Rev. Bonds (New England Power Co.), 7 1/4s, 10/15/15 A 5,198,937 2,000,000 CT State Res. Recv. Auth. Muni. Rev. Bonds (Bridgeport Service Fee), Ser. A, 7 1/2s, 1/1/09 Baa 2,112,500 ------------ 7,311,437 District of Columbia (0.7%) - ------------------------------------------------------------------------------------------------------------------------------ 2,500,000 DC Rev. Bonds (Georgetown U.), Ser. B, 7.15s, 4/1/21 A 2,684,375 Florida (3.9%) - ------------------------------------------------------------------------------------------------------------------------------ 11,555,000 Broward Cnty., Resource Recvy. Rev. Bonds (SES Broward Cnty. LP South), 7.95s, 12/1/08 A 12,782,719 2,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds (FL Crushed Stone Co.), 8 1/2s, 12/1/14 B/P 2,240,000 ------------ 15,022,719 Georgia (2.5%) - ------------------------------------------------------------------------------------------------------------------------------ 4,000,000 Burke Cnty., Dev. Auth. Control Rev. Bonds (Oglethorpe Pwr. Co. ), MBIA, 8s, 1/1/22# Aaa 4,775,000 4,800,000 De Kalb Cnty., Muni. Hsg. Auth. Rev. Bonds (Briarcliff Park Apts.), Ser. A, 7 1/2s, 4/1/17 BBB/P 5,016,000 ------------ 9,791,000 Hawaii (1.3%) - ------------------------------------------------------------------------------------------------------------------------------ 4,500,000 HI State Dept. of Budget & Fin. Special Purpose Mtge. IFB, 9.391s, 11/1/21 AAA 5,068,125 Illinois (1.9%) - ------------------------------------------------------------------------------------------------------------------------------ 7,000,000 Cook Cnty., G.O. Bonds, FGIC, 5 7/8s, 11/15/22 Aaa 7,148,750 Indiana (0.6%) - ------------------------------------------------------------------------------------------------------------------------------ 1,000,000 Indiana Bond Bank Note (Special Loan Program), Ser. B, 8 1/2s, 2/1/18 A 1,060,000 1,000,000 Rockport, Indl. Poll. Ctrl. Rev. Bonds (Indiana-Michigan Pwr.), Ser. B, FGIC, 7.6s, 3/1/16 Aaa 1,123,750 ------------ 2,183,750 Kansas (1.3%) - ------------------------------------------------------------------------------------------------------------------------------ 4,500,000 Burlington, Poll. Control Rev. Bonds (Kansas Gas & Electric Co.), MBIA, 7s, 6/1/31 Aaa 4,989,375 Louisiana (7.4%) - ------------------------------------------------------------------------------------------------------------------------------ 9,250,000 St. Charles Parish, Poll. Control Rev. Bonds (LA Pwr. & Lt. Co.), 8s, 12/1/14 Baa 10,128,750 W. Feliciana Parish, Poll. Control Rev. Bonds (Gulf States Utils. Co.) 2,500,000 8s, 12/1/24 Ba 2,700,000 5,100,000 7.7s, 12/1/14 Ba 5,648,250 3,000,000 Ser. III, 7.7s, 12/1/14 Ba 3,322,500 6,000,000 Ser. A, 7 1/2s, 5/1/15 Aa 6,495,000 ------------ 28,294,500 Maryland (0.6%) - ------------------------------------------------------------------------------------------------------------------------------ 2,000,000 MD, State Hlth. & Higher Edl. Fac. Auth. Rev. Bonds (Doctors Cmnty. Hosp.), 8 3/4s, 7/1/12 AAA 2,330,000 Massachusetts (7.3%) - ------------------------------------------------------------------------------------------------------------------------------ 8,750,000 MA State Hlth. & Edl. Fac. Auth. IFB (Med. Ctr. of Central MA), Ser. B, AMBAC, 9.28s, 6/23/22 Aaa 10,325,000 5,000,000 MA State Indl. Fin. Agcy. Rev. Bonds (Cape Cod Hlth. Syst. Issue), 8 1/2s, 11/15/20 Aaa 5,850,000 2,100,000 MA State Wtr. Poll. Auth. Rev. Bonds, Ser. B, 5 1/4s, 8/1/14 Aa 2,086,875 9,405,000 MA State Wtr. Resources Auth. Rev. Bonds, Ser. A, MBIA, 6s, 8/1/20 Aaa 9,734,175 ------------ 27,996,050 Michigan (3.2%) - ------------------------------------------------------------------------------------------------------------------------------ 1,755,000 Detroit, Dev. Fin. Auth. Tax Increment Rev. Bonds, Ser. A, 8.72s, 5/1/21 BBB/P 2,180,588 2,200,000 Detroit, Wtr. Supply Syst. IFB, FGIC, 8.841s, 7/1/22 Aaa 2,480,500 1,690,000 Highland Park, Fin. Auth. Hosp. Fac. Rev. Bonds (MI Hlth. Care Corp.), Ser. A, 9 3/4s, 12/1/06 (In Default) + Caa 329,550 3,000,000 MI State Strategic Fund Rev. Bonds (Mercy Svcs. for Aging), 9.4s, 5/15/20 BBB/P 3,390,000 3,630,000 Monroe Cnty., Poll. Ctrl. Rev. Bonds (Detroit Edison), Ser. I, AMBAC, 7.3s, 9/1/19 Aaa 3,979,388 ------------ 12,360,026 Mississippi (2.3%) - ------------------------------------------------------------------------------------------------------------------------------ 7,950,000 Claiborne Cnty., Poll. Control Rev. Bonds (Middle South Energy Inc.), Ser. C, 9 7/8s, 12/1/14 Ba 8,854,313 Missouri (3.9%) - ------------------------------------------------------------------------------------------------------------------------------ 2,500,000 MO State Hlth. & Edl. Fac. Auth. Rev. Bonds (BJC Hlth. Syst.), Ser. A, 6 1/2s, 5/15/20 Aa 2,759,375 8,900,000 SCA Tax Exempt Trust Multi-Fam. Mtge. Rev. Bonds (Whispering Lake), Ser. A-11, FSA, 7.1s, 1/1/30 Aaa/P 9,422,875 2,500,000 Sikeston, Elec. Auth. Rev. Bonds, MBIA, 6s, 6/1/13 Aaa 2,712,500 ------------ 14,894,750 Nebraska (2.4%) - ------------------------------------------------------------------------------------------------------------------------------ 2,200,000 NE Investment Fin. Auth. Single Fam. Mtge. IFB, Ser. B, GNMA Coll., 11.328s, 3/15/22 Aaa 2,439,250 6,375,000 NE Investment Fin. Auth. Single Fam. Mtge. Rev. Bonds, Ser. 1, GNMA Coll, 8 1/8s, 8/15/38 Aaa 6,677,813 ------------ 9,117,063 Nevada (1.8%) - ------------------------------------------------------------------------------------------------------------------------------ 6,500,000 Clark Cnty., Indl. Dev. Rev. Bonds (NV Pwr. Co.), 7.8s, 6/1/20 Baa 7,052,500 New York (7.1%) - ------------------------------------------------------------------------------------------------------------------------------ NY State Dorm. Auth. Rev. Bonds 4,500,000 (City U. Syst.), Ser. F, 7 7/8s, 7/1/17 Aaa 5,118,750 6,250,000 (State U. Edl. Fac.), Ser. A, 7.7s, 5/15/12 Aaa 7,054,687 2,000,000 (City U. Syst.), Ser. A, 7 5/8s, 7/1/20 Aaa 2,260,000 2,450,000 NY State Energy Research & Dev. Auth. Elec. Fac. Rev. Bonds (Cons. Edison Co. of NY, Inc.), Ser. A, 7 3/4s, 1/1/24 A 2,566,473 700,000 NY State Local Govt. Assistance Corp. VRDN, Ser. B, 3.3s, 4/1/23 VMIG1 700,000 1,535,000 NY State Urban Dev. Corp. Rev. Bonds (Syracuse U. Ctr.), 6s, 1/1/08 Baa 1,598,319 8,780,000 Triborough Bridge & Tunnel Auth. General Purpose Rev. Bonds, Ser. A, 5s, 1/1/24 Aa 8,198,325 ------------ 27,496,554 North Carolina (0.7%) - ------------------------------------------------------------------------------------------------------------------------------ 2,500,000 NC Eastern Muni. Pwr. Agcy. Rev. Bonds, Ser. A, 7 1/4s, 1/1/21 Baa 2,553,300 Ohio (1.5%) - ------------------------------------------------------------------------------------------------------------------------------ 5,000,000 OH State Air Quality Dev. Auth. Rev. Bonds (Cleveland Co.), FGIC, 8s, 12/1/13 Aaa 5,881,250 Oklahoma (0.3%) - ------------------------------------------------------------------------------------------------------------------------------ 1,000,000 Tulsa, Indl. Auth. Rev. Bonds (U. of Tulsa), Ser. A, MBIA, 6s, 10/1/16 Aaa 1,080,000 Pennsylvania (4.4%) - ------------------------------------------------------------------------------------------------------------------------------ 3,125,000 Allegheny Cnty. Resc. Fin. Auth. Mtge. Rev. Bonds (Single Fam.), Ser. M, GNMA Coll., 7.9s, 6/1/11 Aaa 3,292,969 5,000,000 Montgomery Cnty., Indl. Dev. Auth. Rev. Bonds, 7 1/2s, 1/1/12 A 5,406,250 7,600,000 PA State Higher Ed. Assistance Agcy. IFB, Ser. B, MBIA, 11.031s, 3/1/20 Aaa 8,360,000 ------------ 17,059,219 South Dakota (3.5%) - ------------------------------------------------------------------------------------------------------------------------------ 13,100,000 SD State Bldg. Auth. COP (Building Authority), Ser. A, 7 1/2s, 12/1/16 A 13,362,000 Tennessee (3.8%) - ------------------------------------------------------------------------------------------------------------------------------ 2,600,000 Metro. Govt. Nashville & Davidson Cnty. Tenn. Wtr. & Swr. IFB, AMBAC, 8.317s, 1/1/22 Aaa 2,743,000 10,900,000 SCA Tax Exempt Trust Multi-Fam. Mtge. Rev. Bonds (Steeplechase Falls), Ser. A-10, FSA, 7 1/8s, 1/1/30 Aaa 11,921,875 ------------ 14,664,875 Texas (8.7%) - ------------------------------------------------------------------------------------------------------------------------------ 2,770,000 Austin, School Dist. G.O. Bonds, PSFG, 5 3/4s, 8/1/15 Aaa 2,856,560 Austin Util. Syst. Rev. Bonds 340,000 Ser. A, MBIA, 5s, 11/15/07 Aaa 341,700 665,000 Ser. A, MBIA, 5s, 5/15/07 Aaa 668,325 2,500,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds (St. Luke's Lutheran Hosp.), 7.9s, 5/1/11 AAA/P 2,953,125 4,390,000 Matagorda Cnty., Poll. Control Rev. Bonds (Houston Lt. & Pwr.), Ser. D, FGIC, 7.6s, 10/1/19 Aaa 4,818,025 16,000,000 North Central TX Hlth. Fac. Dev. Corp. Rev. Bonds (Presbyterian Hlth. Syst.), MBIA, 6.685s, 6/22/21 Aaa 17,020,000 4,500,000 TX State Nat'l Research Lab Communication Superconductor G.O. Bonds, 7 1/8s, 4/1/20 Aaa 4,972,500 ------------ 33,630,235 Washington (2.4%) - ------------------------------------------------------------------------------------------------------------------------------ 2,650,000 WA State Hlth. Care Fac. VRDN (Sisters Providence), Ser. E, 4s, 10/1/05 VMIG1 2,650,000 6,075,000 WA State Pub. Pwr. Supply Syst. Rev. Bonds (Nuclear No. 1), Ser. A, 7 1/2s, 7/1/15 Aa 6,674,906 ------------ 9,324,906 West Virginia (0.2%) - ------------------------------------------------------------------------------------------------------------------------------ 1,400,000 Marion Cnty., Cmnty. Solid Waste Disp. Fac. Rev. Bonds (American Pwr. Paper Recycling), 8 1/4s, 12/1/11 CCC/P 700,000 - ------------------------------------------------------------------------------------------------------------------------------ Total Investments (cost $360,961,886)*** $ 378,439,969 - ------------------------------------------------------------------------------------------------------------------------------ * Percentages indicated are based on net assets of $384,489,910. Net assets available to common shareholders are $244,476,830. ** The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at November 30, 1996 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 November 30,1996 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 on a tax basis is $360,961,886, resulting in gross unrealized appreciation and depreciation of $20,252,369 and $2,774,286, respectively, or net unrealized appreciation of $17,478,083. + Non-income-producing security. (double dagger) Restricted, excluding 144A securities, as to public resale. At the date of acquisition these securities were valued at cost. The total market value of restricted securities held at November 30, 1996 was $11,048,750 or 2.9% of net assets. # A portion of these securities was pledged and segregated with the custodian to cover margin requirements for futures contracts at November 30, 1996. The market value of these securities is $219,650 or less than 0.1% of net assets. The rates shown on the IFBs which are securities paying variable interest rates that vary inversely to changes in the market interest rates and VRDNs are the current interest rates at November 30, 1996, and are subject to change based on the terms of the security. The fund had the following industry group concentrations) greater than 10% at November 30, 1996 as a percentage of net assets: Utilities 22.7% Housing 13.8 Transportation 13.2 Hospital/Health Care 10.2 The fund had the following insurance concentrations greater than 10% at November 30, 1996 as a percentage of net assets: MBIA 15.3% - ---------------------------------------------------------------------------------------------------- Futures contracts outstanding at November 30, 1996 Total Aggregate Face Expiration Unrealized Market Value Value Date Depreciation - ---------------------------------------------------------------------------------------------------- UST Bond 20 Years (Short) $6,952,500 $6,900,000 March 1997 $(52,500) - ---------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities November 30, 1996 Assets - ---------------------------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $360,961,886) (Note 1) $378,439,969 - ---------------------------------------------------------------------------------------------------------------- Cash 891,422 - ---------------------------------------------------------------------------------------------------------------- Interest receivable 7,181,833 - ---------------------------------------------------------------------------------------------------------------- Receivable for securities sold 590,000 - ---------------------------------------------------------------------------------------------------------------- Total assets 387,103,224 Liabilities - ---------------------------------------------------------------------------------------------------------------- Distributions payable to shareholders 1,729,606 - ---------------------------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 661,441 - ---------------------------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 32,385 - ---------------------------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 5,845 - ---------------------------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 1,274 - ---------------------------------------------------------------------------------------------------------------- Payable for variation margin 54,375 - ---------------------------------------------------------------------------------------------------------------- Other accrued expenses 128,388 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 2,613,314 - ---------------------------------------------------------------------------------------------------------------- Net Assets $384,489,910 Represented by - ---------------------------------------------------------------------------------------------------------------- Series A remarketed preferred shares (1,400 shares authorized and outstanding issued at $100,000 per share) (Note 4) $140,000,000 - ---------------------------------------------------------------------------------------------------------------- Paid in capital-common shares (Note 1) 226,369,604 - ---------------------------------------------------------------------------------------------------------------- Undistributed net investment income (Note 1) 8,901,036 - ---------------------------------------------------------------------------------------------------------------- Accumulated net realized loss on investments (Note 1) (8,206,313) - ---------------------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments 17,425,583 - ---------------------------------------------------------------------------------------------------------------- Net assets $384,489,910 Computation of net asset value: - ---------------------------------------------------------------------------------------------------------------- Series A remarketed preferred shares $140,000,000 - ---------------------------------------------------------------------------------------------------------------- Cumulative undeclared dividends on Series A remarketed preferred shares 13,080 - ---------------------------------------------------------------------------------------------------------------- Net assets allocated to Series A remarketed preferred shares at liquidation preference $140,013,080 - ---------------------------------------------------------------------------------------------------------------- Net assets available to common shares: $244,476,830 - ---------------------------------------------------------------------------------------------------------------- Net asset value per share ($244,476,830 divided by 20,470,991 outstanding shares) $11.94 - ---------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of operations Year ended November 30, 1996 Tax exempt interest income: $25,381,825 - ------------------------------------------------------------------------------------------------------- Expenses: - ------------------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 2,679,663 - ------------------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 279,078 - ------------------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 19,906 - ------------------------------------------------------------------------------------------------------- Administrative services (Note 2) 7,864 - ------------------------------------------------------------------------------------------------------- Reports to shareholders 47,811 - ------------------------------------------------------------------------------------------------------- Auditing 47,574 - ------------------------------------------------------------------------------------------------------- Legal 9,336 - ------------------------------------------------------------------------------------------------------- Postage 124,927 - ------------------------------------------------------------------------------------------------------- Exchange listing fees 35,924 - ------------------------------------------------------------------------------------------------------- Preferred share remarketing agent fees 356,889 - ------------------------------------------------------------------------------------------------------- Other 11,310 - ------------------------------------------------------------------------------------------------------- Total expenses 3,620,282 - ------------------------------------------------------------------------------------------------------- Expense reduction (Note 2) (112,649) - ------------------------------------------------------------------------------------------------------- Net expenses 3,507,633 - ------------------------------------------------------------------------------------------------------- Net investment income 21,874,192 - ------------------------------------------------------------------------------------------------------- Net realized loss on investments (Notes 1 and 3) (3,879) - ------------------------------------------------------------------------------------------------------- Net realized gain on futures contracts (Note 1) 20,915 - ------------------------------------------------------------------------------------------------------- Net unrealized depreciation of investments and futures contracts during the year (6,157,973) - ------------------------------------------------------------------------------------------------------- Net loss on investments (6,140,937) - ------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $15,733,255 - ------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets Year ended November 30 --------------------------------- 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets - ---------------------------------------------------------------------------------------------------------------- Operations: - ---------------------------------------------------------------------------------------------------------------- Net investment income $21,874,192 $23,652,493 - ---------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments 17,036 (5,837,577) - ---------------------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) of investments (6,157,973) 30,521,242 - ---------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 15,733,255 48,336,158 - ---------------------------------------------------------------------------------------------------------------- Distributions to Series A remarketed preferred shareholders: - ---------------------------------------------------------------------------------------------------------------- From net investment income (5,200,089) (5,504,552) - ---------------------------------------------------------------------------------------------------------------- In excess of net realized gain on investments (45,038) (107,562) - ---------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations applicable to common shareholders (excluding cumulative undeclared dividends on remarketed preferred shares of $13,080 and $161,420, respectively) 10,488,128 42,724,044 - ---------------------------------------------------------------------------------------------------------------- Distributions to common shareholders: - ---------------------------------------------------------------------------------------------------------------- From net investment income (19,568,069) (18,869,148) - ---------------------------------------------------------------------------------------------------------------- In excess of net realized net realized gain on investments -- (492,000) - ---------------------------------------------------------------------------------------------------------------- Increase from capital shares transactions from issuance of common shares 2,567,091 2,826,196 - ---------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (6,512,850) 26,189,092 - ---------------------------------------------------------------------------------------------------------------- Net assets - ---------------------------------------------------------------------------------------------------------------- Beginning of year 391,002,760 364,813,668 - ---------------------------------------------------------------------------------------------------------------- End of year (including undistributed net investment income of $8,901,036 and $11,316,328, respectively) $384,489,910 $391,002,760 - ---------------------------------------------------------------------------------------------------------------- Number of fund shares - ---------------------------------------------------------------------------------------------------------------- Common shares outstanding at beginning of year 20,272,824 20,039,145 - ---------------------------------------------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 198,167 233,679 - ---------------------------------------------------------------------------------------------------------------- Common shares outstanding at end of year 20,470,991 20,272,824 - ---------------------------------------------------------------------------------------------------------------- Series A remarketed preferred shares outstanding at beginning and end of year 1,400 1,400 - ---------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Financial highlights (For a share outstanding throughout the period) Year ended November 30 ------------------------------------------------ 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period (common shares) $12.37 $11.22 $13.44 - --------------------------------------------------------------------------------------------------------------------------- Investment operations - --------------------------------------------------------------------------------------------------------------------------- Net investment income 1.06 1.17 1.20 - --------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments (.28) 1.23 (2.03) - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations .78 2.40 (.83) - --------------------------------------------------------------------------------------------------------------------------- Less distributions: - --------------------------------------------------------------------------------------------------------------------------- From net investment income - --------------------------------------------------------------------------------------------------------------------------- to Common Shareholders (.96) (.94) (.97) - --------------------------------------------------------------------------------------------------------------------------- to Preferred Shareholders (.25) (.28) (.19) - --------------------------------------------------------------------------------------------------------------------------- From net realized gain on investments - --------------------------------------------------------------------------------------------------------------------------- to Common Shareholders -- -- (.21) - --------------------------------------------------------------------------------------------------------------------------- to Preferred Shareholders -- -- -- - --------------------------------------------------------------------------------------------------------------------------- In excess of net realized gain on investments - --------------------------------------------------------------------------------------------------------------------------- to Common Shareholders -- (.02) (.02) - --------------------------------------------------------------------------------------------------------------------------- to Preferred Shareholders --(d) (.01) -- - --------------------------------------------------------------------------------------------------------------------------- Total distributions (1.21) (1.25) (1.39) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period (common shares) $11.94 $12.37 $11.22 - --------------------------------------------------------------------------------------------------------------------------- Market value, end of period (common shares) $13.625 $13.500 $11.880 - --------------------------------------------------------------------------------------------------------------------------- Total investment return at market price (common shares)(%)(a) 8.65 22.95 (6.74) - --------------------------------------------------------------------------------------------------------------------------- Net assets, end of period (total fund) (in thousands) $384,490 $391,003 $364,814 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b)(c) 1.49 1.50 1.45 - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%)(b) 6.84 7.50 8.07 - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover (%) 146.43 122.65 78.97 - --------------------------------------------------------------------------------------------------------------------------- Financial highlights (continued) (For a share outstanding throughout the period) Year ended November 30 ----------------------------------- 1993 1992 - ------------------------------------------------------------------------------------------------------ Net asset value, beginning of period (common shares) $12.36 $11.51 - ------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------ Net investment income 1.32 1.35 - ------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments .91 .65 - ------------------------------------------------------------------------------------------------------ Total from investment operations 2.23 2.00 - ------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------ From net investment income - ------------------------------------------------------------------------------------------------------ to Common Shareholders (.96) (.91) - ------------------------------------------------------------------------------------------------------ to Preferred Shareholders (.16) (.24) - ------------------------------------------------------------------------------------------------------ From net realized gain on investments - ------------------------------------------------------------------------------------------------------ to Common Shareholders -- -- - ------------------------------------------------------------------------------------------------------ to Preferred Shareholders (.03) -- - ------------------------------------------------------------------------------------------------------ In excess of net realized gain on investments - ------------------------------------------------------------------------------------------------------ to Common Shareholders -- -- - ------------------------------------------------------------------------------------------------------ to Preferred Shareholders -- -- - ------------------------------------------------------------------------------------------------------ Total distributions (1.15) (1.15) - ------------------------------------------------------------------------------------------------------ Net asset value, end of period (common shares) $13.44 $12.36 - ------------------------------------------------------------------------------------------------------ Market value, end of period (common shares) $14.000 $13.250 - ------------------------------------------------------------------------------------------------------ Total investment return at market price (common shares)(%)(a) 13.54 20.24 - ------------------------------------------------------------------------------------------------------ Net assets, end of period (total fund) (in thousands) $405,670 $381,681 - ------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b)(c) 1.40 1.45 - ------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%)(b) 8.59 9.20 - ------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 33.73 44.39 - ------------------------------------------------------------------------------------------------------ (a) Total investment 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 year ended November 30, 1995 and thereafter, includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts (Note 2). (d) Distributions in excess of net realized gain to the preferred shareholders amounted to less than $0.01 per a common share.
Notes to financial statements November 30, 1996 Note 1 Significant accounting policies The fund is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company. The fund's investment objective is to provide as high a level of current income exempt from federal income tax as is believed to be consistent with preservation of capital. The fund intends to achieve its objective by investing in a diversified portfolio of tax-exempt municipal securities that Putnam Investment Management ("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc., believes do not involve undue risk to income or principal. Under normal market conditions, the fund will invest at least 80% of its total assets in tax-exempt municipal securities rated "investment grade" at the time of investment or, if not rated, determined by Putnam Management to be of comparable quality. 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. Certain amounts from the prior year have been reclassified to conform with their current year presentation. 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. Short-term investments having remaining maturities of 60 days or less are stated at amortized cost, which approximates market value and other investments including restricted securities are stated at fair market value following procedures approved by the Trustees. B) Determination of net asset value Net asset value of the common shares is determined by dividing the value of all assets of the fund (including accrued interest and dividends), less all liabilities (including accrued expenses) and the liquidation preference of any outstanding remarketed preferred shares, by the total number of common shares outstanding. C) Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis. D) Futures and options contracts The fund may use futures and options contracts to hedge against changes in the values of securities the fund owns or expects to purchase. The fund may also write options on securities it owns or in which it may invest to increase its current returns. The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. E) Federal taxes It is the policy of the fund to distribute all of its taxable income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. At November 30, 1996, the fund had a capital loss carryover of approximately $1,985,000 available to offset future net capital gains, if any, which will expire on November 30, 2004. F) Distributions to shareholders Distributions to common and preferred shareholders are recorded by the fund on the ex-dividend date. Dividends on remarketed preferred shares become payable when, as and if declared by the Trustees. Each dividend period for the remarketed preferred shares is generally a seven day period. The applicable dividend rate for the remarketed preferred shares on November 30, 1996 was 3.41%. 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 treatment of dividends payable, defaulted bond interest, realized and unrealized losses on certain future contracts and market discount. 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 November 30, 1996, the fund reclassified $478,674 to increase undistributed net investment income and $4,334 to increase paid-in-capital, with an increase to accumulated net realized loss on investments of $483,008. The calculation of net investment income per share in the financial highlights table excludes these adjustments. 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. The premium in excess of the call price, if any, is amortized to the call date; thereafter, the remaining excess premium is amortized to maturity. Discounts on zero coupon bonds and original issue discount are accreted according to the effective yield method. 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, including those allocated to the remarketed preferred shares. Such fee is based on the annual rate of 0.70% of the average weekly net assets. 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 net income attributable to the proceeds of the remarketed preferred shares during that period, then the fee payable to Putnam 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 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 wholly-owned subsidiary of Putnam Investments, Inc. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. For the year ended November 30, 1996 fund expenses were reduced by $112,649 under expense offset arrangements with PFTC. Investor servicing and custodian fees reported in the Statement of operations exclude these credits. The fund could have invested 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. Trustees of the fund receive an annual Trustees fee of $830 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 adopted a Trustee Fee Deferral Plan (the "Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees fees payable on or after July 1, 1995. The deferred fees remain in the fund and are invested in certain Putnam funds until distribution in accordance with the 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 November 30, 1996, purchases and sales of investment securities other than short-term investments aggregated $544,548,014 and $534,723,367, 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 remarketed preferred shares are redeemable at the option of the fund on any dividend payment date at a redemption price of $100,000 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. Additionally, the fund has authorized a separate series of 2,000 Serial Remarketed Preferred shares, which are issuable only under certain conditions in exchange for Series A shares. No Serial Remarketed Preferred shares are currently outstanding. 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 November 30, 1996, 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. Results of October 31, 1996 shareholder meeting (Unaudited) A meeting of shareholders of the fund was held on October 31, 1996. 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 13,111,907 293,478 822 21 Hans H. Estin 13,112,907 292,478 822 21 Ronald J. Jackson 13,114,024 291,361 822 21 Elizabeth T. Kennan 13,115,024 290,361 822 21 Lawrence J. Lasser 13,112,907 292,478 822 21 Donald S. Perkins 13,113,524 291,861 822 21 William F. Pounds 13,114,824 290,561 822 21 George Putnam 13,114,024 291,361 822 21 George Putnam, III 13,115,024 290,361 822 21 Eli Shapiro 13,112,907 292,478 772 71 A.J.C. Smith 13,115,024 290,361 822 21 W. Nicholas Thorndike 13,112,907 292,478 822 21
Results of October 31, 1996 shareholder meeting (continued) (Unaudited) - ------------------------------------------------------------------------------------------------------------------ Common Shares Preferred shares - ------------------------------------------------------------------------------------------------------------------ Abstentions Abstentions Votes Votes and Broker Votes Votes & Broker For Against Non-Votes For Against Non-Votes - ------------------------------------------------------------------------------------------------------------------ A proposal to ratify the selection of Price Waterhouse LLP as auditors for the fund was approved as follows 13,069,544 83,375 252,466 790 8 45 - ------------------------------------------------------------------------------------------------------------------ A proposal to amend the fund's fundamental investment restriction with respect to investments in the securities of a single issuer was approved as follows 11,046,828 812,314 1,546,243 771 27 45 - ------------------------------------------------------------------------------------------------------------------ A proposal to amend the fund's fundamental investment restriction with respect to making loans through purchases of debt obligations, repurchase agreements and securities loans was approved as follows 10,631,765 1,247,224 1,526,396 760 38 45 - ------------------------------------------------------------------------------------------------------------------ A proposal to amend the fund's fundamental investment restriction with respect to investments in commodities or commodity contracts was approved as follow 10,536,648 1,352,068 1,516,669 761 37 45 - ------------------------------------------------------------------------------------------------------------------ A proposal to amend the fund's fundamental investment restriction with respect to concentration of its assets was approved as follows 10,992,744 888,590 1,524,051 772 26 45 - ------------------------------------------------------------------------------------------------------------------ A proposal to eliminate the fund's fundamental investment restriction with respect to investments in securities of issuers in which management of the fund or Putnam Investment Management, Inc. owns securities was approved as follows 10,721,974 1,150,238 1,533,173 776 22 45 - ------------------------------------------------------------------------------------------------------------------ A proposal to eliminate the fund's fundamental investment restriction with respect to margin transactions was approved as follows 10,325,353 1,526,146 1,553,866 761 37 45 - ------------------------------------------------------------------------------------------------------------------ A proposal to eliminate the fund's fundamental investment restriction with respect to short sales was approved as follows 10,418,007 1,390,804 1,596,574 721 77 45 - ------------------------------------------------------------------------------------------------------------------ Common Shares Preferred shares - ------------------------------------------------------------------------------------------------------------------ Abstentions Abstentions Votes Votes and Broker Votes Votes & Broker For Against Non-Votes For Against Non-Votes - ------------------------------------------------------------------------------------------------------------------ A proposal to eliminate the fund's fundamental investment restriction which limits the fund's ability to pledge assets was approved as follows 10,368,485 1,454,431 1,582,469 771 27 45 - ------------------------------------------------------------------------------------------------------------------ A proposal to eliminate the fund's fundamental investment restriction with respect to investments in restricted securities was approved as follows 10,478,036 1,317,931 1,609,418 760 38 45 - ------------------------------------------------------------------------------------------------------------------ A proposal to eliminate the fund's fundamental investment restriction with respect to investments in certain oil, gas and mineral interests was approved as follows 10,693,351 1,203,151 1,508,883 721 77 45 - ------------------------------------------------------------------------------------------------------------------ A proposal to eliminate the fund's fundamental investment restriction with respect to investing to gain control of a company's management was approved as follows 10,687,150 1,175,847 1,542,388 771 27 45 - ------------------------------------------------------------------------------------------------------------------ All tabulations are rounded to nearest whole number.
Fund information INVESTMENT MANAGER Putnam Investment Management, Inc. One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Mutual Funds Corp. One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray INDEPENDENT ACCOUNTANTS Price Waterhouse LLP TRUSTEES George Putnam, Chairman William F. Pounds, Vice Chairman Jameson Adkins Baxter Hans H. Estin John A. Hill Ronald J. Jackson 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 John D. Hughes Senior Vice President and Treasurer Lawrence J. Lasser Vice President Gordon H. Silver Vice President Gary N. Coburn Vice President Jerome J. Jacobs Vice President Blake E. Anderson Vice President Richard P. Wyke Vice President and Fund Manager William N. Shiebler Vice President John R. Verani Vice President Paul M. O'Neil Vice President Beverly Marcus Clerk and Assistant Treasurer Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up- to-date information about the fund's net asset value. PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 - --------------------- Bulk Rate U.S. Postage PAID Putnam Investments - --------------------- 29927-058 1/97 -----END PRIVACY-ENHANCED MESSAGE-----