-----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, OpfUI2q8EAQGSydfUZ1FgKxLbbSGaNADDR8bUGdZqZJNX6PLYZP6pEimvAvk1ALD c72RONWN7gBY7v3hbRdZEQ== 0000928816-99-000008.txt : 19990120 0000928816-99-000008.hdr.sgml : 19990120 ACCESSION NUMBER: 0000928816-99-000008 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990119 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: SEC FILE NUMBER: 811-05901 FILM NUMBER: 99507670 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 ON PERFORMANCE AND OUTLOOK 11-30-98 [LOGO: BOSTON * LONDON * TOKYO] Fund highlights * "It is reassuring to know that we have a Federal Reserve Board that is prepared to step in to stabilize the markets when a crisis occurs." -- Richard P. Wyke Putnam Investment Grade Municipal Trust * "We're at historical highs in terms of muni yields relative to Treasuries. They represent an unprecedented bargain and opportunity." -- Money, Year End, 1998 CONTENTS 4 Report from Putnam Management 8 Fund performance summary 11 Portfolio holdings 17 Financial statements 26 Results of October 1, 1998 shareholder meeting From the Chairman [GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM] [copyright] Karsh, Ottawa Dear Shareholder: The rush of foreign investors to the safety of U.S. Treasury bonds in recent months has driven prices on these securities markedly higher. Because of the inverse relationship of yields to prices, yields on 30-year Treasuries have declined to virtually the same level as those on long-term municipals. This near parity has made tax-exempt bonds unusually attractive for U.S. investors. The increased demand for tax-exempt bonds, however, is not likely to be matched by a new supply; most issuers have already refinanced outstanding bonds at lower rates and the flow of refundings has fallen off markedly. Thus one of the greatest challenges for Fund Manager Richard Wyke may continue to be that of finding securities that meet Putnam Investment Grade Municipal Trust's strict selection criteria. In the following report from Rick, you will find details of these developments and other aspects of the fund's performance during the fiscal year that closed on November 30, 1998. He also offers his views on prospects for the fiscal year that just began. Respectfully yours, /S/GEORGE PUTNAM George Putnam Chairman of the Trustees January 20, 1999 Report from the Fund Manager Richard P. Wyke After a turbulent autumn, the municipal bond market has calmed down and even slightly outperformed the Treasury market. Long-term municipal bond yields are approximately the same as the 30-year Treasury bond yield -- exhibiting a remarkable level of cheapness against Treasuries. This ratio dropped to 97% during November, but by the end of the month, it had returned to 100%. Considering that this ratio stood between 85% and 95% for most of the 1990s, today's relationship is quite unusual and, in our opinion, indicates a buying opportunity. It is within this environment that Putnam Investment Grade Municipal Trust continued to produce high current income exempt from federal taxes as well as a solid total return. For the 12 months ended November 30, 1998, the fund's common shares earned total returns of 6.98% at net asset value and 8.73% at market price. For complete performance information, please see pages 8 and 9. * FLIGHT TO QUALITY DRIVES TREASURY YIELDS DOWN Municipal bonds arrived at these unprecedented yield ratios after a string of international problems set off the stock market volatility and the bond market rallies. As foreign investors and hedge fund investors panicked about plummeting stock markets, they began the flight to quality -- selling hedge funds and emerging-markets funds in favor of the safety of U.S. Treasury bonds. This buying drove up the prices of Treasuries while pushing down their yields. Since foreign investors do not benefit from the tax advantages of municipal bonds, prices in this market did not rise as much as those of Treasuries. For the past few months, municipal bond yields have been extremely close or equal to Treasury yields, making municipal bonds an exceptional investment choice for U.S. investors. * REFUNDINGS SLOW; MUNICIPAL SUPPLY BEGINS TO MODERATE Normally, when interest rates fall, refundings boost the bond supply. But rates have been low for some time; most issuers have already completed their refundings and we expect that the supply of new issues will slow -- a positive factor for municipal bond prices. The calendar of municipal bond sales usually slows during the holiday season as well. The yield relationship of Treasury and municipal securities is also contributing to the decline in supply. Since Treasury yields fell so dramatically relative to municipal yields, the Treasury escrows used in prerefundings are not adequate to pay off the municipal issues. * SEARCHING FOR INCOME OPPORTUNITIES Since last spring, one of our challenges has been to deliver an attractive level of income in a market in which yields have fallen. We have tried to meet this challenge by exploring attractive opportunities in key industry sectors, including utilities, transportation and health care. Transportation issues have fared well over the past year, since capacity has remained steady and fuel costs have been low. This combination of factors has enabled airlines to increase prices and helped support airport revenues. For example, Denver (Colorado) City and County Airport revenue bonds with a Baa1 rating have generated steady income for some time. As the economy slows down, however, this sector may need closer scrutiny. [GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS] TOP INDUSTRY SECTORS* Utilities 22.4% Transportation 19.1% Hospitals/health care 10.8% Housing 9.9% Education 8.6% Footnote reads: *Based on net assets as of 11/30/98. Holdings will vary over time. [GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW] CREDIT QUALITY OVERVIEW* A -- 9.2% Baa -- 31.2% Ba and below -- 8.8% VMIGI -- 1.2% Aaa -- 45.2% Aa -- 4.4% Footnote reads: *As a percentage of market value as of 11/30/98. A bond rated Baa or higher is considered investment grade. All ratings reflect Moody's descriptions unless noted otherwise; percentages may include unrated bonds considered by Putnam Management to be of comparable quality. Ratings will vary over time. Another strategy we have used has been to extend call protection as we make new investments. This is done by purchasing noncallable bonds or bonds with distant call dates. Callable bonds carry the option of being redeemed, or called away, by the issuer at a certain future date. Bonds are normally called away if interest rates are lower than they were when the bonds were originally issued. By avoiding callable bonds, the portfolio has a better chance of maintaining a certain level of income. The potential for declining income may be offset in part by leveraging, a strategy that has been useful in enhancing the trust's income. The fund issues preferred shares to institutional short-term investors at low rates and reinvests the proceeds in higher-paying longer-term bonds. The effect is a more positive cash flow for the fund's common shareholders. * INTEREST-RATE CUTS SEND POSITIVE MESSAGE It is reassuring to know that we have a Federal Reserve Board that is prepared to step in to stabilize the markets when a crisis occurs. As of period's end, the Fed has cut interest rates three times -- totaling 75 basis points -- sending a positive message to the world and Wall Street. With the Fed's encouragement, we anticipate a slowing, but still strong U.S. economy supported by consumers' willingness to spend. And on the local level, cities and towns are still enjoying increases in tax collections, always a positive aspect of the municipal bond market. Looking ahead, the municipal bond market appears stable, offering superb value for tax-conscious investors. 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 11/30/98, there is no guarantee the fund will continue to hold these securities in the future. Performance summary This section provides information about your fund's performance, which should always be considered in light of its investment strategy. Putnam Investment Grade Municipal Trust is designed for investors seeking high current income free from federal income tax, consistent with preservation of capital. TOTAL RETURN FOR PERIODS ENDED 11/30/98 (common shares) Lehman Bros. Market Municipal Consumer NAV price Bond Index Price Index - --------------------------------------------------------------------- 1 year 6.98% 8.73% 7.77% 1.55% - --------------------------------------------------------------------- 5 years 31.85 57.47 37.81 12.48 Annual average 5.69 9.51 6.63 2.38 - --------------------------------------------------------------------- Life of Fund (10/26/89) 116.42 149.27 103.52 30.57 Annual average 8.85 10.56 8.14 2.98 - --------------------------------------------------------------------- Past performance is not indicative of future results. More recent returns may be more or less than those shown. They do not take into account any adjustment for taxes payable on reinvested distributions. Investment returns, net asset value and market price will fluctuate so that an investor's shares when sold may be worth more or less than their original cost. PRICE AND DISTRIBUTION INFORMATION 12 months ended 11/30/98 - ------------------------------------------------------------------------------ Distributions (common shares) - ------------------------------------------------------------------------------ Number 12 - ------------------------------------------------------------------------------ Income $0.96 - ------------------------------------------------------------------------------ Capital gains1 -- - ------------------------------------------------------------------------------ Total $0.96 - ------------------------------------------------------------------------------ Preferred shares Series A (1400 shares) - ------------------------------------------------------------------------------ Income $3,629.68 - ------------------------------------------------------------------------------ Capital gains1 -- - ------------------------------------------------------------------------------ Total $3,629.68 - ------------------------------------------------------------------------------ Share value (common shares) NAV Market price - ------------------------------------------------------------------------------ 11/30/97 $12.05 $14.750 - ------------------------------------------------------------------------------ 11/30/98 11.98 14.937 - ------------------------------------------------------------------------------ Current return (common shares end of period) - ------------------------------------------------------------------------------ Current dividend rate2 8.01% 6.43% - ------------------------------------------------------------------------------ Taxable equivalent3 13.26 10.65 - ------------------------------------------------------------------------------ 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 of common shares at end of period. 3 Assumes maximum 39.6% federal tax rate. Results for investors subject to lower tax rates would not be as advantageous. TOTAL RETURN FOR PERIODS ENDED 12/31/98 (most recent calendar quarter) (common shares) NAV Market price - ------------------------------------------------------------------------------ 1 year 5.69% 9.15% - ------------------------------------------------------------------------------ 5 years 29.20 56.55 Annual average 5.26 9.38 - ------------------------------------------------------------------------------ Life of fund (10/26/89) 117.17 153.78 Annual average 8.81 10.68 - ------------------------------------------------------------------------------ Performance data represent past results, do not reflect future performance, and will differ for each share class. Investment returns and principal value will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. TERMS AND DEFINITIONS Total return shows how the value of the fund's common shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Net asset value (NAV) is the value of all your fund's assets, minus any liabilities and the net assets allocated to remarketed preferred shares, divided by the number of outstanding common shares. Market price is the current trading price of one share of one common share. Market prices are set by transactions between buyers and sellers on the New York Stock Exchange. COMPARATIVE BENCHMARKS Lehman Brothers Municipal Bond Index is an unmanaged list of long-term fixed-rate investment-grade tax-exempt bonds representative of the municipal bond market. The index assumes reinvestment of all distributions and interest payments and does not take in account brokerage fees or taxes. Securities in the fund do not match those in the indexes and performance of the fund will differ. It is not possible to invest directly in an index. Consumer Price Index (CPI) is a commonly used measure of inflation; it does not represent an investment return. Report of independent accountants For the fiscal year ended November 30, 1998 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, 1998, 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, 1998 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts January 8, 1999
Portfolio of investments owned November 30, 1998 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 (95.9%) (a) PRINCIPAL AMOUNT RATINGS(RAT) VALUE Alabama (1.6%) - -------------------------------------------------------------------------------------------------------------------------- $ 5,500,000 Gadsden East, Med. Clinic Board Rev. Bonds (Baptist Hosp. of Gadsden Inc.), Ser. A, 7.8s, 11/1/21 BBB $ 6,215,000 Arkansas (1.1%) - -------------------------------------------------------------------------------------------------------------------------- 4,000,000 Northwest Regl. Apt. Auth. Rev. Bonds, 7s, 2/1/10 B+/P 4,305,000 California (8.3%) - -------------------------------------------------------------------------------------------------------------------------- 2,000,000 Anaheim, Pub. Fin. Auth. IFB, MBIA, 9.12s, 12/28/18 Aaa 2,592,500 4,650,000 CA State U. IFB, AMBAC, 9.959s, 11/1/21 (acquired 3/2/92, cost $19,013,580) (RES) Aaa 5,411,438 5,200,000 Central Valley Fin. Auth. Rev. Bonds (Carson Ice- Cogeneration), 6s, 7/1/09 BBB- 5,583,500 Los Angeles Cnty., Metro. Trans. Auth. Sales Tax Rev. Bonds, MBIA 3,235,000 1st Tier Lien, Ser. A, 5 3/4s, 7/1/11 Aaa 3,598,938 3,030,000 2nd Tier Lien, 5 5/8s, 7/1/11 Aaa 3,325,425 4,425,000 Los Angeles, Regl. Arpt. Impt. Corp. Lease Rev. Bonds (Continental Airlines), 9s, 8/1/17 BB+/P 4,543,723 1,000,000 Los Angeles, School Dist. COP VRDN (Belmont Learning Complex), Ser. A, 3.05s, 12/1/17 VMIG1 1,000,000 1,400,000 Orange Cnty., Local Trans. Auth. IFB, FGIC, 7.911s, 2/14/11 (acquired 2/6/96, cost $1,474,153) (RES) Aaa 1,657,250 4,625,000 San Diego, Pub. Fac. Fin. Auth. Swr. Rev. Bonds, FGIC, 5s, 5/15/25 Aaa 4,625,000 -------------- 32,337,774 Colorado (8.6%) - -------------------------------------------------------------------------------------------------------------------------- CO Hsg. Fin. Auth. Rev. Bonds (Single Fam.), Ser. B-2 2,000,000 7s, 5/1/26 AA+/P 2,232,500 1,000,000 6.8s, 11/1/28 AA+/P 1,127,500 Denver, City & Cnty. Arpt. Rev. Bonds 735,000 Ser. A, 8 3/4s, 11/15/23 Baa1 834,225 265,000 Prerefunded, Ser. A, 8 3/4s, 11/15/23 Aaa 306,406 4,365,000 Ser. A, 8 1/2s, 11/15/23 Baa1 4,779,675 410,000 Prerefunded, Ser.A, 8 1/2s, 11/15/23 Aaa 455,613 4,480,000 Ser. A, 8 1/4s, 11/15/12 Baa1 4,877,600 420,000 Prerefunded, Ser. A, 8 1/4s, 11/15/12 Aaa 464,625 3,820,000 Ser. A, 8s, 11/15/25 Baa1 4,192,450 1,380,000 Prerefunded, Ser.A, 8s, 11/15/25 Aaa 1,542,150 6,330,000 Ser. A, 7 3/4s, 11/15/21 Baa1 7,002,563 1,670,000 Prerefunded, Ser.A, 7 3/4s, 11/15/21 Aaa 1,885,013 3,000,000 Ser. D, 7 3/4s, 11/15/13 Baa1 3,843,750 -------------- 33,544,070 Connecticut (1.8%) - -------------------------------------------------------------------------------------------------------------------------- 4,825,000 CT State Dev. Auth. Poll. Control Rev. Bonds (New England Power Co.), 7 1/4s, 10/15/15 A1 5,066,347 2,000,000 CT State Resource Recvy. Auth. Muni. Rev. Bonds (Bridgeport Service Fee), Ser. A, 7 1/2s, 1/1/09 A2 2,044,360 -------------- 7,110,707 District of Columbia (0.7%) - -------------------------------------------------------------------------------------------------------------------------- 2,500,000 DC Rev. Bonds (Georgetown U.), Ser. B, 7.15s, 4/1/21 A1 2,573,425 Florida (3.5%) - -------------------------------------------------------------------------------------------------------------------------- 10,525,000 Broward Cnty., Resource Recvy. Rev. Bonds (SES Broward Cnty. LP South), 7.95s, 12/1/08 A 11,194,495 2,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds (FL Crushed Stone Co.), 8 1/2s, 12/1/14 B+/P 2,310,000 -------------- 13,504,495 Georgia (2.9%) - -------------------------------------------------------------------------------------------------------------------------- 4,000,000 Burke Cnty., Dev. Auth. Poll. Control Rev. Bonds (Oglethorpe Pwr. Co. Vogtle), MBIA, 8s, 1/1/22 Aaa 4,725,000 4,800,000 De Kalb Cnty., Muni. Hsg. Auth. Rev. Bonds (Briarcliff Park Apts.), Ser. A, 7 1/2s, 4/1/17 BBB+/P 5,352,000 1,000,000 GA Med. Ctr. Hosp. Auth. IFB (Columbus Regl. Hlth. Care Syst.), Ser. B, MBIA, 8.901s, 8/1/10 Aaa 1,185,000 -------------- 11,262,000 Hawaii (1.6%) - -------------------------------------------------------------------------------------------------------------------------- 5,500,000 HI State Dept. of Budget & Fin. Special Purpose Mtge. IFB, 9.386s, 11/1/21 Aa1 6,366,250 Illinois (0.7%) - -------------------------------------------------------------------------------------------------------------------------- 2,385,000 Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds (United Air Lines, Inc.), Ser. B, 8.95s, 5/1/18 Baa2 2,638,406 Indiana (1.2%) - -------------------------------------------------------------------------------------------------------------------------- 310,000 Indiana Bond Bank Rev. Bonds (Special Loan Program), Ser. B, 8 1/2s, 2/1/18 A 314,163 3,000,000 Indianapolis Indl. Arpt. Auth. Special Fac. Rev. Bonds (United Airlines), Ser. A, 6 1/2s, 11/15/31 Baa2 3,217,500 1,000,000 Rockport, Indl. Poll. Ctrl. Rev. Bonds (Indiana-Michigan Pwr.), Ser. B, FGIC, 7.6s, 3/1/16 Aaa 1,097,500 -------------- 4,629,163 Kansas (1.3%) - -------------------------------------------------------------------------------------------------------------------------- 4,500,000 Burlington, Poll. Control Rev. Bonds (Kansas Gas & Electric Co.), MBIA, 7s, 6/1/31 Aaa 4,921,875 Louisiana (7.2%) - -------------------------------------------------------------------------------------------------------------------------- 9,250,000 St. Charles, Parish Poll. Control Rev. Bonds (LA Pwr. & Lt. Co.), 8s, 12/1/14 Baa3 9,817,488 W. Feliciana Parish Poll. Control Rev. Bonds (Gulf States Util. Co.) 2,500,000 8s, 12/1/24 Ba1 2,631,000 5,100,000 Ser. II, 7.7s, 12/1/14 Ba1 5,648,250 3,000,000 Ser. III, 7.7s, 12/1/14 Ba1 3,322,500 6,000,000 Ser. A, 7 1/2s, 5/1/15 BB+ 6,652,500 -------------- 28,071,738 Maine (1.4%) - -------------------------------------------------------------------------------------------------------------------------- 5,000,000 ME Fin. Auth. Solid Waste Recycling Fac. Rev. Bonds (Great Northern Paper-Bowater), 7 3/4s, 10/1/22 Baa1 5,568,750 Maryland (1.4%) - -------------------------------------------------------------------------------------------------------------------------- 3,035,000 MD Econ. Dev. Corp. Hlth. Care Facs. Rev. Bonds (Crescent Cities), Ser. A, GNMA Coll., 5.45s, 12/20/37 AAA 3,103,288 2,000,000 MD State Hlth. & Higher Edl. Fac. Auth. Rev. Bonds, (Doctors Cmnty. Hosp.), 8 3/4s, 7/1/12 Aaa 2,200,000 -------------- 5,303,288 Massachusetts (5.5%) - -------------------------------------------------------------------------------------------------------------------------- 8,750,000 MA State Hlth. & Edl. Fac. Auth. IFB (Med. Ctr. of Central MA), Ser. B, AMBAC, 9.19s, 6/23/22 Aaa 11,484,375 4,000,000 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Baa3 4,435,000 5,000,000 MA State Indl. Fin. Agcy. Rev. Bonds (Cape Cod Hlth. Syst. Issue), 8 1/2s, 11/15/20 Aaa 5,568,750 -------------- 21,488,125 Michigan (2.0%) - -------------------------------------------------------------------------------------------------------------------------- 1,715,000 Detroit, Dev. Fin. Auth. Tax Increment Rev. Bonds, Ser. A, 9 1/2s, 5/1/21 BBB+/P 2,105,163 2,200,000 Detroit, Wtr. Supply Syst. IFB, FGIC, 9.221s, 7/1/22 Aaa 2,557,500 2,900,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds (Mercy Svcs. for Aging), 9.4s, 5/15/20 Aaa 3,161,000 -------------- 7,823,663 Missouri (3.2%) - -------------------------------------------------------------------------------------------------------------------------- 2,500,000 MO State Hlth. & Edl. Fac. Auth. Rev. Bonds (BJC Hlth. Syst.), Ser. A, 6 1/2s, 5/15/20 Aa2 2,856,250 8,900,000 SCA Tax Exempt Trust Multi-Fam. Mtge. Rev. Bonds (Whispering Lake), Ser. A-11, FSA, 7.1s, 1/1/30 Aaa 9,701,000 -------------- 12,557,250 Nebraska (0.5%) - -------------------------------------------------------------------------------------------------------------------------- 1,700,000 NE Investment Fin. Auth. Single Fam. Mtge. IFB, Ser. B, GNMA Coll., 11.419s, 3/15/22 Aaa 1,861,500 Nevada (2.6%) - -------------------------------------------------------------------------------------------------------------------------- Clark Cnty., Indl. Dev. Rev. Bonds 6,500,000 (NV Pwr. Co.), 7.8s, 6/1/20 Baa3 6,922,500 3,000,000 (Southwest Gas Corp.), Ser. B, 7 1/2s, 9/1/32 Baa 3,322,500 -------------- 10,245,000 New York (8.1%) - -------------------------------------------------------------------------------------------------------------------------- 4,000,000 Long Island, Pwr. Auth. NY Elec. Syst. Rev. Bonds, Ser. A, 5 1/4s, 12/1/26 Baa1 4,030,000 1,900,000 Long Island, Pwr. Auth. NY Elec. Syst. VRDN, Ser. 1, 3.25s, 5/1/33 VMIG1 1,900,000 400,000 NY City, Hsg. Dev. Corp. Mtge. VRDN (Multi-Fam. James Twr.), Ser. A, 3.3s, 7/1/05 A-1+ 400,000 2,000,000 NY City, Indl. Dev. Agcy. Rev. Bonds (Brooklyn Navy Yard Cogen. Partners), Ser. G, 5 3/4s, 10/1/36 Baa3 2,050,000 4,100,000 NY City, Muni. Wtr. & Swr. Fin. Auth. Rev. Bonds, Ser. C, 5 3/4s, 6/15/26 A1 4,397,250 NY State Dorm. Auth. Rev. Bonds 4,500,000 (City U. Syst.), Ser. F, 7 7/8s, 7/1/17 Aaa 4,893,750 6,250,000 (State U. Edl. Fac.), Ser. A, 7.7s, 5/15/12 Aaa 6,757,813 2,000,000 (City U. Syst.), Ser. A, 7 5/8s, 7/1/20 Aaa 2,167,500 1,200,000 Suffolk Cnty., Indl. Dev. Agcy. VRDN (Cold Spring Harbor Lab), 3.3s, 7/1/23 A-1+ 1,200,000 3,780,000 Triborough Bridge & Tunnel Auth. Gen. Purpose Rev. Bonds, Ser. A, 5s, 1/1/24 Aa 3,780,000 -------------- 31,576,313 Ohio (1.5%) - -------------------------------------------------------------------------------------------------------------------------- 5,000,000 OH State Air Quality Dev. Auth. Rev. Bonds (Cleveland Co.), FGIC, 8s, 12/1/13 Aaa 5,787,500 Pennsylvania (4.2%) - -------------------------------------------------------------------------------------------------------------------------- 2,430,000 Allegheny Cnty., Res. Fin. Auth. Rev. Bonds, Ser. M, GNMA Coll., 7.9s, 6/1/11 Aaa 2,542,382 5,000,000 Montgomery Cnty., Indl. Dev. Auth. Resource Recvy. Rev. Bonds, 7 1/2s, 1/1/12 A 5,300,000 7,600,000 PA State Higher Ed. Assistance Agcy. IFB, Ser. B, MBIA, 11.041s, 3/1/20 Aaa 8,540,500 -------------- 16,382,882 Puerto Rico (1.0%) - -------------------------------------------------------------------------------------------------------------------------- 4,000,000 Cmnwlth. of PR, Hwy. Trans. Auth. Rev. Bonds, Ser. A, 5s, 7/1/38 Baa1 3,940,000 Tennessee (3.9%) - -------------------------------------------------------------------------------------------------------------------------- 2,600,000 Metropolitan Govt. Nashville & Davidson Cnty., Tenn. Wtr. & Swr. IFB, AMBAC, 8.57s, 1/1/22 Aaa 3,045,250 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 12,167,125 -------------- 15,212,375 Texas (11.6%) - -------------------------------------------------------------------------------------------------------------------------- 11,500,000 Alliance, Arpt. Auth. Rev. Bonds (Federal Express Corp.), 6 3/8s, 4/1/21 Baa2 12,376,875 2,770,000 Austin, School Dist. G.O. Bonds, PSFG, 5 3/4s, 8/1/15 Aaa 2,970,825 2,500,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds (St. Luke's Lutheran Hosp.), 7.9s, 5/1/11 AAA/P 2,900,000 5,000,000 Brazos River, Poll. Control Auth. Rev. Bonds (TX Utils. Elec. Co.), Ser. A, 7 7/8s, 3/1/21 Baa1 5,425,000 2,500,000 Dallas-Fort Worth, Intl. Arpt. Fac. Impt. Corp. Rev. Bonds (American Airlines, Inc.), 7 1/2s, 11/1/25 Baa2 2,678,125 4,390,000 Matagorda Cnty., Poll. Control Rev. Bonds (Houston Pwr. & Lt. Co.), Ser. D, FGIC, 7.6s, 10/1/19 Aaa 4,620,212 8,000,000 North Central Hlth. Fac. Dev. Corp. IFB (Presbyterian Hlth. Care Syst.), Ser. C, MBIA, 9.265s, 6/22/21 Aaa 9,440,000 4,500,000 TX State G.O. Bonds (Nat'l. Research Lab. Communication Superconductor), 7 1/8s, 4/1/20 Aaa 4,809,375 -------------- 45,220,412 Utah (4.6%) - -------------------------------------------------------------------------------------------------------------------------- 3,000,000 Carbon Cnty., Solid Waste Disp. Rev. Bonds (Ladilaw Env.), Ser. A, 7.45s, 7/1/17 B/P 3,330,000 13,000,000 Utah Pwr. Supply Rev. Bonds (Intermountain Pwr. Agcy.), Ser. A, MBIA, 6.15s, 7/1/14 Aaa 14,690,000 -------------- 18,020,000 Vermont (1.4%) - -------------------------------------------------------------------------------------------------------------------------- 4,765,000 VT Edl. & Hlth. Bldgs. Fin. Agcy. Rev. Bonds (Brattleboro Memorial Hosp.), 7s, 3/1/24 BBB+ 5,444,013 Wisconsin (2.5%) - -------------------------------------------------------------------------------------------------------------------------- 3,400,000 WI Hsg. & Econ. Dev. Auth. Rev. Bonds, Ser. B, 7.05s, 11/1/22 A1 3,646,500 5,600,000 WI State Hlth. & Edl. Fac. Auth. Rev. Bonds (United Hlth. Group, Inc.), Ser. B, MBIA, 5 1/2s, 12/15/20 Aaa 5,894,000 -------------- 9,540,500 - -------------------------------------------------------------------------------------------------------------------------- Total Investments (cost $350,449,030) (b) $ 373,451,474 - -------------------------------------------------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $389,621,549. (RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at November 30, 1998 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, 1998. Securities rated by Putnam are indicated by "/P" and are not publicly rated. Ratings are not covered by the Report of independent accountants. (b) The aggregate identified cost on a tax basis is $350,449,030, resulting in gross unrealized appreciation and depreciation of $24,935,278 and $1,932,834, respectively, or net unrealized appreciation of $23,002,444. (RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at November 30, 1998 was $7,068,688 or 1.8% of net assets. The rates shown on IFB's, which are securities paying interest rates that vary inversely to changes in the market interest rates, and VRDN's are the current interest rates at November 30, 1998. The fund had the following industry group concentrations greater than 10% at November 30, 1998 (as a percentage of net assets): Utilities 22.4% Transportation 19.1 Hospitals/Health care 10.8 The fund had the following insurance concentration greater than 10% at November 30, 1998 (as a percentage of net assets) MBIA 15.1% The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities November 30, 1998 Assets - ----------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $350,449,030) (Note 1) $373,451,474 - ----------------------------------------------------------------------------------------------- Cash 145,376 - ----------------------------------------------------------------------------------------------- Interest receivable 6,937,120 - ----------------------------------------------------------------------------------------------- Receivable for securities sold 11,589,500 - ----------------------------------------------------------------------------------------------- Total assets 392,123,470 Liabilities - ----------------------------------------------------------------------------------------------- Distributions payable to shareholders 1,667,038 - ----------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 682,828 - ----------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 31,538 - ----------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 12,519 - ----------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 1,094 - ----------------------------------------------------------------------------------------------- Other accrued expenses 106,904 - ----------------------------------------------------------------------------------------------- Total liabilities 2,501,921 - ----------------------------------------------------------------------------------------------- Net assets $389,621,549 Represented by - ----------------------------------------------------------------------------------------------- Series A remarketed preferred shares, (1,400 shares authorized and outstanding at $100,000 per share) (Note 4) $140,000,000 - ----------------------------------------------------------------------------------------------- Paid-in capital -- common shares (unlimited shares authorized) (Note 1) 231,328,005 - ----------------------------------------------------------------------------------------------- Undistributed net investment income (Note 1) 3,713,329 - ----------------------------------------------------------------------------------------------- Accumulated net realized loss on investments (Note 1) (8,422,229) - ----------------------------------------------------------------------------------------------- Net unrealized appreciation of investments 23,002,444 - ----------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $389,621,549 Computation of net asset value - ----------------------------------------------------------------------------------------------- Series A remarketed preferred shares $140,000,000 - ----------------------------------------------------------------------------------------------- Cumulative undeclared dividends on remarketed preferred shares 36,822 - ----------------------------------------------------------------------------------------------- Net assets allocated to remarketed preferred shares -- liquidation preference $140,036,822 - ----------------------------------------------------------------------------------------------- Net assets available to common shares $249,584,727 - ----------------------------------------------------------------------------------------------- Net asset value per common share ($249,584,727 divided by 20,838,596 shares) $11.98 - ----------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of operations Year ended November 30, 1998 Tax exempt interest income: $25,790,168 - ----------------------------------------------------------------------------------------------- Expenses: - ----------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 2,733,391 - ----------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 337,530 - ----------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 14,844 - ----------------------------------------------------------------------------------------------- Administrative services (Note 2) 6,551 - ----------------------------------------------------------------------------------------------- Reports to shareholders 19,409 - ----------------------------------------------------------------------------------------------- Auditing 60,398 - ----------------------------------------------------------------------------------------------- Legal 15,410 - ----------------------------------------------------------------------------------------------- Exchange listing fees 45,220 - ----------------------------------------------------------------------------------------------- Preferred share remarketing agent fees 389,888 - ----------------------------------------------------------------------------------------------- Other 60,533 - ----------------------------------------------------------------------------------------------- Total expenses 3,683,174 - ----------------------------------------------------------------------------------------------- Expense reduction (Note 2) (30,053) - ----------------------------------------------------------------------------------------------- Net expenses 3,653,121 - ----------------------------------------------------------------------------------------------- Net investment income 22,137,047 - ----------------------------------------------------------------------------------------------- Net realized loss on investments (Notes 1 and 3) (1,368,499) - ----------------------------------------------------------------------------------------------- Net unrealized appreciation of investments during the year 2,425,356 - ----------------------------------------------------------------------------------------------- Net gain on investments 1,056,857 - ----------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $23,193,904 - ----------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets Year ended November 30 ------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------------------------- Increase in net assets - --------------------------------------------------------------------------------------------------------------- Operations: - --------------------------------------------------------------------------------------------------------------- Net investment income $ 22,137,047 $ 22,541,282 - --------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments (1,368,499) 1,176,166 - --------------------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments 2,425,356 3,151,505 - --------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 23,193,904 26,868,953 - --------------------------------------------------------------------------------------------------------------- Distributions to remarketed preferred shareholders: - --------------------------------------------------------------------------------------------------------------- From net investment income (5,081,552) (5,144,062) - --------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations applicable to common shareholders (excluding cumulative undeclared dividends on remarketed preferred shares of $36,822 and $29,536 respectively) 18,112,352 21,724,891 - --------------------------------------------------------------------------------------------------------------- Distributions to common shareholders: - --------------------------------------------------------------------------------------------------------------- From net investment income (19,919,416) (19,741,555) - --------------------------------------------------------------------------------------------------------------- Issuance of common shares in connection with reinvestment of distributions 2,597,553 2,357,814 - --------------------------------------------------------------------------------------------------------------- Total increase in net assets 790,489 4,341,150 Net assets - --------------------------------------------------------------------------------------------------------------- Beginning of year 388,831,060 384,489,910 - --------------------------------------------------------------------------------------------------------------- End of year (including undistributed net investment income of $3,713,329 and $6,541,122, respectively) $389,621,549 $388,831,060 - --------------------------------------------------------------------------------------------------------------- Number of fund shares - --------------------------------------------------------------------------------------------------------------- Common shares outstanding at beginning of year 20,646,799 20,470,991 - --------------------------------------------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 191,797 175,808 - --------------------------------------------------------------------------------------------------------------- Common shares outstanding at end of year 20,838,596 20,646,799 - --------------------------------------------------------------------------------------------------------------- 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) - ------------------------------------------------------------------------------------------------------------------------------------ Per-share operating performance Year ended November 30 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of year (common shares) $12.05 $11.94 $12.37 $11.22 $13.44 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income 1.07 1.09 1.06 1.17 1.20 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments .06 .23 (.28) 1.23 (2.03) - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations 1.13 1.32 .78 2.40 (.83) - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income - ------------------------------------------------------------------------------------------------------------------------------------ to Common Shareholders (.96) (.96) (.96) (.94) (.97) - ------------------------------------------------------------------------------------------------------------------------------------ to Preferred Shareholders (.24) (.25) (.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 (1.20) (1.21) (1.21) (1.25) (1.39) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of year (common shares) $11.98 $12.05 $11.94 $12.37 $11.22 - ------------------------------------------------------------------------------------------------------------------------------------ Market value, end of year (common shares) $14.937 $14.750 $13.625 $13.500 $11.880 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at market price (common shares) (%)(a) 8.73 16.25 8.65 22.95 (6.74) - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (total fund) (in thousands) $389,622 $388,831 $384,490 $391,003 $364,814 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b)(c) 1.47 1.43 1.49 1.50 1.45 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%)(b) 6.82 7.13 6.84 7.50 8.07 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 14.44 26.91 146.43 122.65 78.97 - ------------------------------------------------------------------------------------------------------------------------------------ (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 stockholders amounted to less than $0.01 per common share.
Notes to financial statements November 30, 1998 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 Inc. ("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. 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) 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) 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 on securities held and for excise tax on income and capital gains. At November 30, 1998, the fund had a capital loss carryover of approximately $4,259,000 available to offset future capital gains, if any. The amount of the carryover and the expiration dates are: Loss Carryover Expiration -------------- ----------------- $1,985,000 November 30, 2004 612,000 November 30, 2005 1,662,000 November 30, 2006 D) Distributions to shareholders Distributions to common and preferred shareholders are recorded by the fund on the ex-dividend date. If the market price of your fund's shares is equal to or exceeds their net asset value on the payment date, you will be issued shares of the fund at a value equal to the higher of the net asset value or 95% of the market price on that 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, 1998 was 3.20%. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include temporary and permanent differences of dividends payable, defaulted bond interest, market discount, and prior year straddle loss deferrals. Reclassifications are made to the fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. For the year ended November 30, 1998, the fund reclassified $36,128 to increase undistributed net investment income and $36,128 to decrease accumulated net realized losses. The calculation of net investment income per share in the financial highlights table excludes these adjustments. E) 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) less all liabilities (including accrued expenses and undeclared dividends on remarketed preferred shares) and the liquidation value of any outstanding remarketed preferred shares, by the total number of common shares outstanding. F) Amortization of bond premium and discount Any premium resulting from the purchase of securities in excess of maturity value is amortized on a yield-to-maturity basis. Discounts on zero coupon bonds and original issue bonds are accreted according to the yield-to-maturity basis. Note 2 Management fee, administrative services, and other transactions Compensation of Putnam Management for management and investment advisory services is paid quarterly based on the average net assets of the fund, 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 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, 1998, fund expenses were reduced by $30,053 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. Each Trustee of the fund receives an annual Trustee fee, of which $550 has been allocated to the fund, and an additional fee for each Trustee's meeting attended. Trustees who are not interested persons of Putnam Management and who serve on committees of the Trustees receive additional fees for attendance at certain committee meetings. The fund 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 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, 1998, purchases and sales of investment securities other than short-term investments aggregated $55,521,330 and $58,622,225, 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, 1998, no such restrictions have been placed on the fund. Federal Tax Information (Unaudited) The fund has designated 100% of dividends paid from net investment income during the fiscal year as tax exempt for Federal income tax purposes. The Form 1099 you receive in January 1999 will show the tax status of all distributions paid to your account in calendar 1998. Results of October 1, 1998 shareholder meeting (Unaudited) An annual meeting of shareholders of the fund was held on October 1, 1998. At the meeting, each of the nominees for Trustees was elected, as follows: Common Shares Preferred Shares Votes Votes Votes for withheld Votes for withheld Jameson Adkins Baxter 15,356,377 321,614 978 7 Hans H. Estin 15,364,103 313,888 978 7 Ronald J. Jackson 15,373,891 304,100 978 7 Paul L. Joskow 15,377,427 300,564 978 7 Elizabeth T. Kennan 15,364,953 313,038 978 7 Lawrence J. Lasser 15,381,168 296,823 978 7 John H. Mullin III 15,376,253 301,738 978 7 Donald S. Perkins 15,355,372 322,619 978 7 William F. Pounds 15,354,752 323,239 978 7 George Putnam 15,358,719 319,272 978 7 George Putnam, III 15,355,174 322,817 978 7 A.J.C. Smith 15,364,216 313,775 978 7 W. Thomas Stephens 15,363,304 314,687 978 7 W. Nicholas Thorndike 15,351,139 326,852 978 7 A proposal to ratify the selection of PricewaterhouseCoopers LLP as the independent auditors of your fund was approved as follows: Common Shares - -- 15,272,545 votes for, and 79,918 votes against, with 325,528 abstentions and broker non-votes. Preferred Shares -965 votes for, and 13 votes against, with 7 abstentions and broker non-votes. A proposal to approve an amendment to the fund's fundamental investment restriction with respect to making loans was approved as follows: Common Shares -- 11,596,586 votes for, and 1,176,371 votes against, with 2,905,034 abstentions and broker non-votes. Preferred Shares -- 780 votes for, and 117 votes against, with 88 abstentions and broker non-votes. 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 PricewaterhouseCoopers LLP TRUSTEES George Putnam, Chairman William F. Pounds, Vice Chairman John A. Hill, Vice Chairman Jameson Adkins Baxter Hans H. Estin Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan Lawrence J. Lasser John H. Mullin III Robert E. Patterson Donald S. Perkins George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike OFFICERS George Putnam President Charles E. Porter Executive Vice President Patricia C. Flaherty Senior Vice President John D. Hughes Senior Vice President and Treasurer Lawrence J. Lasser Vice President Gordon H. Silver Vice President Ian C. Ferguson Vice President Brett C. Browchuk Vice President Jerome J. Jacobs Vice President Richard P. Wyke Vice President and Fund Manager John R. Verani Vice President Beverly Marcus Clerk and Assistant Treasurer Call 1-800-225-1581 weekdays from 9 a.m. Eastern Time, or visit our website (www.putnaminv.com) any time for up-to-date information about the fund's NAV. [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 www.putnaminv.com - --------------------- BULK RATE U.S. POSTAGE PAID PUTNAM INVESTMENTS - --------------------- 48650 058 1/99 -----END PRIVACY-ENHANCED MESSAGE-----