Putnam
Investment Grade
Municipal Trust
Item 1. Report to Stockholders:
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The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
5-31-05
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
During the period ended May 31, 2005, the Federal Reserve Board's series
of gradual increases in the federal funds rate occupied investors'
attention. The Fed's more restrictive monetary policy, along with high
energy prices, has moderated the pace of the economic expansion. Recent
reports show the economy is growing at a respectable rate of about 3.5%
annually, but some investors believe that this pace cannot sustain
corporate profits near their robust levels of late. This concern has
held the stock market in check and focused attention on credit risk in
the bond market, even as long-term bond yields remained low. Major
credit rating agencies underscored market concerns in early May by
downgrading bonds issued by Ford and General Motors. Amid the
uncertainties of this environment, security selection takes on even
greater importance and the in-depth, professional research and active
management that mutual funds can provide makes them an intelligent
choice for today's investors.
We want you to know that Putnam Investments' management team, under the
leadership of Chief Executive Officer Ed Haldeman, continues to focus on
investment performance and remains committed to putting the interests of
shareholders first. In keeping with these goals, we are including
additional disclosure about your fund's management team in this report.
Following the Outlook for Your Fund, we provide manager compensation
information that pertains to your fund. In addition, on page 13 of this
report we provide information about the 2004 approval by the Trustees of
your fund's management contract with Putnam.
We would also like to take this opportunity to announce the retirement
of one of your fund's Trustees, Ronald J. Jackson, who has been an
independent Trustee of the Putnam funds since 1996. We thank him for his
service.
In the following pages, members of your fund's management team discuss
the fund's performance, the strategies used to pursue the fund's
investment objectives during the reporting period, and the team's
outlook for the months ahead.
As always, we thank you for your continuing confidence in Putnam.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
July 20, 2005
Report from Fund Management
Fund highlights
* For the six months ended May 31, 2005, Putnam Investment Grade
Municipal Trust had a total return of 6.09% at net asset value (NAV) and
4.06% at market price.
* The fund's benchmark, the Lehman Municipal Bond Index, returned 3.52%.
* The average return for the fund's Lipper category, General Municipal
Debts Funds (leveraged closed-end), was 5.94%.
* The fund's dividend was reduced to $0.0409 per share in June 2005. See
page 5 for details.
* See the Performance Summary beginning on page 10 for additional
information on fund performance, comparative performance, and Lipper
data.
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TOTAL RETURN FOR
PERIODS ENDED 5/31/05
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Market
(inception 10/26/89) NAV price
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6 months 6.09% 4.06%
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1 year 13.50 6.27
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5 years 52.79 14.51
Annual average 8.85 2.75
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10 years 88.45 57.83
Annual average 6.54 4.67
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Annual average
(life of fund) 7.70 6.32
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Data is historical. Past performance does not guarantee future results.
More recent returns may be less or more than those shown. Investment
return, net asset value, and market price will fluctuate and you may
have a gain or a loss when you sell your shares. Performance assumes
reinvestment of distributions and does not account for taxes.
Performance commentary
The past six months, although volatile, were favorable for longer-term
bonds in general and for the municipal market in particular. While your
fund's focus remains on investment-grade bonds, its mod est allocation
to lower-rated, longer-term bonds helped its competitive performance.
This, combined with the fund's ability to use leverage, enabled it to
outperform its unleveraged benchmark. The fund's results were in line
with the average for its Lipper category, which is composed of similarly
leveraged, closed-end funds. The fund's relatively short duration and
limited exposure to airline-related in dus t rial development bonds
(IDBs) -- one of the strongest sec tors during the period -- held back
performance to some extent, but reflect our conservative approach and
efforts to manage risk. It is important to note that a fund's
performance at market price may differ from its results at NAV. Although
market price performance generally reflects investment results, it may
also be influenced by other factors, including investor perception of
the fund or its advisor, market conditions, fluctuations in supply and
demand for the fund's shares, and changes in fund distributions.
FUND PROFILE
Putnam Investment Grade Municipal Trust is a leveraged fund that seeks
to provide as high a level of current income free from federal income
tax as is consistent with preservation of capital by investing primarily
in investment-grade municipal bonds. The fund may be suitable for
investors seeking tax-exempt income who can accept a higher level of
risk in exchange for the potentially higher level of income offered by a
leveraged fund.
Market overview
Early in the fiscal year, signs of solid economic growth and rising
corporate profits heightened investor concerns about potential
interest-rate increases by the Federal Reserve Board (the Fed). This
concern helped push bond yields somewhat higher and bond prices, which
move in the opposite direction of yields, lower. Signs of accelerating
economic growth and rising corporate profits prompted the Fed to
increase the federal funds rate four times during the six-month period,
each time in 0.25% increments. The Fed uses interest-rate increases in
its efforts to rein in economic growth with the goal of limiting its
potential inflationary impact. Rising short-term rates and falling
long-term rates resulted in a flattening of the yield curve, as shorter-
and longer-term interest rates began to converge.
The same conditions that led to rising interest rates -- an improving
economy and rising corporate earnings -- were particularly favorable for
lower-rated bonds. Among uninsured bonds and especially bonds rated BBB
and below, yield spreads tightened, and bond prices rose. Bonds at the
lower end of the credit spectrum, including BB- and B-rated bonds,
turned in the strongest performance. There was limited variation in
municipal bond performance among states during the six-month period.
Based on continued favorable legal rulings, yields on tobacco settlement
bonds declined overall during the period, and their prices rose
accordingly. After underperforming for most of the year, airline-related
industrial development bonds (IDBs) staged a comeback from distressed
levels and outperformed over the trailing six-month period. Callable
bonds (which can be redeemed by their issuers before maturity)
outperformed non-callable bonds, as investors expect bonds priced to
call to be less sensitive to interest rate increases.
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MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 5/31/05
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Bonds
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Lehman Municipal Bond Index (tax-exempt bonds) 3.52%
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Lehman Aggregate Bond Index (broad bond market) 2.90%
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Lehman Government Bond Index (U.S. Treasury and agency
securities) 3.27%
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JP Morgan Global High Yield Index (global high-yield
corporate bonds) 0.99%
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Equities
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S&P 500 Index (broad stock market) 2.42%
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Russell 1000 Index (large-company stocks) 3.31%
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Russell 2000 Index (small-company stocks) -2.10%
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These indexes provide an overview of performance in different market
sectors for the six months ended 5/31/05.
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Strategy overview
Given our expectation for rising interest rates, we maintained a
shorter, or defensive, duration position throughout the six-month
period. One of the strategies we used to manage duration was selling
Treasury bond futures. This enabled us to achieve our target duration
without trading large volumes of securities. Duration is a measure of a
fund's sensitivity to changes in interest rates. Investing in bonds with
short duration may help protect principal when interest rates are
rising, but it can reduce the fund's potential for appreciation when
rates fall. As we had expected, the Fed increased short-term interest
rates during the period. However, rates on long-term bonds unexpectedly
trended downward for much of the period and the prices of these bonds
rose as a result. The fund's participation in this rally was somewhat
limited by its overall defensive duration position.
During the period, we repositioned the portfolio to take better
advantage of the flattening of the yield curve. Given our expectation
that short-term rates would continue to rise, we also reduced the fund's
positions in inverse floating-rate securities during the period. These
securities pay additional interest income as short rates fall and less
interest income when short rates rise. We also sold shorter-maturity
Treasury bond futures and bought longer-maturity futures to better
position the fund to benefit from anticipated changes in the yield
curve. As with the use of futures for duration management, this strategy
enabled us to replicate the desired yield curve exposure at a lower
cost.
The fund benefited from its emphasis on lower-rated, higher-yielding
bonds during the period, as this segment of the market outperformed
during the period. However, we believe the high-yield rally has nearly
run its course and we continued to take advantage of price strength to
reduce the fund's position in this market segment.
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
11/30/04 5/31/05
Average effective
maturity in years 7.0 6.2
Duration in years 8.1 7.6
Footnotes read:
This chart compares changes in the fund's duration (a measure of its
sensitivity to interest-rate changes) and its average effective maturity
(a weighted average of the holdings' maturities).
Average effective maturity also takes into account put and call
features, where applicable, and reflects prepayments for mortgage-backed
securities.
How fund holdings affected performance
Relative to the other funds in its Lipper peer group, your fund had a
slightly higher portion of assets in lower-rated, higher-yielding
municipal bonds -- those rated BBB and below. This had a positive
influence on results during the period, as investors continued to focus
on yield-enhancing lower-rated securities. We also were overweight
tobacco settlement bonds, which were among the fund's top performers,
although this sector has been volatile. Payments from these bonds are
secured by the income stream from tobacco companies' settlement
obligations to the states and generally offer higher yields than bonds
of comparable quality. In what has amounted to an ongoing threat to this
income stream, the Department of Justice (DOJ) initiated a lawsuit in
1999 against the major tobacco companies, seeking billions of dollars
that the DOJ claimed had been obtained fraudulently from the sale of
cigarettes. As highlighted in the Market Overview section of this
report, this sector benefited from a February 4, 2005, ruling by a panel
of the U.S. Circuit Court of Appeals for the District of Columbia
against the federal government. Investors believe this has significantly
mitigated the potential financial impact of the DOJ's lawsuit on tobacco
companies. The fund's top-performing individual issues during the period
included two BBB-rated tobacco settlement bonds: South Carolina Tobacco
Settlement bonds and Wisconsin Badger Tobacco Settlement Asset
Securitization bonds.
Although the fund has less exposure to airline-related industrial
development bonds (IDBs) than its competitors, those it did hold
contributed positively to absolute results. IDBs are issued by
municipalities but backed by the credit of the institution benefiting from
the financing. Investor perceptions about the backer's health, or that of
its industry group, can affect the prices of these bonds to a greater
extent than the rating of the issuing municipality. Airline-related IDBs
have been among the most volatile sectors for some time. Although the
higher yields on these bonds continue to attract investors and the sector
did well during the past six months, the fund's position in these bonds
remains relatively small because we do not believe the risks justify the
potential return in many cases. However, the fund's holding in Dallas-Fort
Worth International Airport Facilities Improvement bonds, issued for
American Airlines, was one of the best-performing bonds in the portfolio.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa (47.4%)
Aa (6.3%)
A (17.2%)
Baa (19.6%)
Ba (3.3%)
B (1.4%)
VMIG1 (4.0%)
Other (0.8%)
Footnote reads:
As a percentage of market value as of 5/31/05. A bond rated Baa or
higher is considered investment grade. The chart reflects Moody's
ratings; percentages may include bonds not rated by Moody's but
considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
Two other especially strong performers in the fund's portfolio during
the period were distressed issues that had hurt performance in the past.
Prices of both these issues rose during the period, reflecting a
combination of broad trends affecting prices of lower-rated bonds in
general, as well as from developments specific to each of the
institutions backing these IDBs. Bonds issued by Gilroy, California for
Bonfante Gardens Park became more attractive to investors as the Park
began selling land and reducing the debt load on the project. IDBs
issued for Lake Charles Memorial Hospital in Louisiana also rose in
value, reflecting steps the Hospital is taking to improve its operation.
However, another lower-rated issue had a negative return during the
period. Florida's Capital Trust Agency revenue bonds issued to benefit
the Seminole Tribe Convention fell in price when the IRS began
questioning the tax-exempt status of its bonds. Although this holding
cut into the fund's positive performance, our emphasis on broad
diversification limited its impact. We have since sold our position in
this bond. For the most part, the poorest performers during the past six
months were bonds with a flat to low total return, and most of those
were higher-quality bonds maturing in less than three years. The
portfolio's short duration relative to its competitors, which reduced
its sensitivity to interest rates, was a meaningful detractor from its
results because this defensive positioning limited the fund's ability to
benefit during periods when longer-term rates declined.
Please note that all holdings discussed in this report are subject to
review in accordance with the fund's investment strategy and may vary in
the future.
OF SPECIAL INTEREST
Fund's dividend reduced
As certain higher-yielding bonds in the portfolio have matured, those
assets have been reinvested in newer bonds, which in some cases carried
a lower yield. As a result, the fund earned less income during the most
recent distribution period, and in June your fund's dividend rate was
lowered from $0.0498 per share to $0.0409 per share to reflect that
change.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
Economic growth has remained solid, despite the Fed's efforts to slow
growth and curb inflation by raising short-term interest rates.
Long-term rates remain surprisingly low. In fact, after rising modestly
in late March and early April of 2005, long-term rates generally fell
again from mid-April through the end of the period. Nevertheless, based
on sustained economic growth and continued robust corporate earnings, we
believe the Fed will likely maintain its policy of increasing rates
through 2005. We believe Fed actions are likely to cause rising yields.
We also expect more Fed tightening than is currently anticipated by the
market, and believe that bond yields may begin to rise more quickly as
other investors come to the same conclusion. In light of current market
conditions, we plan to maintain the fund's defensive duration and to
continue to increase its exposure to callable bonds, which, in our
opinion, are likely to outperform in a rising-rate cycle.
We have a positive view of the single-family housing sector and plan to
add selectively to the fund's positions. We believe that the recent
outperformance of lower-rated, higher-yielding bonds will likely slow
and we plan to reduce the fund's exposure to this segment of the credit
spectrum in favor of higher-quality issues. Despite recent
outperformance, we remain bearish on airline-related IDBs in light of
likely continued fundamental weaknesses in this sector. Our view on
tobacco settlement bonds is positive and we are seeking to increase the
fund's exposure as opportunities arise.
We believe we are headed into a more challenging environment for bond
investing. Our task will be to continue to search for the most
attractive opportunities among tax-exempt securities, and to balance the
pursuit of current income with prudent risk management.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Capital gains, if
any, are taxable for federal and, in most cases, state purposes. For
some investors, investment income may be subject to the federal
alternative minimum tax. Income from federally exempt funds may be
subject to state and local taxes. Mutual funds that invest in bonds are
subject to certain risks, including interest-rate risk, credit risk, and
inflation risk. As interest rates rise, the prices of bonds fall.
Long-term bonds are more exposed to interest-rate risk than short-term
bonds. Unlike bonds, bond funds have ongoing fees and expenses. The
fund's shares trade on a stock exchange at market prices, which may be
lower than the fund's net asset value. This fund currently uses
investment leverage by issuing preferred shares. Leverage offers the
potential for higher returns, but also involves increased risk.
Your fund's management
Your fund is managed by the members of the Putnam Tax Exempt
Fixed-Income Team. David Hamlin is the Portfolio Leader, and Paul Drury,
Susan McCormack, and James St. John are Portfolio Members of your fund.
The Portfolio Leader and Portfolio Members coordinate the team's
management of the fund.
For a complete listing of the members of the Putnam Tax Exempt
Fixed-Income Team, including those who are not Portfolio Leaders or
Portfolio Members of your fund, visit Putnam's Individual Investor Web
site at www.putnaminvestments.com.
Fund ownership
The table below shows how much the fund's current Portfolio Leader and
Portfolio Members have invested in the fund (in dollar ranges).
Information shown is as of May 31, 2005, and May 31, 2004.
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FUND PORTFOLIO LEADER AND PORTFOLIO MEMBERS
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$1 - $10,001 - $50,001- $100,001 - $500,001 - $1,000,001
Year $0 $10,000 $50,000 $100,000 $500,000 $1,000,000 and over
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David Hamlin 2005 *
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Portfolio Leader 2004 *
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Paul Drury 2005 *
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Portfolio Member 2004 *
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Susan McCormack 2005 *
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Portfolio Member 2004 *
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James St. John 2005 *
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Portfolio Member 2004 *
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Fund manager compensation
The total 2004 fund manager compensation that is attributable to your
fund is approximately $60,000. This amount includes a portion of 2004
compensation paid by Putnam Management to the fund managers listed in
this section for their portfolio management responsibilities, calculated
based on the fund assets they manage taken as a percentage of the total
assets they manage. The compensation amount also includes a portion of
the 2004 compensation paid to the Chief Investment Officer of the team
and the Group Chief Investment Officer of the fund's broader investment
category for their oversight responsibilities, calculated based on the
fund assets they oversee taken as a percentage of the total assets they
oversee. This amount does not include compensation of other personnel
involved in research, trading, administration, systems, compliance, or
fund operations; nor does it include non-compensation costs. These
percentages are determined as of the fund's fiscal period-end. For
personnel who joined Putnam Management during or after 2004, the
calculation reflects annualized 2004 compensation or an estimate of 2005
compensation, as applicable.
Other Putnam funds managed by the Portfolio Leader and Portfolio Members
David Hamlin is the Portfolio Leader and Paul Drury, Susan McCormack,
and James St. John are Portfolio Members for Putnam's tax-exempt funds
for the following states: Arizona, California, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, New York, Ohio, and Pennsylvania. The
same group also manages Putnam AMT-Free Insured Municipal Fund*, Putnam
California Investment Grade Municipal Trust, Putnam High Yield Municipal
Trust, Putnam Managed Municipal Income Trust, Putnam Municipal Bond
Fund, Putnam Municipal Opportunities Trust, Putnam New York Investment
Grade Municipal Trust, Putnam Tax Exempt Income Fund, Putnam Tax-Free
Health Care Fund, and Putnam Tax-Free High Yield Fund.
David Hamlin, Paul Drury, Susan McCormack, and James St. John may also
manage other accounts and variable trust funds advised by Putnam
Management or an affiliate.
Changes in your fund's Portfolio Leader and Portfolio Members
During the year ended May 31, 2005, Portfolio Member Richard Wyke left
your fund's management team.
* Formerly Putnam Tax-Free Insured Fund.
Fund ownership
The table below shows how much the members of Putnam's Executive Board
have invested in the fund (in dollar ranges). Information shown is as of
May 31, 2005, and May 31, 2004.
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PUTNAM EXECUTIVE BOARD
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$1 - $10,001 - $50,001- $100,001
Year $0 $10,000 $50,000 $100,000 and over
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Philippe Bibi 2005 *
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Chief Technology Officer 2004 *
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John Boneparth 2005 *
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Head of Global Institutional Mgmt 2004 *
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Joshua Brooks 2005 *
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Deputy Head of Investments N/A
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Kevin Cronin 2005 *
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Head of Investments 2004 *
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Charles Haldeman, Jr. 2005 *
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President and CEO 2004 *
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Amrit Kanwal 2005 *
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Chief Financial Officer 2004 *
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Steven Krichmar 2005 *
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Chief of Operations 2004 *
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Francis McNamara, III 2005 *
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General Counsel 2004 *
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Richard Monaghan 2005 *
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Head of Retail Management 2004 *
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Richard Robie, III 2005 *
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Chief Administrative Officer 2004 *
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Edward Shadek 2005 *
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Deputy Head of Investments N/A
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N/A indicates the individual was not a member of Putnam's Executive
Board as of 5/31/04.
Performance summary
This section shows your fund's performance during the first half of its
fiscal year, which ended May 31, 2005. In accordance with regulatory
requirements, we also include performance for the most current calendar
quarter-end. Performance should always be considered in light of a
fund's investment strategy. Data represents past performance. Past
performance does not guarantee future results. More recent returns may
be less or more than those shown. Investment return, net asset value,
and market price will fluctuate and you may have a gain or a loss when
you sell your shares.
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TOTAL RETURN AND COMPARATIVE INDEX RESULTS FOR PERIODS ENDED 5/31/05
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Lipper General
Municipal
Lehman Debt Funds
Municipal (leveraged
Market Bond closed-end)
NAV price Index category average*
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6 months 6.09% 4.06% 3.52% 5.94%
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1 year 13.50 6.27 7.97 12.69
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5 years 52.79 14.51 42.27 57.93
Annual average 8.85 2.75 7.31 9.54
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10 years 88.45 57.83 82.85 94.85
Annual average 6.54 4.67 6.22 6.89
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Annual average
Life of fund
(since 10/26/89) 7.70 6.32 7.05 7.63
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Performance assumes reinvestment of distributions and does not account
for taxes.
Index and Lipper results should be compared to fund performance at net
asset value. Lipper calculations for reinvested dividends may differ
from actual performance.
* Over the 6-month and 1-, 5-, and 10-year periods ended 5/31/05, there
were 68, 68, 51, and 46 funds, respectively, in this Lipper category.
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PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 5/31/05
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Distributions -- common shares
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Number 6
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Income 1 $0.3057
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Capital gains 1 --
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Total $0.3057
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Distributions -- Series A
preferred shares (1,400 shares)
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Income 1 $1,055.72
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Capital gains 1 --
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Total $1,055.72
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Share value (common shares): NAV Market price
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11/30/04 $10.73 $9.67
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5/31/05 11.03 9.75
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Current return (common shares, end of period)
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Current dividend rate 2 5.42% 6.13%
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Taxable equivalent 3 8.34 9.43
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1 Capital gains, if any, are taxable for federal and, in most cases, state
purposes. For some investors, investment income may be subject to the
federal alternative minimum tax. Income from federally exempt funds may be
subject to state and local taxes.
2 Most recent distribution, excluding capital gains, annualized and
divided by NAV or market price at end of period.
3 Assumes maximum 35% federal tax rate for 2005. Results for investors
subject to lower tax rates would not be as advantageous.
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TOTAL RETURN FOR PERIODS ENDED 6/30/05 (MOST RECENT CALENDAR QUARTER)
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NAV Market price
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6 months 4.93% 4.76%
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1 year 13.93 9.81
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5 years 49.60 34.55
Annual average 8.39 6.11
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10 years 91.26 55.15
Annual average 6.70 4.49
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Annual average
Life of fund
(since 10/26/89) 7.73 6.28
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Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities and the net assets allocated to any outstanding 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
exchanges such as the American Stock Exchange and the New York Stock
Exchange.
Comparative indexes
JP Morgan Global High Yield Index is an unmanaged index of global
high-yield fixed-income securities.
Lehman Aggregate Bond Index is an unmanaged index of U.S.
investment-grade fixed-income securities.
Lehman Government Bond Index is an unmanaged index of U.S. Treasury and
agency securities.
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Russell 1000 Index is an unmanaged index of the 1,000 largest companies
in the Russell 3000 Index.
Russell 2000 Index is an unmanaged index of the 2,000 smallest companies
in the Russell 3000 Index.
S&P 500 Index is an unmanaged index of common stock performance.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
Trustee approval of management contract
General conclusions
The Board of Trustees of the Putnam funds oversees the management of
each fund and, as required by law, determines annually whether to
approve the continuance of each fund's management contract with Putnam
Management. In this regard the Board of Trustees, with the assistance of
its Contract Committee consisting solely of Independent Trustees,
requests and evaluates all information it deems reasonably necessary in
the circumstances. Over the course of several months beginning in March
and ending in June of 2004, the Contract Committee reviewed the
information provided by Putnam Management and other information
developed with the assistance of the Board's independent counsel and
independent staff. The Contract Committee reviewed and discussed key
aspects of this information with all of the Independent Trustees. Upon
completion of this review, the Contract Committee recommended and the
Independent Trustees approved the continuance of your fund's contract,
effective July 1, 2004.
This approval was based on the following conclusions:
* That the fee schedule currently in effect for your fund represents
reasonable compensation in light of the nature and quality of the
services being provided to the fund, the fees paid by competitive funds
and the costs incurred by Putnam Management in providing such service,
and
* That such fee schedule represents an appropriate sharing between fund
shareholders and Putnam Management of such economies of scale as may
exist in the management of the fund at current asset levels.
These conclusions were based on a comprehensive consideration of all
information provided to the Trustees and were not the result of any
single factor. Some of the factors that figured particularly in the
Trustees' deliberations are described below.
Model fee schedules and categories; total expenses
The Trustees, working in cooperation with Putnam Management, have
developed and implemented a series of model fee schedules for the Putnam
funds designed to ensure that each fund's management fee is consistent
with the fees for similar funds in the Putnam complex and compares
favorably with fees paid by competitive funds sponsored by other advisors.
The Trustees reviewed the model fee schedule currently in effect for the
fund, including fee levels and breakpoints, and the assignment of the fund
to a particular fee category under this structure. The Trustees also
reviewed comparative fee and expense information for competitive funds.
The Trustees concluded that no changes should be made in the fund's
current fee schedule at this time. The Trustees noted that expense ratios
for a number of Putnam funds had been increasing recently as a result of
declining net assets and the natural operation of fee breakpoints. They
noted that such expense ratio increases were currently being controlled by
expense limitations implemented in January 2004. They also noted that the
competitive landscape regarding mutual fund fees may be changing as a
result of fee reductions accepted by various other fund groups in
connection with recent regulatory settlements and greater focus on fees
and expenses in the mutual fund industry generally. The Trustees
indicated an intention to monitor these developments closely.
Economies of scale
As noted above, the Trustees concluded that the fee schedule currently
in effect for your fund represents an appropriate sharing of economies
of scale at current asset levels. The Trustees indicated their intention
to continue their ongoing consideration of economies of scale and in
particular to consider further the possible operation of such economies
in the event that a significant recovery in the equity markets or net
fund sales were to raise asset levels substantially above current
levels. In this regard, the Trustees noted that they had reviewed data
relating to the substantial increase in asset levels of the Putnam funds
that occurred during the years leading up to the market peak in 2000,
the subsequent decline in assets and the resulting impact on revenues
and expenses of Putnam Management. The Trustees also noted that recent
declines in net assets in many Putnam funds, together with significant
changes in the cost structure of Putnam Management have altered the
economics of Putnam Management's business in significant ways. The
Trustees concluded that they would monitor these changes carefully and
evaluate the resulting impact on Putnam Management's economics and the
sharing of economies of scale between the parties.
Investment performance
The quality of the investment process provided by Putnam Management
represented a major factor in the Trustees' evaluation of the quality of
services provided by Putnam Management under the Management Contracts.
The Trustees recognized that a high quality investment process -- as
measured by the experience and skills of the individuals assigned to the
management of fund portfolios, the resources made available to such
personnel, and in general the ability of Putnam Management to attract
and retain high-quality personnel -- does not guarantee favorable
investment results for every fund in every time period. The Trustees
considered the investment performance of each fund over multiple time
periods and considered information comparing the fund's performance with
various benchmarks and with the performance of competitive funds. The
Trustees noted the satisfactory investment performance of many Putnam
funds.
They also noted the disappointing investment performance of certain
funds in recent years and continued to discuss with senior management of
Putnam Management the factors contributing to such under-performance and
actions being taken to improve performance. The Trustees recognized
that, in recent years, Putnam Management has made significant changes in
its investment personnel and processes and in the fund product line in
an effort to address areas of underperformance. The Trustees indicated
their intention to continue to monitor performance trends to assess the
effectiveness of these changes and to evaluate whether additional
remedial changes are warranted. As a general matter, the Trustees
concluded that consultation between the Trustees and Putnam Management
represents the most effective way to address investment performance
problems. The Trustees believe that investors in the Putnam funds and
their financial advisors have, as a general matter, effectively placed
their trust in the Putnam organization, under the supervision of the
funds' Trustees, to make appropriate decisions regarding the management
of the funds. The Trustees believe that the termination of the
Management Contract and engagement of a new investment adviser for
under-performing funds, with all the attendant disruptions, would not
serve the interests of fund shareholders at this time and would not
necessarily provide any greater assurance of improved investment
performance.
Brokerage and soft-dollar allocations; other benefits
The Trustees considered various potential benefits that Putnam
Management may receive in connection with the services it provides under
the Management Contract with your fund. These include principally
benefits related to brokerage and soft-dollar allocations, which pertain
mainly to funds investing in equity securities. The Trustees believe
that soft-dollar credits and other potential benefits associated with
the allocation of fund brokerage represent assets of the funds that
should be used for the benefit of fund shareholders. The Trustees noted
recent trends in the allocation of fund brokerage, including commission
costs, the allocation of brokerage to firms that provide research
services to Putnam Management, and the sources and application of
available soft-dollar credits. Effective December 31, 2003, reflecting a
decision made by the Trustees earlier that year, Putnam Management
ceased allocating brokerage in connection with the sale of fund shares.
In addition, in preparing its budget for commission allocations in 2004,
Putnam Management voluntarily reduced substantially the allocation of
brokerage commissions to acquire research services from third-party
service providers. In light of evolving best practices in the mutual
fund industry, the Trustees concluded that this practice should be
further curtailed and possibly eliminated in the near future. The
Trustees indicated that they would continue to monitor the allocation of
the funds' brokerage to ensure that the principle of "best price and
execution" remains paramount in the portfolio trading process.
Comparison of retail and institutional fee schedules
The information examined by the Trustees as part of the annual contract
reviews included information regarding fees charged by Putnam Management
and its affiliates to institutional clients such as defined benefit
pension plans and college endowments. This information included
comparison of such fees with fees charged to the Putnam funds, as well
as a detailed assessment of the differences in the services provided to
these two types of clients. The Trustees devoted special attention to
these issues and reviewed recent articles by critics of mutual fund
fees, articles by the ICI defending such fee differences, and relevant
guidance provided by decisions of the courts. The Trustees observed, in
this regard, that the differences in fee rates between institutional
clients and mutual funds are by no means uniform when examined by
individual asset sectors, suggesting that differences in the pricing of
investment management services to these types of clients reflects to a
substantial degree historical competitive forces operating in separate
market places. In reaching their conclusions, the Trustees considered
the fact that fee rates across all asset sectors are higher on average
for mutual funds than for institutional clients, and also considered the
differences between the services that Putnam provides to the Putnam
funds and those that it provides to institutional clients of the firm.
Settlement of regulatory charges related to market timing
Finally, in reaching their conclusions, the Trustees considered all
matters pertinent to the administrative charges filed against Putnam
Management by the SEC and the Commonwealth of Massachusetts in October
2003 relating to market timing, the firm's settlement of those charges,
and the conclusions and recommendations of the Trustees' Audit and
Pricing Committee based on its review of these matters. The Trustees
considered the actions taken by the owner of Putnam Management and its
new senior management to terminate or discipline the individuals
involved, to implement new compliance systems, to indemnify the funds
against all costs and liabilities related to these matters, and
otherwise to ensure that the interests of the funds and their
shareholders are fully protected. The Trustees noted that, in addition
to the settlements of the regulatory charges which will provide
comprehensive restitution for any losses suffered by shareholders, the
new senior management of Putnam Management has moved aggressively to
control expense ratios of funds affected by market timing, to reduce
charges to new investors, to improve disclosure of fees and expenses,
and to emphasize the paramount role of investment performance in
achieving shareholders' investment goals.
Other information for shareholders
A note about duplicate mailings
In response to investors' requests, the SEC has modified mailing
regulations for proxy statements, semiannual and annual reports, and
prospectuses. Putnam is now able to send a single copy of these
materials to customers who share the same address. This change will
automatically apply to all shareholders except those who notify us. If
you would prefer to receive your own copy, please call Putnam at
1-800-225-1581.
Proxy voting
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. The Putnam funds' proxy voting guidelines and
procedures, as well as information regarding how your fund voted proxies
relating to portfolio securities during the 12-month period ended June
30, 2004, are available on the Putnam Individual Investor Web site,
www.putnaminvestments.com/individual, and on the SEC's Web site,
www.sec.gov. If you have questions about finding forms on the SEC's Web
site, you may call the SEC at 1-800-SEC-0330. You may also obtain the
Putnam funds' proxy voting guidelines and procedures at no charge by
calling Putnam's Shareholder Services at 1-800-225-1581.
Fund portfolio holdings
The fund will file a complete schedule of its portfolio holdings with
the SEC for the first and third quarters of each fiscal year on Form
N-Q. Shareholders may obtain the fund's Forms N-Q on the SEC's Web site
at www.sec.gov. In addition, the fund's Forms N-Q may be reviewed and
copied at the SEC's public reference room in Washington, D.C. You may
call the SEC at 1-800-SEC-0330 for information about the SEC's Web site
or the operation of the public reference room.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or loss
the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal period.
Statement of changes in net assets shows how the fund's net assets were
affected by the fund's net investment gain or loss, by distributions to
shareholders, and by changes in the number of the fund's shares. It
lists distributions and their sources (net investment income or realized
capital gains) over the current reporting period and the most recent
fiscal year-end. The distributions listed here may not match the sources
listed in the Statement of operations because the distributions are
determined on a tax basis and may be paid in a different period from the
one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment
income ratios, and portfolio turnover in one summary table, reflecting
the five most recent reporting periods. In a semiannual report, the
highlight table also includes the current reporting period. For open-end
funds, a separate table is provided for each share class.
The fund's portfolio
May 31, 2005 (Unaudited)
Key to Abbreviations
-------------------------------------------------------------------------------
AMBAC AMBAC Indemnity Corporation
COP Certificate of Participation
FGIC Financial Guaranty Insurance Company
FNMA Coll. Federal National Mortgage Association Collateralized
FRB Floating Rate Bonds
FSA Financial Security Assurance
G.O. Bonds General Obligation Bonds
GNMA Coll. Government National Mortgage Association Collateralized
IFB Inverse Floating Rate Bonds
MBIA MBIA Insurance Company
PSFG Permanent School Fund Guaranteed
U.S. Govt. Coll. U.S. Government Collateralized
VRDN Variable Rate Demand Notes
XLCA XL Capital Assurance
Municipal bonds and notes (160.6%) (a)
Principal amount Rating (RAT) Value
Arizona (1.5%)
-------------------------------------------------------------------------------
$500,000 AZ Hlth. Fac. Auth. Hosp. Syst.
Rev. Bonds (John C. Lincoln Hlth.
Network), 6 3/8s, 12/1/37 BBB $550,595
1,175,000 Casa Grande, Indl. Dev. Auth.
Rev. Bonds (Casa Grande Regl. Med.
Ctr.), Ser. A, 7 5/8s, 12/1/29 B-/P 1,259,612
525,000 Pima Cnty., Indl Dev. Auth.
Rev. Bonds (Horizon Cmnty. Learning
Ctr.), 5.05s, 6/1/25 BBB- 530,292
1,000,000 Scottsdale, Indl. Dev. Auth. Hosp.
Rev. Bonds (Scottsdale Hlth. Care),
5.8s, 12/1/31 A3 1,086,470
--------------
3,426,969
Arkansas (3.3%)
-------------------------------------------------------------------------------
2,530,000 AR Dev. Fin. Auth. Rev. Bonds,
Ser. D, GNMA/FNMA Coll., 3s, 1/1/24 AAA 2,493,163
3,000,000 AR State Hosp. Dev. Fin. Auth.
Rev. Bonds (Washington Regl. Med.
Ctr.), 7 3/8s, 2/1/29 Baa2 3,408,690
500,000 Independence Cnty., Poll. Control
Rev. Bonds (Entergy, Inc.), 5s,
1/1/21 A- 512,130
895,000 Little Rock G.O. Bonds (Cap. Impt.),
FSA, 3.95s,4/1/19 Aaa 913,356
510,000 Northwest Regl. Arpt. Auth.
Rev. Bonds, 7s, 2/1/10 BB/P 523,296
--------------
7,850,635
California (17.4%)
-------------------------------------------------------------------------------
4,000,000 Anaheim, Pub. Fin. Auth. Tax Alloc.
Rev. Bonds, MBIA, 4.733s, 12/28/18 Aaa 4,410,720
2,500,000 CA Hlth. Fac. Auth. Rev. Bonds
(Sutter Hlth.), Ser. A, MBIA,
5 3/8s, 8/15/30 Aaa 2,634,950
CA State G.O. Bonds
500,000 5 1/8s, 4/1/23 A 536,845
750,000 5.1s, 2/1/34 A 772,388
CA State Dept. of Wtr. Resources
Rev. Bonds,Ser. A
1,500,000 6s, 5/1/15 A2 1,726,230
13,000,000 AMBAC, 5 1/2s, 5/1/13 Aaa 14,754,220
1,500,000 5 1/2s, 5/1/11 A2 1,667,355
1,000,000 CA State Econ. Recvy. G.O. Bonds,
Ser. A, 5s, 7/1/16 Aa3 1,067,910
1,750,000 CA Statewide Cmnty. Dev. Auth. COP
(The Internext Group), 5 3/8s,
4/1/30 BBB- 1,762,478
1,475,000 Gilroy, Rev. Bonds (Bonfante Gardens
Park), 8s, 11/1/25 D/P 1,232,097
Golden State Tobacco Securitization
Corp. Rev. Bonds
1,000,000 Ser. 2003 A-1, 6 1/4s, 6/1/33 BBB 1,057,920
1,500,000 Ser. B, 5 5/8s, 6/1/38 A- 1,636,440
450,000 Orange Cnty., Cmnty. Fac. Dist.
Special Tax Rev. Bonds (No. 02-1
Ladera Ranch), Ser. A, 5.55s,
8/15/33 BBB/P 464,499
4,700,000 Riverside Cnty., Redev. Agcy. Tax
Alloc., Ser. A, XLCA, 5s, 10/1/29 Aaa 4,951,450
1,040,000 Sacramento, Special Tax (North
Natomas Cmnty. Fac.), 5s, 9/1/18 BB/P 1,070,181
1,400,000 Vallejo, COP (Marine World
Foundation), 7.2s, 2/1/26 BBB-/P 1,474,634
--------------
41,220,317
Colorado (4.5%)
-------------------------------------------------------------------------------
2,500,000 CO Hlth. Fac. Auth. Rev. Bonds
(Hlth. Fac.-Evangelical Lutheran),
3.35s, 10/1/06 A3 2,498,300
CO Springs, Hosp. Rev. Bonds
1,515,000 6 3/8s, 12/15/30 A3 1,688,195
1,485,000 6 3/8s, 12/15/30 (Prerefunded) A3 1,737,272
CO State Hsg. Fin. Auth. Rev. Bonds
(Single Fam.)
150,000 Ser. B-2 , 7s, 5/1/26 Aa2 153,060
80,000 Ser. B-3, 6.8s, 11/1/28 Aa2 83,068
2,500,000 Denver, City & Cnty. Arpt.
Rev. Bonds, MBIA, 5 1/2s, 11/15/25 Aaa 2,608,650
1,650,000 U. of CO. Enterprise Syst.
Rev. Bonds, FGIC, 5s, 6/1/26 Aaa 1,769,361
--------------
10,537,906
Delaware (0.6%)
-------------------------------------------------------------------------------
GMAC Muni. Mtge. Trust 144A sub.
notes
500,000 Ser. A1-3, 5.3s, 10/31/39 A3 514,735
1,000,000 Ser. A1-2, 4.9s, 10/31/39 A3 1,011,240
--------------
1,525,975
District of Columbia (1.8%)
-------------------------------------------------------------------------------
4,000,000 DC G.O. Bonds, Ser. B, FSA, 5 1/4s,
6/1/26 Aaa 4,238,120
Florida (2.3%)
-------------------------------------------------------------------------------
1,895,000 Escambia Cnty., Hlth. Fac. Auth.
Rev. Bonds (Baptist Hosp. & Baptist
Manor), 5 1/8s, 10/1/19 A3 1,952,191
1,000,000 Lee Cnty., Indl. Dev. Auth.
Rev. Bonds (Alliance Cmnty.
Project), Ser. C, 5 1/2s, 11/15/29 BBB- 1,007,520
2,000,000 Miami Beach, Hlth. Fac. Auth. Hosp.
Rev. Bonds (Mount Sinai Med. Ctr.),
5 3/8s, 11/15/28 BB+ 1,998,880
375,000 Okeechobee Cnty., Solid Waste
Mandatory Put Bonds (Waste
Mgt./Landfill), Ser. A, 4.2s, 7/1/09 BBB 378,349
--------------
5,336,940
Georgia (8.5%)
-------------------------------------------------------------------------------
1,500,000 Atlanta, Arpt. Rev. Bonds, Ser. B,
FGIC, 5 5/8s, 1/1/30 Aaa 1,594,080
1,045,000 Atlanta, Waste Wtr. Rev. Bonds,
Ser. A, FGIC, 5s, 11/1/38 Aaa 1,131,672
6,000,000 Atlanta, Waste Wtr. VRDN, Ser. C,
FSA, 2.97, 11/1/41 VMIG1 6,000,000
2,300,000 Burke Cnty., Poll. Control Dev.
Auth. Mandatory Put Bonds (GA Power
Co.), 4.45s, 12/1/08 A2 2,394,346
5,215,000 Cobb Cnty., Dev. Auth. U. Fac.
Rev. Bonds (Kennesaw State U. Hsg.),
Ser. A, MBIA, 5s, 7/15/29 Aaa 5,552,463
300,000 GA Med. Ctr. Hosp. Auth. FRB, MBIA,
1.77s, 8/1/10 Aaa 300,000
300,000 GA Med. Ctr. Hosp. Auth. IFB, MBIA,
10.66s, 8/1/10 Aaa 303,288
1,500,000 GA Muni. Elec. Auth. Rev. Bonds,
AMBAC, 5s, 1/1/26 Aaa 1,590,555
1,280,000 Rockdale Cnty., Dev. Auth. Solid
Waste Disp. Rev. Bonds (Visay
Paper, Inc.), 7.4s, 1/1/16 B+/P 1,297,587
--------------
20,163,991
Illinois (8.9%)
-------------------------------------------------------------------------------
4,270,000 Chicago, G.O. Bonds, Ser. A, FSA,
5s, 1/1/27 Aaa 4,513,774
2,500,000 Chicago, Board of Ed. G.O. Bonds
(School Reform Project), Ser. A,
AMBAC, 5 1/4s, 12/1/27 Aaa 2,664,375
1,580,000 Cook Cnty., Cmnty. G.O. Bonds (Cons.
School Dist. No. 64 Pk. Ridge), FSA,
5 1/2s, 12/1/16 Aaa 1,841,095
1,600,000 IL Dev. Fin. Auth. Rev. Bonds
(Midwestern U.), Ser. B, 6s, 5/15/26 A- 1,763,584
2,500,000 IL Dev. Fin. Auth. Hosp. Rev. Bonds
(Adventist Hlth. Syst./Sunbelt
Obligation), 5.65s, 11/15/24 A2 2,640,400
1,945,000 IL U. Rev. Bonds (Auxiliary Fac.
Syst.), Ser. A, AMBAC, 5 1/4s,
4/1/19 Aaa 2,225,722
5,000,000 Schaumburg, G.O. Bonds, Ser. B,
FGIC, 5s, 12/1/27 Aaa 5,310,550
--------------
20,959,500
Indiana (1.9%)
-------------------------------------------------------------------------------
800,000 IN Ed. Fac. Fin. Auth. VRDN, 2.97s,
7/1/32 VMIG1 800,000
2,600,000 IN State Dev. Fin. Auth. Env. Impt.
Rev. Bonds (USX Corp.), 5.6s,
12/1/32 Baa1 2,705,560
1,000,000 Rockport, Poll. Control
Rev. Bonds (Indiana-Michigan Pwr.),
Ser. A, 4.9s, 6/1/25 Baa2 1,024,220
--------------
4,529,780
Iowa (0.9%)
-------------------------------------------------------------------------------
1,715,000 IA Fin. Auth. Hlth. Care Fac.
Rev. Bonds (Care Initiatives),
9 1/4s, 7/1/25 BBB-/P 2,091,631
Louisiana (1.1%)
-------------------------------------------------------------------------------
1,500,000 Ernest N. Morial-New Orleans,
Exhibit Hall Auth. Special Tax,
Ser. A, AMBAC, 5 1/4s, 7/15/21 Aaa 1,636,395
740,000 LA Pub. Fac. Auth. Hosp. Rev. Bonds
(Lake Charles Memorial Hosp.),
8 5/8s, 12/1/30 CCC/P 721,574
300,000 Tangipahoa Parish Hosp. Svcs.
Rev. Bonds (North Oaks Med. Ctr.),
Ser. A, 5s, 2/1/25 A 307,374
--------------
2,665,343
Maine (0.6%)
-------------------------------------------------------------------------------
1,405,000 ME State Hsg. Auth. Rev. Bonds,
Ser. D-2-AMT, 5s, 11/15/27 Aa1 1,458,952
Massachusetts (15.6%)
-------------------------------------------------------------------------------
10,330,000 MA State G.O. Bonds, Ser. A, MBIA,
5 3/8s, 8/1/08 Aaa 11,080,371
2,785,000 MA State Dev. Fin. Agcy. Rev. Bonds
(MA Biomedical Research), Ser. C,
6 3/8s, 8/1/17 A1 3,121,512
8,400,000 MA State Hlth. & Edl. Fac. Auth. IFB
(Med. Ctr. of Central MA), Ser. B,
AMBAC, 10.27s, 6/23/22 Aaa 9,863,952
MA State Hlth. & Edl. Fac. Auth.
Rev. Bonds
1,000,000 (Civic Investments), Ser. A, 9s,
12/15/15 BBB-/P 1,156,780
750,000 (Jordan Hosp.), Ser. E, 6 3/4s,
10/1/33 BBB- 809,813
8,400,000 MA State Hlth. & Edl. Fac. Auth.
FRB, AMBAC, 1.80s, 6/23/22 Aaa 8,400,000
2,500,000 MA State Hsg. Fin. Agcy. Rev. Bonds
(Rental Mtge.), Ser. C, AMBAC,
5 5/8s, 7/1/40 Aaa 2,570,375
--------------
37,002,803
Michigan (4.7%)
-------------------------------------------------------------------------------
4,300,000 Detroit, Swr. Disp. VRDN, Ser. B,
FSA, 2.97s, 7/1/33 VMIG1 4,300,000
900,000 Dickinson Cnty., Econ. Dev. Corp.
Poll. Control Rev. Bonds (Intl.
Paper Co.), Ser. A, 4.8s, 11/1/18 Baa2 921,186
300,000 Flint, Hosp. Bldg. Auth. Rev. Bonds
(Hurley Med. Ctr.), 6s, 7/1/20 Baa3 312,639
MI State Hosp. Fin. Auth. Rev. Bonds
1,000,000 (Oakwood Hosp.), Ser. A, 5 3/4s,
4/1/32 A2 1,066,010
1,250,000 (Holland Cmnty. Hosp.), Ser. A,
FGIC, 5 3/4s, 1/1/21 A2 1,372,250
1,650,000 MI State Strategic Fund, Ltd.
Rev. Bonds (Detroit Edison Poll.
Control), 5.65s, 9/1/29 A3 1,745,733
1,210,000 Saginaw Cnty., G.O. Bonds
(Healthsource Saginaw, Inc.), MBIA,
5s, 5/1/26 Aaa 1,298,935
--------------
11,016,753
Minnesota (1.9%)
-------------------------------------------------------------------------------
2,500,000 Cohasset, Poll. Control Rev. Bonds
(Allete, Inc.), 4.95s, 7/1/22 A 2,562,375
1,705,000 Minneapolis, Cmnty. Dev. Agcy.
Supported Dev. Rev. Bonds, Ser. G-3,
5.45s, 12/1/31 A- 1,811,102
--------------
4,373,477
Mississippi (2.0%)
-------------------------------------------------------------------------------
Lowndes Cnty., Solid Waste Disp. &
Poll. Control Rev. Bonds
(Weyerhaeuser Co.)
500,000 Ser. A, 6.8s, 4/1/22 Baa2 620,465
525,000 Ser. B, 6.7s, 4/1/22 Baa2 645,435
1,750,000 MS Bus. Fin. Corp. Poll. Control
Rev. Bonds (Syst. Energy Resources,
Inc.), 5 7/8s, 4/1/22 BBB- 1,779,803
1,385,000 MS Dev. Bk. Special Obligation
Rev. Bonds (Jackson MS Project),
FSA, 5 1/4s, 3/1/21 Aaa 1,587,473
--------------
4,633,176
Missouri (2.4%)
-------------------------------------------------------------------------------
1,250,000 Cape Girardeau Cnty., Indl. Dev.
Auth. Hlth. Care Fac. Rev. Bonds
(St. Francis Med. Ctr.),
Ser. A, 5 1/2s, 6/1/16 A 1,356,738
1,360,000 MO Hsg. Dev. Comm. Rev. Bonds (Home
Ownership), GNMA/FNMA Coll., 5.55s,
9/1/34 AAA 1,437,221
1,000,000 MO State Hlth. & Edl. Fac. Auth.
Rev. Bonds (BJC Hlth. Syst.),
5 1/4s, 5/15/32 Aa2 1,055,110
1,900,000 MO State Hlth. & Edl. Fac. Auth.
VRDN (Cox Hlth. Syst.), AMBAC,
3.05s, 6/1/22 VMIG1 1,900,000
--------------
5,749,069
Montana (0.5%)
-------------------------------------------------------------------------------
1,175,000 Forsyth, Poll. Control Mandatory Put
Bonds (Avista Corp.), AMBAC, 5s,
6/22/05 Aaa 1,233,715
Nevada (3.2%)
-------------------------------------------------------------------------------
5,105,000 Clark Cnty., Arpt. Rev. Bonds,
Ser. A-2, FGIC, 5 1/8s, 7/1/26 Aaa 5,446,269
Henderson, Local Impt. Dist.
Special Assmt.
1,000,000 (No. T-16), 5.1s, 3/1/21 BB-/P 1,017,250
1,195,000 (No. T-14), 4 3/4s, 3/1/10 BB-/P 1,216,247
--------------
7,679,766
New Hampshire (0.4%)
-------------------------------------------------------------------------------
950,000 NH State Bus. Fin. Auth. Poll.
Control Rev. Bonds, 3 1/2s, 7/1/27 Baa2 937,432
New Jersey (5.8%)
-------------------------------------------------------------------------------
NJ Econ. Dev. Auth. Rev. Bonds
650,000 (Cedar Crest Vlg., Inc.), Ser. A,
7 1/4s, 11/15/31 BB-/P 694,824
1,750,000 (Cigarette Tax), 5 3/4s, 6/15/29 Baa2 1,871,993
5,000,000 (Motor Vehicle), Ser. A, MBIA, 5s,
7/1/27 Aaa 5,345,900
3,100,000 NJ State G.O. Bonds, Ser. F, MBIA,
5 1/2s, 8/1/11 AAA 3,486,477
750,000 NJ State Edl. Fac. Auth.
Rev. Bonds (Fairleigh Dickinson),
Ser. C, 6s, 7/1/20 BBB-/F 823,673
Tobacco Settlement Fin. Corp.
Rev. Bonds
500,000 6 3/4s, 6/1/39 BBB 543,355
1,000,000 (Asset Backed Bonds), 6s, 6/1/37 BBB 1,014,230
--------------
13,780,452
New Mexico (0.4%)
-------------------------------------------------------------------------------
1,000,000 Farmington, Poll. Control VRDN (AZ
Pub. Service Co.), Ser. B, 2.97s,
9/1/24 VMIG1 1,000,000
New York (18.3%)
-------------------------------------------------------------------------------
7,780,000 NY City, G.O. Bonds, Ser. B, 5 1/4s,
12/1/09 A1 8,419,049
500,000 NY City, Hsg. Dev. Corp. Rev. Bonds,
Ser. A, FGIC, 5s, 7/1/25 Aaa 539,400
NY City, Indl. Dev. Agcy. Rev. Bonds
950,000 (Liberty-7 World Trade Ctr.),
Ser. A, 6 1/4s, 3/1/15 B-/P 978,975
2,000,000 (Brooklyn Navy Yard Cogen.
Partners), Ser. G, 5 3/4s, 10/1/36 BBB- 1,991,180
750,000 NY City, Indl. Dev. Agcy. Special
Fac. Rev. Bonds (British Airways),
5 1/4s, 12/1/32 Ba2 668,250
NY City, Muni. Wtr. & Swr. Fin.
Auth. Rev. Bonds
4,100,000 Ser. B, 5 3/4s, 6/15/26 AA+ 4,376,135
7,500,000 Ser. D, 5s, 6/15/37 AA+ 7,936,650
2,000,000 NY State Energy Research & Dev.
Auth. Gas Fac. Rev. Bonds (Brooklyn
Union Gas), 6.952s, 7/1/26 A+ 2,114,000
4,000,000 NY State Env. Fac. Corp. Rev. Bonds,
5s, 6/15/32 Aaa 4,230,200
10,500,000 Port. Auth. NY & NJ Special
Obligation Rev. Bonds (JFK Intl. Air
Term. - 6), MBIA, 5.9s, 12/1/17 Aaa 11,336,850
650,000 Suffolk Cnty., Indl. Dev. Agcy.
Rev. Bonds (Peconic Landing),
Ser. A, 8s, 10/1/30 B+/P 721,780
--------------
43,312,469
North Carolina (3.3%)
-------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Syst.
Rev. Bonds
1,000,000 Ser. D, 6 3/4s, 1/1/26 Baa2 1,123,190
2,000,000 Ser. A, 5 3/4s, 1/1/26 Baa2 2,127,440
3,500,000 NC State Muni. Pwr. Agcy. Rev. Bonds
(No. 1, Catawba Elec.), Ser. B,
6 1/2s, 1/1/20 A3 3,954,475
500,000 U. of NC Chapel Hill Hosp.
Rev. Bonds, Ser. A, 5s, 2/1/11 AA- 538,990
--------------
7,744,095
Ohio (2.5%)
-------------------------------------------------------------------------------
1,000,000 Brookville, Local School Dist. G.O.
Bonds, FSA, 5s, 12/1/31 Aaa 1,056,660
2,000,000 OH State Air Quality Dev. Auth.
Rev. Bonds (Toledo Poll. Control),
Ser. A, 6.1s, 8/1/27 Baa2 2,090,020
2,500,000 Rickenbacker, Port Auth. Rev. Bonds
(OASBO Expanded Asset Pooled),
Ser. A, 5 3/8s, 1/1/32 A2 2,811,925
--------------
5,958,605
Oklahoma (0.5%)
-------------------------------------------------------------------------------
1,050,000 OK Dev. Fin. Auth. Rev. Bonds
(Hillcrest Hlth. Care Syst.),
Ser. A, U.S. Govt. Coll., 5 5/8s,
8/15/29 AAA 1,160,208
Oregon (0.4%)
-------------------------------------------------------------------------------
980,000 OR State Hsg. & Cmnty. Svcs. Dept.
Rev. Bonds (Single Family Mtg.),
Ser. K, 5 5/8s, 7/1/29 Aa2 1,036,909
Pennsylvania (5.4%)
-------------------------------------------------------------------------------
1,005,000 Carbon Cnty., Indl. Dev. Auth.
Rev. Bonds (Panther Creek Partners),
6.65s, 5/1/10 BBB- 1,084,174
1,500,000 Lancaster Cnty., Hosp. Auth.
Rev. Bonds (Gen. Hosp.), 5 1/2s,
3/15/26 A 1,598,385
1,000,000 Lehigh Cnty., Gen. Purpose Auth.
Rev. Bonds (Lehigh Valley Hosp.
Hlth. Network), Ser. A, 5 1/4s,
7/1/32 A2 1,044,130
1,000,000 PA Econ. Dev. Fin. Auth. Rev. Bonds
(Amtrak), Ser. A, 6 3/8s, 11/1/41 A3 1,057,920
PA State Econ. Dev. Fin. Auth.
Resource Recvy. Rev. Bonds
750,000 (Colver), Ser. E, 8.05s, 12/1/15 BBB-/P 789,765
750,000 (Northampton Generating), Ser. A,
6.6s, 1/1/19 BB 755,453
1,045,000 PA State Higher Edl. Fac. Auth.
Rev. Bonds (Philadelphia College of
Osteopathic Med.), 5s, 12/1/08 A 1,095,432
5,000,000 Philadelphia, School Dist. G.O.
Bonds, Ser. D, FGIC, 5s, 6/1/27 Aaa 5,331,800
--------------
12,757,059
Puerto Rico (2.4%)
-------------------------------------------------------------------------------
5,000,000 Cmnwlth. of PR, Hwy. & Trans. Auth.
Rev. Bonds, Ser. B, 6s, 7/1/39 A 5,731,750
South Carolina (2.8%)
-------------------------------------------------------------------------------
2,515,000 Florence Cnty., Hosp. Rev. Bonds
(McLeod Regl. Med. Ctr.), Ser. A,
FSA, 5 1/4s, 11/1/23 Aaa 2,763,583
1,000,000 SC Hosp. Auth. Rev. Bonds (Med. U.),
Ser. A, 6 1/2s, 8/15/32 AAA 1,196,440
600,000 SC Jobs Econ. Dev. Auth. Hosp. Fac.
Rev. Bonds (Palmetto Hlth.
Alliance), Ser. A, 7 3/8s, 12/15/21 Baa2 732,054
1,750,000 SC Tobacco Settlement Rev. Mgt.
Rev. Bonds, Ser. B, 6 3/8s, 5/15/28 BBB 1,827,140
--------------
6,519,217
South Dakota (0.9%)
-------------------------------------------------------------------------------
2,000,000 SD Edl. Enhancement Funding Corp.
Rev. Bonds, Ser. B, 6 1/2s, 6/1/32 BBB 2,101,580
Tennessee (4.3%)
-------------------------------------------------------------------------------
Johnson City, Hlth. & Edl. Fac.
Board Hosp. Rev. Bonds (Mountain
States Hlth.)
2,000,000 Ser. A, 7 1/2s, 7/1/25 BBB+ 2,402,440
7,000,000 Ser. A, MBIA, 6s, 7/1/21 Aaa 7,831,453
--------------
10,233,893
Texas (10.1%)
-------------------------------------------------------------------------------
2,500,000 Alliance, Arpt. Auth. Rev. Bonds
(Federal Express Corp.), 6 3/8s,
4/1/21 Baa2 2,621,575
4,525,000 Columbus, Indpt. School Dist. G.O.
Bonds, PSFG, 5 1/8s, 8/15/29 Aaa 4,827,180
2,905,000 Conroe, Indpt. School Dist. G.O.
Bonds (School House), PSFG, 5s,
2/15/26 Aaa 3,074,913
1,135,000 Dallas-Fort Worth, Intl. Arpt. Fac.
Impt. Corp. Rev. Bonds (American
Airlines, Inc.), 6 3/8s, 5/1/35 Caa2 832,137
750,000 Gateway, Pub. Fac. Corp. Rev. Bonds
(Stonegate Villas Apt.), FNMA Coll.,
4.55s, 7/1/34 Aaa 781,703
1,250,000 Gulf Coast, Waste Disp. Auth.
Rev. Bonds, Ser. A, 6.1s, 8/1/24 Baa2 1,341,138
1,500,000 Harris Cnty., Hlth. Fac. Rev. Bonds
(Memorial Hermann Hlth. Care),
Ser. A, 6 3/8s, 6/1/29 A2 1,675,395
1,335,000 Montgomery Cnty., G.O. Bonds
(Library), Ser. B, AMBAC, 5s, 3/1/26 Aaa 1,405,808
1,500,000 Sam Rayburn Muni. Pwr. Agcy.
Rev. Bonds, 6s, 10/1/21 Baa2 1,629,270
Snyder, Indpt. School Dist. G.O.
Bonds (School Bldg.), AMBAC
1,215,000 5 1/4s, 2/15/24 AAA 1,324,812
1,150,000 5 1/4s, 2/15/23 AAA 1,257,790
1,360,000 Socorro, Indpt. School Dist. G.O.
Bonds, PSFG, 5s, 8/15/29 AAA 1,432,678
1,700,000 Tomball, Hosp. Auth. Rev. Bonds
(Tomball Regl. Hosp.), 6s, 7/1/19 Baa3 1,748,603
--------------
23,953,002
Utah (6.9%)
-------------------------------------------------------------------------------
1,000,000 Carbon Cnty., Solid Waste Disp.
Rev. Bonds (Laidlaw Env.), Ser. A,
7.45s, 7/1/17 BB-/P 1,038,470
500,000 Tooele Cnty., Harbor & Term. Dist.
Port Fac. Rev. Bonds (Union
Pacific), Ser. A, 5.7s, 11/1/26 Baa2 523,525
675,000 UT Cnty., Env. Impt. Rev. Bonds
(Marathon Oil), 5.05s, 11/1/17 Baa1 723,357
UT State Pwr. Supply Rev. Bonds
(Intermountain Pwr. Agcy.), Ser. A,
MBIA
4,720,000 6.15s, 7/1/14 Aaa 4,973,511
8,280,000 6.15s, 7/1/14 (prerefunded) Aaa 8,984,876
--------------
16,243,739
Vermont (0.4%)
-------------------------------------------------------------------------------
975,000 VT Hsg. Fin. Agcy. Rev. Bonds, Ser.
19A, FSA, 4.62s, 5/1/29 Aaa 994,861
Virginia (0.9%)
-------------------------------------------------------------------------------
2,000,000 Prince William Cnty., Indl. Dev.
Auth. Hosp. Rev. Bonds (Potomac
Hosp. Corp.), 5.35s, 10/1/36 A3 2,105,260
Washington (1.1%)
-------------------------------------------------------------------------------
2,370,000 Tobacco Settlement Auth. of WA
Rev. Bonds, 6 1/2s, 6/1/26 BBB 2,498,146
West Virginia (6.7%)
-------------------------------------------------------------------------------
7,500,000 Econ. Dev. Auth. Lease Rev. Bonds
(Correctional Juvenile Safety),
Ser. A, MBIA, 5s, 6/1/29 Aaa 7,951,350
1,545,000 Marshall Cnty., Poll. Control VRDN
(OH Pwr. Co.), Ser. E, 2.56s, 6/1/22 VMIG1 1,545,000
6,000,000 West Virginia U. Rev. Bonds (Impt.
West VA. U.), Ser. C, FGIC, 5s,
10/1/26 Aaa 6,395,580
--------------
15,891,930
Wisconsin (3.5%)
-------------------------------------------------------------------------------
Badger Tobacco Settlement
Asset Securitization Corp.
Rev. Bonds
1,800,000 7s, 6/1/28 BBB 1,949,598
3,500,000 6 3/8s, 6/1/32 BBB 3,659,320
2,500,000 WI State Hlth. & Edl. Fac. Auth.
Rev. Bonds (Wheaton Franciscan),
5 3/4s, 8/15/30 A2 2,683,900
--------------
8,292,818
-------------------------------------------------------------------------------
Total Investments
(cost $359,724,813) $379,948,243
-------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $236,554,835.
(RAT) The Moody's, Standard & Poor's or Fitch's ratings indicated are
believed to be the most recent ratings available at May 31, 2005 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 May 31, 2005. Securities rated by Putnam are indicated by
"/P". Security ratings are defined in the Statement of Additional
Information.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
The rates shown on VRDN, Mandatory Put Bonds and Floating Rate Bonds
(FRB) are the current interest rates at May 31, 2005.
The dates shown on Mandatory Put Bonds are the next mandatory put dates.
The rates shown on IFB, which are securities paying interest rates that
vary inversely to changes in the market interest rates, are the current
interest rates at May 31, 2005.
The fund had the following industry group concentrations greater than
10% at May 31, 2005 (as a percentage of net assets):
Health care 36.1%
Utilities and power 27.6
Transportation 13.9
Water and sewer 12.5
The fund had the following insurance concentrations greater than 10% at
May 31, 2005 (as a percentage of net assets):
MBIA 33.0%
AMBAC 21.5
FGIC 12.2
FSA 11.9
The accompanying notes are an integral part of these financial
statements.
Statement of assets and liabilities
May 31, 2005 (Unaudited)
Assets
-------------------------------------------------------------------------------
Investment in securities, at value (Note 1):
-------------------------------------------------------------------------------
Unaffiliated issuers (identified cost $359,724,813) $379,948,243
-------------------------------------------------------------------------------
Cash 38,726
-------------------------------------------------------------------------------
Interest and other receivables 6,017,045
-------------------------------------------------------------------------------
Receivable for securities sold 1,876,862
-------------------------------------------------------------------------------
Total assets 387,880,876
Liabilities
-------------------------------------------------------------------------------
Distributions payable to shareholders 1,067,585
-------------------------------------------------------------------------------
Accrued preferred shares distribution payable (Note 1) 32,221
-------------------------------------------------------------------------------
Payable for securities purchased 9,477,547
-------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 616,854
-------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 39,119
-------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 37,988
-------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,295
-------------------------------------------------------------------------------
Other accrued expenses 52,432
-------------------------------------------------------------------------------
Total liabilities 11,326,041
-------------------------------------------------------------------------------
Series A remarketed preferred shares: (1,400 shares
authorized and outstanding at $100,000 per share) (Note 4) 140,000,000
-------------------------------------------------------------------------------
Net assets $236,554,835
Represented by
-------------------------------------------------------------------------------
Paid-in capital -- common shares (Unlimited shares
authorized) (Note 1) $237,411,614
-------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (296,200)
-------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (20,784,009)
-------------------------------------------------------------------------------
Net unrealized appreciation of investments 20,223,430
-------------------------------------------------------------------------------
Total -- Representing net assets applicable to common shares
outstanding $236,554,835
Computation of net asset value
-------------------------------------------------------------------------------
Net asset value per common share ($236,554,835 divided by
21,438,811 shares) $11.03
-------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of operations
Six months ended May 31, 2005 (Unaudited)
-------------------------------------------------------------------------------
Interest income: $9,201,663
-------------------------------------------------------------------------------
Expenses:
-------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,203,804
-------------------------------------------------------------------------------
Investor servicing fees (Note 2) 58,359
-------------------------------------------------------------------------------
Custodian fees (Note 2) 63,724
-------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 10,603
-------------------------------------------------------------------------------
Administrative services (Note 2) 15,184
-------------------------------------------------------------------------------
Preferred share remarketing agent fees 164,573
-------------------------------------------------------------------------------
Other 73,842
-------------------------------------------------------------------------------
Total expenses 1,590,089
-------------------------------------------------------------------------------
Expense reduction (Note 2) (27,373)
-------------------------------------------------------------------------------
Net expenses 1,562,716
-------------------------------------------------------------------------------
Net investment income 7,638,947
-------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,028,906
-------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 104,387
-------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 5,875,656
-------------------------------------------------------------------------------
Net gain on investments 7,008,949
-------------------------------------------------------------------------------
Net increase in net assets resulting from operations $14,647,896
-------------------------------------------------------------------------------
Distributions to Series A remarketed
preferred shareholders: (Note 1)
-------------------------------------------------------------------------------
From tax exempt income (1,478,006)
-------------------------------------------------------------------------------
Net increase in net assets resulting from operations
(applicable to common shareholders) $13,169,890
-------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of changes in net assets
Six months ended Year ended
May 31 November 30
Increase in net assets 2005* 2004
-------------------------------------------------------------------------------
Operations:
-------------------------------------------------------------------------------
Net investment income $7,638,947 $16,281,242
-------------------------------------------------------------------------------
Net realized gain on investments 1,133,293 1,613,430
-------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 5,875,656 (563,619)
-------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 14,647,896 17,331,053
Distributions to Series A remarketed
preferred shareholders: (Note 1)
-------------------------------------------------------------------------------
From tax exempt income (1,478,006) (1,686,256)
-------------------------------------------------------------------------------
Net increase in net assets resulting from
operations (applicable to common
shareholders) 13,169,890 15,644,797
-------------------------------------------------------------------------------
Distributions to common shareholders: (Note 1)
-------------------------------------------------------------------------------
From tax exempt income (6,405,506) (15,326,794)
-------------------------------------------------------------------------------
From ordinary income (147,928) --
-------------------------------------------------------------------------------
Increase from issuance of common shares in
connection with reinvestment of
distributions -- 479,878
-------------------------------------------------------------------------------
Total increase in net assets 6,616,456 797,881
Net assets
-------------------------------------------------------------------------------
Beginning of period 229,938,379 229,140,498
-------------------------------------------------------------------------------
End of period (including distributions in
excess of net investment income of $296,200
and undistributed net investment income of
$96,293, respectively) $236,554,835 $229,938,379
-------------------------------------------------------------------------------
Number of fund shares
-------------------------------------------------------------------------------
Common shares outstanding at beginning of
period 21,438,811 21,394,578
-------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions -- 44,233
-------------------------------------------------------------------------------
Common shares outstanding at end of period 21,438,811 21,438,811
-------------------------------------------------------------------------------
Remarketed preferred shares outstanding at
beginning and end of period 1,400 1,400
-------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
Six months
ended
May 31
Per-share (Unaudited) Year ended November 30
operating performance 2005 2004 2003 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning
of period (common shares) $10.73 $10.71 $10.41 $10.96 $10.88 $10.71
----------------------------------------------------------------------------------------------------------------------------
Investment operations:
----------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .36 .76 .84 .95 1.01 1.03
----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .32 .06 .36 (.60) (.02) .26
----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .68 .82 1.20 .35 .99 1.29
----------------------------------------------------------------------------------------------------------------------------
Distributions to
preferred shareholders:
----------------------------------------------------------------------------------------------------------------------------
From net investment income (.07) (.08) (.07) (.10) (.20) (.28)
----------------------------------------------------------------------------------------------------------------------------
Total from investment
operations: (applicable to
common shareholders) .61 .74 1.13 .25 .79 1.01
----------------------------------------------------------------------------------------------------------------------------
Distributions to
common shareholders:
----------------------------------------------------------------------------------------------------------------------------
From net investment income (.31) (.72) (.83) (.80) (.71) (.84)
----------------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.72) (.83) (.80) (.71) (.84)
----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period
(common shares) $11.03 $10.73 $10.71 $10.41 $10.96 $10.88
----------------------------------------------------------------------------------------------------------------------------
Market price, end of period
(common shares) $9.75 $9.67 $10.74 $10.75 $10.67 $9.81
----------------------------------------------------------------------------------------------------------------------------
Total return at market price
(common shares) (%)(b) 4.06* (3.46) 8.07 8.58 15.96 (11.14)
----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
common shares (in thousands) $236,555 $229,938 $229,140 $221,432 $231,983 $229,854
----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c)(d) .68* 1.39 1.42 1.46 1.49 1.47
----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%)(c) 2.63* 6.34 7.26 7.99 7.19 7.10
----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 14.05* 29.59 32.72 19.25 23.05 24.90
----------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Per share net investment income has been determined on the basis of
the weighted average number of common shares outstanding during the
period.
(b) Total return assumes dividend reinvestment.
(c) Ratios reflect net assets available to common shares only; net
investment income ratio also reflects reduction for dividend payments to
preferred shareholders.
(d) Includes amounts paid through expense offset arrangements (Note 2).
The accompanying notes are an integral part of these financial
statements.
Notes to financial statements
May 31, 2005 (Unaudited)
Note 1
Significant accounting policies
Putnam Investment Grade Municipal Trust (the "fund"), a Massachusetts
business trust, 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, LLC ("Putnam Management"),
the fund's manager, an indirect wholly-owned subsidiary of Putnam, LLC,
believes do not involve undue risk to income or principal. Under normal
circumstances, the fund will invest at least 80% of its net assets in
investment grade securities (rated "investment grade" at the time of
investment or, if not rated, determined by Putnam Management to be of
comparable quality).
In the normal course of business, the fund enters into contracts that
may include agreements to indemnify another party under given
circumstances. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be, but have not
yet been, made against the fund. However, the fund expects the risk of
material loss to be remote.
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 accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in the financial
statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results could
differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are valued on the basis
of valuations provided by an independent pricing service, approved by
the Trustees. Such services use information with respect to transactions
in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. Other investments are valued at fair value following
procedures approved by the Trustees. Such valuations and procedures are
reviewed periodically by the Trustees.
B) Security transactions and related investment income Security
transactions are recorded on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on
the identified cost basis.
Interest income is recorded on the accrual basis. All premiums/discounts
are amortized /accreted on a yield-to-maturity basis. The premium in
excess of the call price, if any, is amortized to the call date;
thereafter, any remaining premium is amortized to maturity.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. Risks may exceed amounts recognized on the statement of assets
and liabilities. When the contract is closed, the fund records a realized
gain or loss equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed. Realized
gains and losses on purchased options are included in realized gains and
losses on investment securities. If a written call option is exercised,
the premium originally received is recorded as an addition to sales
proceeds. If a written put option is exercised, the premium originally
received is recorded as a reduction to the cost of investments.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. The fund and the broker
agree to exchange an amount of cash equal to the daily fluctuation in
the value of the futures contract. Such receipts or payments are known
as "variation margin." 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.
Futures and written option contracts outstanding at period end, if any,
are listed after the fund's portfolio.
D) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code of 1986 (the "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 Code, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
At November 30, 2004, the fund had a capital loss carryover of
$19,431,165 available to the extent allowed by the Code to offset future
net capital gain, if any. The amount of the carryover and the expiration
dates are:
Loss Carryover Expiration
--------------------------------------
$612,177 November 30, 2005
1,661,946 November 30, 2006
2,968,039 November 30, 2007
535,007 November 30, 2009
1,282,640 November 30, 2010
12,371,356 November 30, 2011
The aggregate identified cost on a tax basis is $359,724,813, resulting
in gross unrealized appreciation and depreciation of $21,024,215 and
$800,785, respectively, or net unrealized appreciation of $20,223,430.
E) Distributions to shareholders Distributions to common and preferred
shareholders from net investment income are recorded by the fund on the
ex-dividend date. Distributions from capital gains, if any, are recorded
on the ex-dividend date and paid at least annually. 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 May 31, 2005 was 2.80%. 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. 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.
F) Determination of net asset value Net asset value of the common shares
is determined by dividing the value of all assets of the fund, less all
liabilities and the liquidation preference of any outstanding remarketed
preferred shares, by the total number of common shares outstanding as of
period end.
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on the annual rate of 0.65% of the weekly average net assets of
the fund.
If dividends payable on remarketed preferred shares during any dividend
payment period plus any expenses attributable to remarketed preferred
shares for that period exceed the fund's gross income attributable to
the proceeds of the remarketed preferred shares during that period, then
the fee payable to Putnam Management for that period will be reduced by
the amount of the excess (but not more than 0.65% of the liquidation
preference of the remarketed preferred shares outstanding during the
period).
In June 2005, the Trustees and Putnam Management agreed to a reduced
management fee structure for the fund that will go into effect on
January 1, 2006. Effective on that date, the fund's management fee is
expected to be an annual rate of 0.55% of the weekly average net assets
of the fund (based on the fund's current asset level), with additional
breakpoints leading to lower fee rates at higher asset levels.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company ("PFTC"), a subsidiary of Putnam, LLC. Putnam
Investor Services, a division of PFTC, provides investor servicing agent
functions to the fund. During the six months ended May 31, 2005, the
fund paid PFTC $122,083 for these services.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the six months ended May 31, 2005,
the fund's expenses were reduced by $27,373 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $710, as a quarterly retainer, has been allocated to the fund, and
an additional fee for each Trustees meeting attended. Trustees receive
additional fees for attendance at certain committee meetings. George
Putnam III also receives the foregoing fees for his services as Trustee.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a 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 Trustee compensation and expenses in the
statement of operations. Accrued pension liability is included in
Payable for Trustee compensation and expenses in the statement of assets
and liabilities. The Trustees have terminated the Pension Plan with
respect to any Trustee first elected after 2003.
Note 3
Purchases and sales of securities
During the six months ended May 31, 2005, cost of purchases and proceeds
from sales of investment securities other than short-term investments
aggregated $55,538,411 and $50,311,247, respectively. There were no
purchases or sales of U.S. government securities.
Note 4
Preferred shares
The Series A 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 may 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 May 31, 2005, no such restrictions have been placed
on the fund.
Note 5
Regulatory matters and litigation
Putnam Management has entered into agreements with the Securities and
Exchange Commission and the Massachusetts Securities Division settling
charges connected with excessive short-term trading by Putnam employees
and, in the case of the charges brought by the Massachusetts Securities
Division, by participants in some Putnam-administered 401(k) plans.
Pursuant to these settlement agreements, Putnam Management will pay a
total of $193.5 million in penalties and restitution, with $153.5
million being paid to shareholders and the funds. The restitution amount
will be allocated to shareholders pursuant to a plan developed by an
independent consultant, with payments to shareholders following approval
of the plan by the SEC and the Massachusetts Securities Division.
The Securities and Exchange Commission's and Massachusetts Securities
Division's allegations and related matters also serve as the general
basis for numerous lawsuits, including purported class action lawsuits
filed against Putnam Management and certain related parties, including
certain Putnam funds. Putnam Management will bear any costs incurred by
Putnam funds in connection with these lawsuits. Putnam Management
believes that the likelihood that the pending private lawsuits and
purported class action lawsuits will have a material adverse financial
impact on the fund is remote, and the pending actions are not likely to
materially affect its ability to provide investment management services
to its clients, including the Putnam funds.
Fund information
About Putnam Investments
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Myra R. Drucker
Charles E. Haldeman, Jr.
Paul L. Joskow
Elizabeth T. Kennan
John H. Mullin, III
Robert E. Patterson
George Putnam, III
W. Thomas Stephens
Richard B. Worley
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President, Associate
Treasurer and Principal Executive
Officer
Jonathan S. Horwitz
Senior Vice President and Treasurer
Steven D. Krichmar
Vice President and Principal
Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Daniel T. Gallagher
Senior Vice President, Staff
Counsel and Compliance Liaison
Beth S. Mazor
Vice President
James P. Pappas
Vice President
Richard S. Robie, III
Vice President
Mark C. Trenchard
Vice President and BSA Compliance Officer
Francis J. McNamara, III
Vice President and Chief Legal Officer
Charles A. Ruys de Perez
Vice President and Chief Compliance Officer
Judith Cohen
Vice President, Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or
visit our Web site (www.putnaminvestments.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
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
Do you want to save paper and receive this document faster?
Shareholders can sign up for email delivery of shareholder reports on
www.putnaminvestments.com.
SA706-225856 7/05
Item 2. Code of Ethics:
-----------------------
Not applicable
Item 3. Audit Committee Financial Expert:
-----------------------------------------
Not applicable
Item 4. Principal Accountant Fees and Services:
-----------------------------------------------
Not applicable
Item 5. Audit Committee: Not applicable
-------------------------
Item 6. Schedule of Investments: Not applicable
--------------------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End
-------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. Purchases of Equity Securities by Closed-End Management Investment
--------------------------------------------------------------------------
Companies and Affiliated Purchasers: Not applicable
------------------------------------
Item 9. Submission of Matters to a Vote of Security Holders:
------------------------------------------------------------
Not applicable
Item 10. Controls and Procedures:
---------------------------------
(a) The registrant's principal executive officer and principal
financial officer have concluded, based on their evaluation of the
effectiveness of the design and operation of the registrant's
disclosure controls and procedures as of a date within 90 days of
the filing date of this report, that the design and operation of
such procedures are generally effective to provide reasonable
assurance that information required to be disclosed by the registrant
in this report is recorded, processed, summarized and reported within
the time periods specified in the Commission's rules and forms.
(b) Changes in internal control over financial reporting:
Not applicable
Item 11. Exhibits:
------------------
(a) Not applicable
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act
of 2002 are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: July 28, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Executive Officer
Date: July 28, 2005
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: July 28, 2005